July 31, 2013

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The battle over Herbalife is getting a lot more complicated. George Soros, CNBC’s Scott Wapner reports, has taken a stake in Herbalife — reportedly one of his three biggest positions — sending the shares up roughly 8% on the day. (Though, this may actually not be a new development). If you’re scoring at home, Team Herbalife now includes Soros, along with Carl Icahn and Dan Loeb’s fund Third Point, which has made hundreds of millions betting on Herbalife.

Left on the lonely squad of Team HerbaShort is Bill Ackman. In December, Ackman unleashed a massive presentation that called Herbalife a pyramid scheme, and later added “this is the highest conviction I’ve ever had about any investment I’ve ever made”. Since then, Reuters reports, Ackman’s hedge fund has racked up $300 million losses on uncovered short Herbalife positions. Herbalife’s stock has doubled this year to $65, and it released its 18th straight earnings beat earlier this week.

Ackman has questioned Herbalife’s accounting, reportedly hiring lobbyists to help his cause. Hedge fund short-seller John Hempton, however, argues that Herbalife is simply a multi-level marketer: its products may be overpriced, some of its distributors may not make much money, but its sellers are akin to Avon ladies. Why do consumers love this kind sales pitch? Here’s Hempton:

With the Avon lady the answer is obvious – which is that she was selling the service of making the customer feel good about themselves through lipstick, eye-liner and finger nail polish… she was not selling mere cosmetics. Multi-level-marketing provides a for-profit community support group and its name was Avon…

Earlier this week, Herbalife announced that it would stop calling its customers “distributors” and would now refer to them as “members”. That distinction could be crucial. As Hempton wrote in late July, the Federal Trade Commission’s definition of a pyramid scheme depends on whether a company’s participants primarily get paid from new recruitments, rather than sales. (Herbalife products aren’t available in stores; members pay to receive discounts on its products. The company says it doesn’t track how many of its products are resold — or consumed — by its distributor/members)

If Herbalife is a pyramid scheme, Hempton writes, you’d expect a massive amount of unsold inventory to pile up from what Ackman calls the company’s “failed distributors.” After scouring eBay and Craigslist, Hempton couldn’t find any evidence of this — he only found Herbalife customers. — Ryan McCarthy

On to today’s links:

Big Brother Inc.
The NSA program that collects “nearly everything a user does on the internet” – Guardian

Bill Ackman invests $2.2 billion in industrial air – CNBC
Dan Loeb, film critic – Hollywood Reporter

Tres Fab
Arguments are over in the Fabulous Fab case – DealBook

Blackstone’s buy-to-rent strategy is now buy-to-rent-to-securitize – WSJ

The Fed
No change to bond buying, inflation “persistently” below target – Federal Reserve
Larry Summers wouldn’t be likely to rapidly unwind Bernanke’s easy money policies – WSJ
Ezra Klein on the case for Summers – WaPo
Larry Summers on monetary policy (circa 1991) – Brad DeLong
The Summers vs. Yellen scorecard – WSJ

Woman finds giant KFC bucket in her yard, is not sure where it came from – NBC 26

Over a million are denied bank accounts for past errors – NYT

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