Ackman Books Herbalife Losses, Forced To Cover 40% Of Short To Avoid Being "Forced To Cover" Short

Tyler Durden's picture

It just keeps getting worse and worse for Bill Ackman.

A few weeks after the epic humiliation, not to mention even more epic losses, he suffered on his now defunct JCP long position (despite ample warnings by the likes of Zero Hedge who said long ago JCP is merely a melting icecube and fast-track Chapter 11/7 candidate) all those who predicted (such as Zero Hedge back in January) that an epic HLF short squeeze would result in the aftermath of Ackman's Herbalife short announcement leading to Ackman's ultimate capitulation, have been proven correct. Moments ago, in a letter to investors, Bill Ackman just announced that he has covered over 40% of his Herbalife short position, with his forced buy-in explaining the endless move higher in Herbalife stock in recent weeks. The explanation of being forced out of nearly half of his position is amusing: "we minimize the risk of so-called short squeezes or other technical attempts by market manipulators to force us to cover our position." So Ackman is forced out by his Prime Brokers so as not to be forced out by market manipulators? That's an interesting explanation for what is a far simple situation: booking your paper losses.

But instead of doing the right thing and slowly but surely bailing on the entire losing trade, and admitting defeat (as he did in JCP, as he will ultimately do here as well, but only after even more booked losses - he still has a massive 60% of his original short in the name) he has decided to double down and go the levered, option rout. Only this time with time-decay, by buying puts. So while before Ackman may "not have been wrong, just very early", as of this moment the time of his trade is really going to start hurting him as every passing day that the trade doesn't work out results in a drop in the put value, and also in total margin value available to Pershing Square.

Finally, while we provide our annotated thoughts to the Ackman letter below, we have two key questions: First: having "only" 60% of your original short remaining does not in any way make the ongoing squeeze and future margin calls any less likely; it only means those who are eager to crush the residual short shares will double down: because in addition to Ackman there are millions of other shorted shares who will take the cue and scramble to cover next). Secondly: one wonders who is on the other side of the "Put" trade. Would his name potentially begin with "I" and end in "cahn",  a billionaire machine that can't be bargained with. He can't be
reasoned with. He doesn't feel pity, or remorse, or fear. And he
absolutely will not stop, ever, until Pershing Square (barely up 0.5% in 2013 through September) is destroyed?

Full justification of Bill Ackman's most recent bizarro trade from his letter (pdf)

During the quarter, Herbalife stock price rose from approximately $45 to $70 per share, and from approximately $60 to $70 per share during the month of September alone. The principal driver of the stock price appears to be the belief by bulls that government regulators will do nothing, and that the Company will continue to generate strong earnings and cash flows which will be returned to shareholders in the form of share repurchases, which could force shorts, including Pershing Square, to cover.

ZH - so far it seems to be having that effect as 8.8 mm shares have covered shorts

The stock price appreciation this past month appears to have been driven by commentary from Tim Ramey, a perennially bullish Herbalife analyst from D.A. Davison, who stated a few weeks ago that in September 2013 PriceWaterhouseCoopers (PwC) would complete its re-audit of the Company’s last three years of financial statements, and Herbalife, shortly thereafter, would launch a $2 billion investment grade bond issue at an interest rate of 4%, the proceeds to be used to fund a share repurchase at $75 per share. According to Ramey, the buyback would serve to refute the bear case on Herbalife as shorts, including Pershing Square, are forced to cover.

ZH - see above


The high degree of specificity of Ramey’s bullish call has led investors to believe that he is speaking on behalf of the Company. While September has come and gone without PwC’s completion of Herbalife’s re-audited financials, bullish investors apparently continue to expect the re-audit to be completed shortly, and a large buyback to be forthcoming.

We are skeptical of Ramey’s pronouncements for several reasons. While we do not know the timing of PwC’s re-audit of Herbalife’s financial statements, we have identified a substantial number of serious issues with Herbalife’s accounting, disclosure, and tax policies that we have brought to the attention of PwC and the SEC in a series of three letters that we delivered to them in recent weeks, the first of which we shared with you earlier this month. At a minimum, we would not be surprised if the re-audited financials provide further disclosures about the Company which will raise additional questions about its business practices and its previously reported results.

ZH - nothing new here - same 'ponzi' thesis as before. In fact the same "most remarkable piece of investment analysis" proclaimed by Whitney Tilson in December 2012, when we first suggested - long before Icahn or any other famous activist and short-hunting investor appeared - that an epic short squeeze was imminent. The stock then was $25. It is now 200% higher. As Tilson further added: "For the many young people on this email list who are looking for a job in this industry, study this carefully – if you can do analysis even a tiny fraction this comprehensive, there will always be a job for you..." Unclear where though: perhaps in JC Penney?


