Following Kyle Bass' earlier comments on Herbalife's ability to tap the capital markets for a major buyback:
- HERBALIFE WILL BE ABLE TO BORROW AS MUCH AS $2B, BASS SAYS
- YOUTH UNEMPLOYMENT MIGHT ENCOURAGE MLM GROWTH, BASS SAYS
- BASS SAYS HERBALIFE CATALYST WILL COME IN 60 DAYS AFTER AUDIT
an HLF spokesperson has noted that Carl Icahn will not be selling (following the stock's close above a key level that enables him to sell). This has sent the stock to $77.39 - an all-time high.
- HERBALIFE SAYS ICAHN HAS NO PRESENT INTENTION TO SELL SHARES
We can only imagine how Ackman feels as day after day of theta is sucked out of his puts...
[10]
As D.A.Davidson Analyst Tim Ramey notes:
Icahn’s lockup provision was to expire Feb. 28, 2014, or upon 5-day VWAP reaching $73 or moreIcahn subject to other insider trading restrictions; he can’t buy/sell in windows that are closed to insiders, such as if HLF was working on deal or had info about audit status
Finally, while the market was initially amused by Ackman's conversion of 40% of his equity short into puts in early October [11], we made it quite clear it would achieve nothing simply based on his technical exposre. To wit: "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."..."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)"
And some annotated thoughts:
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...
And furthermore:
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 [12], 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?
Well, Ackman's put trade has been profitable for at least one entity - the one who sold him the puts.