Thursday, December 19, 2013

Manure! I HATE manure!

This post has been updated: I direct you to the updated version *click here*

During a conversation with an esteemed colleague I discovered that it was his birthday. I immediately congratulated him on being another year older to which he replied, "Thanks, but I'm actually just another day older." So with all the fanfare that I'm sure will accompany the anniversary of Bill Ackman's Herbalife short position, I remember that it is just another day that his thesis is getting older and just like all of us, the sad truth behind each passing day is that it brings us another day closer to our demise. I wish that I could bestow a hearty "Happy Birthday" and clap on the back to Ackman's Herbalife short position, but instead of watching his little tyke grow older I feel like we're going back in time. 

In Back to the Future, we watch as our hero Marty goes from lowly dweeb and sleepy-headed slacker extraordinaire to saving the dignity of his town and his family by preventing the rape of his own mother in a parking lot. We even watch as his family disappears before his eyes in a family photo as he struggles to set right the world he unwittingly perturbed. 

In Ack to the Future II, we watch as our dear Billy goes from Hunk of Burning Cerulean Blue Billionaire Hero kickflipping through Hill Valley on his hoverboard to buried under a $821M pile of manure. Before you know it, Michael Johnson will be chiding him for not putting a second coat of wax on the bimmer. His Sohn presentation was attempted parking lot rape if I ever saw one. And as far as his disappearing family is concerned, Billy has set about erasing his Herbalife short family on his own. 

Before we get to his family, lets run through that $821M pile of manure. I'll break this into two sections:

  1. the manure he's spitting out of his mouth (realized losses)
  2. the manure currently covering the interior of his Ford Super De Luxe convertible (unrealized marks)
Let's start with the post-manure tooth check (strictly platonic of course). Billy has probably realized losses on 9.8M shares he covered, dividends he paid on those shares for three quarters, dividends he's paid on another 14.7M shares he's paid for 4 quarters (he is still short), the cost of his borrow (I'm using 2.5% compounded continuously) and legal costs all stuck up in his grill. 

Moving on to a quote for cleaning the manure out of Billy's Ford Super De Luxe (provided by Biff's Auto Detailing, naturally), as of yesterday's close, Billy has probably marked 14.7M shares at $78, and marked 13.5M shares worth of Jan 2015 50X puts at a ~31% markdown.

Unless he went about covering, (oops I mean restructuring), more of his Herbalife short Billy and Pershing Square investors are sitting on a $821M loss in Herbalife.

If that weren't bad enough, unlike our hero Marty who did everything in his power to save his mediocre family, Billy has gone about erasing those in his Pershing family that helped him set his Herbalife short in motion. For all the accolades that Bill gave Shane Dinneen last year at the Sohn conference, he hasn't said much about Shane's exhaustive efforts recently. For somebody that goes out of their way to name very junior hires in monthly and quarterly letters, I find it odd that Bill hasn't publicly disclosed he has fired Shane. To be accurate I guess "fired" may be a little "technical", but Shane is NOT in the Pershing Square Offices. Leave of absence, break, vacation, lacuna, interval, hiatus, time apart; whatever conversation Bill had with Shane, I'm sure he let Shane know "It's not you it's me." That being said Shane Dinneen and Pershing Square are lovers no more. And really let's face it, it's not Shane. Shane was a Junior staff member that probably worked his ass off on this short. I'm sure he put in 14 hour days and scrubbed through as much data as he could get his hands on. He happened to be wrong in his analysis but Ackman should have known better. Shane was not the one that amassed an extremely concentrated short and then announced it to world. Bill is the registered investment adviser, but Shane is expendable. Bill needed a neck for his albatross. But why would Bill hide the fact that he has "fired" his lead analyst on his Herbalife short? Well that would mean he'd be publicly admitting defeat. And why would you be hiding that you're defeated? I can only assume that he's quietly winding down his Herbalife short. If word got out that he fired his star Herbalife analyst while sitting on a $821M loss there wouldn't be much left to the imagination. Really, what kind of fiduciary amasses an 8% position (short), peacocks it publicly, then fires the one guy in the office that knows more detail and nuance than anyone else? I think everyone would agree that you don't fire your star analyst on one of your largest positions at the end of your year if you plan on maintaining that position until the "ends of the earth" as you've claimed. If you had any intention of sticking around Hill Valley for any meaningful amount of time, you may tuck your DeLorean behind a sign (you may need it in the future), but you sure as hell wouldn't scrap it.

And if Bill has any hope of getting back to the future, he better juice up the flux capacitor and step on the accelerator. Herbalife's debt deal is like the lightning that is going to strike the Hill Valley Courthouse's Clock Tower. We all know it's going to hit at 10:04 p.m., but will Billy be stuck in 1955 or will he make it safely back to 1985? Bill has done his best to delay the strike, but he too knows it's inevitable. He's put on a good show, ever keeping the steely visage of the oracle he wants us all to believe he is. He even went so far as to publicly release an 11 point, 52 page letter he sent to PwC. After that though he was quietly at work behind the scenes, sending letter after letter every single day to PwC in an effort to slow up the release of Herbalife's re-audited financials. Turns out his efforts paid off; all that extra scrutiny he levied on the company helped PwC be certain that their SAS 100 numbers were extremely accurate and that their review of Herbalife's business practices were thorough. Now that the re-audited financials are out there I wonder who Billy will correspond with? Maybe he'll write recommendation letters for Shane, or maybe he'll just troll Herbalife CFO John DeSimone and junk up his inbox with spam. 

DeSimone would be a fitting target of Ackman's rage considering that DeSimone danced around questions yesterday on an investor call (being certain that he didn't say anything that hadn't been publicly disclosed) about Herbalife's planned share repo. Judging by the tenor and measures of DeSimone's responses, Herbalife is currently working a deal with bankers for investment grade debt that they will use for a massive share repurchase; keep in mind, if Temasek doesn't take them private the repo will be massive enough to swallow a minimum of 25 million shares. And if anyone knows the value of this company, it is the CFO. No wonder why Carl Icahn and Bill Stiritz aren't selling.

So where does that leave Ackman? It's 10:03pm and he's sitting in the DeLorean waiting for the alarm to sound. He's gassed up with a $821M loss, he kicked Dinneen to the curb, and his fund is in for $1B with Libyan terrorists. 

If Herbalife hits $88, Ackman may be OUTATIME.


  1. Skeptic- brilliant as usual. We are in awe...and richer for it! One thing to add in: Didn't Billy Boy pledge $25,000,000 to Sohn originally to do the presentation? I thought that he announced that when he also said he would give all of his personal profits from the trade to charity!?

  2. Yes, that $25million was the "cost" for Sohn organizers allowing Billy to put on his bear-raid at the end of the year, when trading volumes are light & many fund managers are away for Christmas/Hannukah.