With respect to the supposed $2 billion investment grade bond issue at an interest rate of 4%, we believe it is extremely unlikely that Herbalife will be able to garner an investment grade rating and raise $2 billion, let alone at an interest rate of 4%. As of March 2011, when Moody’s withdrew its ratings on Herbalife, the Company was rated Ba1, a junk rating. When the ratings were withdrawn, Herbalife had only $178 million of debt, approximately 0.5 times the then 12 month trailing operating profits, and there was little public scrutiny of the Company’s business practices. If Herbalife were able to issue $2 billion of additional debt today, the Company would have $3 billion of total debt, or 4.3 times 12-month trailing operating profits. With more than 16 times as much debt, substantially greater scrutiny of the Company’s business practices, and a regulatory cloud over the Company, we believe that it would now garner a substantially lower junk rating than that of early 2011.

ZH - even if the rating were lowered, in this environment of infinite ZIRP and record credit bubbles, even the junkiest C- crap is well bid, oversubscribed and breaks above par at issuance. See recent bond offerings by Rwanda, Zambia and Kenya.


Furthermore, we question whether a bank would be willing to take on the potential underwriter liability associated with a debt issue for Herbalife. If the Company were later deemed to be a pyramid scheme, an underwriter could find itself liable for the face amount of the entire debt issue, as recoveries to creditors of a pyramid scheme are likely to be de minimis. To earn a 150 basis point fee and risk losing 70 times that amount in a lawsuit is a risk-reward proposition that we believe no financial institution would find attractive.

ZH - Not true courtesy of boiler plate indemnification - remember the existential "risk" facing the underwriters of MF Global's big bond issue just prior to filing and how massive their punishment was? Yeah, didn't think so.


All of the above notwithstanding, if Herbalife could achieve a $2 billion financing, we believe the interest rate would be much higher, and the buyback could only be completed at a price that would be minimally accretive to the Company, factoring in the after-tax cost of debt and the buyback price required to acquire nearly 30% of the outstanding float. When one considers the high degree of leverage that would result from the buyback, we would expect the Company’s earnings multiple to compress accordingly. As a result, we believe that such a leveraged recapitalization would generate minimal, if any, shareholder value.

ZH - this is one of the most ridiculous statement ever made: the last 3 years have seen management and shareholders handily rewarded for leveraged recaps or buybacks - even if, or rather, especially credit risk rises. In fact, the primary source of "growth" in earnings have been leveraged buybacks.

Based on an analysis of comparable situations with our prime brokers, we believe that such a buyback would not require us to cover our position. Furthermore, if a large amount of debt were issued, an Herbalife CDS market would likely develop, presenting us with an even more attractive method to bet against the then highly leveraged Company. We could then choose to add to or replace all or a portion of our existing short position with an even larger notional short position in the debt through the purchase of CDS. We would welcome such an opportunity, although for the reasons described above, we do not believe that the Company will be able to borrow funds to complete such a transaction.

ZH - so after your prime brokers stepped you out of your unlevered short and you think that post-issuance and buyback (when you're already massively underwater) they will 'allow' you to increase you collateral exposure and run a leveraged short credit position on the same credit, even though the thesis catalyst is now well-known by all, and the only impact has been a near doubling in the stock since your entry? Who does Perishing Square bank with: JT Marlin.


Since our presentation on Herbalife at the end of last year, we have not learned any facts that are inconsistent with our belief that the Company is a pyramid scheme that engages in unlawful and deceptive marketing practices. In fact, there have been a number of materially positive developments that increase the likelihood of regulatory intervention and the Company’s closure.

ZH - and the stock price has reacted... how exactly?


Numerous state, federal, and international regulators have launched investigations or inquiries into the Company’s business practices and products that we believe are ongoing. Many federal, state and local elected officials, consumer protection and community organizations and other advocates have publicly called for the FTC and state regulators to investigate the Company. A number of whistleblowers have contacted us, several in the last few weeks alone, and provided us with information that is confirmatory of our thesis that Herbalife is a pyramid scheme while raising additional concerns that we had not previously identified. Bottom line, we continue to have enormous conviction in our investment thesis.

ZH - see above, but when was the 52 week high in the stock? Hint: today.


While we have endured mark-to-market losses on this investment as Herbalife bulls have promoted the stock and downplayed the probability of government intervention, we believe it is only a matter of time before the Company is shut down and prosecuted by regulators.

ZH - so just early... never wrong.


In order to mitigate the risk of further mark-to-market losses on Herbalife, in recent weeks we have restructured the position by reducing our short equity position by more than 40% and replacing it with long-term derivatives, principally over-the-counter put options. The restructuring of the position preserves our opportunity for profit – if the Company fails within a reasonable time frame we will make a similar amount of profit as if we had maintained the entire initial short position – while mitigating the risk of further substantial mark-to-market losses – because our exposure on the put options is limited to the total premium paid. In restructuring the position, we have also reduced the amount of capital consumed by the investment from 16% to 12% of our funds.

ZH - in other words, your prime brokers tapped you on the shoulder. The share price has doubled during the period of your covering 40% of your short - how about the other 60%? Is your prime broker increasing haircuts on that? Adding puts won't help - now your capital is bleeding away every day as theta eats into it - limited risk (but still 100% of the capital in the puts), with guaranteed bleed. Will the proceeds from the puts also go to charity? Or will the LPs finally ask who is footing the losses? Also, we eagerly await the confirmation of this note: surely the reported Short Interest will tumble any second...


We were able to restructure the position cost effectively due to several factors. Over the last 60 or so days, the cost to borrow Herbalife shares has declined substantially while the stock price has risen. Shortly after we filed a formal complaint with the SEC regarding what we believe to be unlawfully manipulative conduct by other market participants, the cost to borrow Herbalife shares dropped substantially to the lowest rate since prior to our presentation last December. In an unrelated recent enforcement action, the SEC confirmed that attempting to engineer a short squeeze by removing stock from the available lending base is a form of market manipulation.

ZH - from several sources, HLF remains hard-to-borrow and costs are high. It ranks 4 (out of 5) on Markit's scale of diffulty to source and on-loan volumes - as seen here - are soaring

Because of the rise of the stock price, the low cost of borrow, and the fact that we are betting on the failure of the Company, we have been able to purchase long-dated, privately negotiated out-of-the-money put options on terms that offer us an attractive opportunity for profit versus their cost. Furthermore, by substantially reducing the size of our short position as a percentage of the share float, we minimize the risk of so-called short squeezes or other technical attempts by market manipulators to force us to cover our position. In that a substantial component of the bull case on Herbalife is predicated on forcing us to cover, we think the restructuring of our investment negates this important pillar of the bull case.

ZH - you still have 60% of your position, there is still 38% of the float short and now you are levered short too... the pressure to cover just increased on any new stock price move higher


The biggest risk of the restructured position is that time begins to be a factor with respect to a portion of our investment. We believe, however, that the long-term nature of the options we own will provide sufficient time for us to be rewarded on this portion of our position. In that the options are privately negotiated, over-the-counter contracts, we have the ability to extend their terms, if we deem it prudent and attractive to do so in the future.

At yesterday’s closing price of $72.84, we believe the potential reward from being short Herbalife is extremely attractive relative to the risk of loss. Using the average analysts’ price target of $77 per share – which assumes that the Company is operating entirely legally – investors have less than 6% upside compared with 100% downside if the Company is determined to be a pyramid scheme by regulators.

In my career, I have not seen a less attractive risk-reward ratio than a long investment in Herbalife common stock at current levels.

ZH - with trades like this, which has now become an ideological obsession and moved beyond and semblance of rational investing (any normal person would have pulled the plug on the nearly half a billion dollar losing trade long ago) and is rapidly morphing into a replica of Pershing Square IV, said career may not be too long. Especially since it is now that the upside/downside analysis in a long trade like JCP that actually does make sense. Remember JCP?

* * *

Finally, one wonders: would Carl Icahn happen to be on the other side of the puts? If so, the right entity to inquire about buying CDS on wouldn't be Herbalife, but Pershing Square.

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Let me sum this up.......he's running out of other people's money. 

Pool Shark's picture



Time for him to buy TSLA:

 [P.S., the fire DID start in the battery...]


flacon's picture

Why did they pick "HERBALIFE" to make into a pissing contest? I mean seriously? Herbalife?! Why not something "MANLY" like TSLA or something trendy like "FB / PCLN / LNKD". Why piss all over a diet food Herbalife - that's really gay. 

Dr. Engali's picture

Have you seen Ackman? When I look at the metro-sexual douchbag I see a pussy in a suit, and the old fossils Ichan could probably use what Herbalife is selling. I think it's the perfect stock for them.

strannick's picture

Sadly, we live in a world where Herbalife isnt seen for the newage snakeoil-selling pyramid scheme it is. Ichan is the perfect poster-geezer for the company.

Ackman thought just cause Herbalife is a turd, he could make money shorting it, in these manipulated, unregulated, farcical psuedo markets. What a dumb shit.

Ichan v. Ackman. A fight where you hope for a double knock-out, or for the ceiling to collapse.

Thomas's picture

I think Ackman just got beaten up on the playground and is trying to regroup. Einhorn's "Fooling Some of the People All of the Time" delineates in lurid detail the kind of games played against the large short positions. I asked a peer/aquaintance of both Ackman and Icahn what was going on, and he said Ackman was right for the wrong reason. This gent is a candidate for selling hard into Ackman's misery (although that is just speculation on my part). If I were to wager (which I will not), I would wager that at some point in the future Ackman will have been shown to be right about the business of Herbalife being flawed. Shorting is the most dangerous of games.

fourchan's picture

live ike a prick die like a prick.

WillyGroper's picture

Hmmmm, I thought they weren't suppose to eat their own.

Think he'll make it to the "Robin Hood Event"?

idea_hamster's picture

Ackman's error was to imagine that US regulators give half a dead rat fart about things like enforcing [name regulation] to protect anyone worth less than $2B.

The underlying concept that HLF was a short to 0 pending a government investigation is like imagining that Boeing is a short to 0 because the Peace Corp is going to strong-arm the UN into pressuring the DOD to stop drone-bombing random people.

Just not going to happen.  If anything, they will conscienciously wait until the statute of limitations for shareholder lawsuits has passed, and then -- reluctantly -- phone in a white-wash fine. 

Jam Akin's picture

Nice to see such a smug dickhead smacked down.

Call me Ishmael's picture

and the Hong Kong Dollar is still pegged, (other Ackman F-up from way back).

It's as uplifting as seeing a celebrity leave Scientology.

Call me Ishmael's picture

He's doubling down with puts?! He should realize he has a problem or just give his money away. You have to be a real piece of work to have billions of dollars and not be able to make more money with it. Billions of dollars will make millions of dollars just sitting there.

Ohhhh Billy Billy Billy Billy Billy

zorba THE GREEK's picture

If you play in an obviously rigged casino, you can expect to lose your money. 

Jumbotron's picture

Couldn't have happened to a nicer DOUCHEBAG.

smlbizman's picture

so many little time....ack man is just i can in the mirror....fuck them both or all....

Common_Cents22's picture

herbalife has been around for 30 yrs, I find it hard to believe a ponzi scheme could last that long, outside of the treasury/fed.   I'd a think they'd run out of fools by now if they were a ponzi.

Pool Shark's picture



You mean like social security?



Yes We Can. But Lets Not.'s picture

Yeah, but SS is a *gubmint* ponzi, and is thus propagated rather than prosecuted...

Common_Cents22's picture

the question is about herbalife is do they have a big core of longer term customers that continually reorder the products.  Herbalife was actually revolutionary predating much of the nutrition concepts out there now.   

If Herbalife was a scam, the mere setup of geometric expansion of an MLM would have seen it burn out a long time ago.

Direct sales are a great business model.   You cannot ignore:

mary kay


pampered chef (acquired by buffett)


newer on the scene, nerium, isagenix growing like wildfire.

I am currently working on a new direct sales concept focusing on products/services for seniors.


TeamDepends's picture

We are thinking of going all in with Herbalife.  No wait, Amway.  No, no Jehova's Witnesses.  No, uh, the Affordable Care Act has us all confused.  Don't print that.

Yen Cross's picture

   Ackman sure is glutton for punishment. As hard as it sometimes is, he's broken rule #1 in trading. {Don't get emotional over your trades}

nbsharma's picture

very well said. in fact, he broke the rule #0 (the eternal rule) of trading: don't publicize your trades, until after - especially, the short position.

so many mistakes with his JCP and HLF thesis. i read through both of them. and i have no idea why tilson thinks it is one of the best thesis out there. it was written by banking analysts. pretty charts. spinning a nice story. too much pie-in-the-sky sell. unbelievable from the start.


Common_Cents22's picture

Ackman broke more of a bigger rule than emotion.    HUBRIS.   He thought he was god, smarter than everyone else, and proclaimed it loudly on TV/media.     It wasn't necessarily emotion.  His HUBRIS painted himself in a corner.


Eat it Ackman.

Dr. Engali's picture

At 2 and 20 Bill is just fine. It's his clients who are a little bit poorer.

TaperProof's picture

yeah but he looks like a clown, especially when a guy with a bear avatar on a web blog makes better picks than he does

NoDebt's picture

Bill picked the wrong week to stop sniffing glue.

Game, Set, Match.  Zero Hedge.

(Don't worry- Bill will be fine.  He's got plenty of good picks that are sorta-kinda offsetting this disaster)

Lets Buy The Dip's picture

totally right!!!

THE BS on the govt shut downs continue. As said before they melt this thing down, for a nice xmas rally, so they get their bonuses to hump their mistress in the hamptons soon. LOL.

. the bonds looking like a bullish flag here on daily =>

Yen Cross's picture

  I was thinking the same thing. All the furloughed workers will get their backpay just before Christmas and spend like drunken sailors. The MSM will procede to tell everyone how great the eCONomy is and the Equity markets will put in a blow off top.

 Coke & Hookers for everyone...

tarsubil's picture

Herbalife doesn't even exist! I'm in the friggin' Twilight Zone here people.

Dr. Engali's picture

Sometimes you just have to cut your losses and walk away. There is no room for pride in the markets. I'll be willing to bet that those options expire worthless and this stock won't roll over until he's booked a lot more losses.

Jethro's picture

I don't understand the product, or why people purchase it.  There is a definite "culture" around the product that reminds me of Amway, Avon, Scentsy, etc. How people make a living selling this stuff and maintain any semblance of dignity eludes me.  

olto's picture

Where else could a person have so much fun with other peoples money?

Downtoolong's picture

No sympathy for Ackman, but, there is some truth in what he says that should concern us all. Our markets are now allowed to accommodate whatever game (names) the high rollers decide to play. It doesn’t matter what the underlying business model, industry, competitive position, or fair valuation of the stock is that’s being played. He with the biggest bankroll always wins. It’s the stock market answer to winner take all championship poker.

Herbalife? Come on. It’s a fucking pyramid marketing company that nobody even heard of before Ackman and Icahn got into it. The really sad fact is that some innocent bystanders get lured in to the excitement and get run over.

“There are no more markets, only manipulations”. That quote should be cast in stone on Wall Street, along with its most famous disclaimer, “Past performance is no guarantee of future outcomes”.  

One And Only's picture

Golf clap for Carl Ichan.

Good job.

Can we move on from HLF?

Still don't know what they sell but someone made money and making money is good.

Obama will shit on Ichan by taking his money with force and redistributing the wealth to pregnant black women who have been victims of racism.

#societywins #equality #ichanwillbebulliedbyericholder

greatbeard's picture

>> by taking his money with force and redistributing the wealth to pregnant black women

Yeah, Obama has such a proven track record of taking form the rich and giving to the poor blacks, I can see where you got that idea from.  The rich have really had a tough run under O.  I don't know what propaganda bull shit you listen to but you need to turn it off and open your eyes.  Here's a place to start: Wealth distribution chart.

wisehiney's picture

icahn already gave it to him.

traditionalfunds's picture

justify my love... my love... my love.


Never One Roach's picture



I prefer Snake Oil.

AON's picture

Whatever you think of Ackman, ironically, I bet HLF is a ponzi from top to bottom just like he says.

TPTB_r_TBTF's picture

Timing is Every Thing.


Especially with a Ponzi...

Stockmonger's picture

At least he has his K-Mart investment to fall back on.

buzzsaw99's picture

...minimally accretive to the Company.


what. the. fuck.

what planet is this mother fucker from anyway?

wisehiney's picture

You will have to get up earlier than this to get ahead of Tyler Durden.

Dollar Bill Hiccup's picture

So is HLF really the POS that Ackman said it was? No matter what your opinion, he's an intelligent and experienced investor.

Entertaining to watch how egos amongst the money changers in the temple have led to a sanctioning of one of their own. Not on any moral grounds, but out of their own egotism and of course, the desire to cash in on a weak spot.

Kick him out! They cry, with the knashing of teeth. And the pocketing of dollars.

There once was a thought, a long time ago, that all of the money changers should be driven from the temple.

Today, they're running the place.

astoriajoe's picture

Wait a second... This is the next Warren Buffett you are all talking about... What does Bartiromo have to say about this.

Jumbotron's picture

"Wait a second... This is the next Warren Buffett you are all talking about... What does Bartiromo have to say about this."


She'd have to remove the marbles from one side of her mouth and Ackman's dick out of the other just to answer you.

soopy's picture

Guess no one left to squeeze that share price higher then. Short at will!  I mean, Bill.