Herbalife

$HLF +7.5%.

$JCP is -17% today.

Ackman is short the former and long the latter.

Zerohedge blogged Ackman's position list according to his 13F filing.

http://www.zerohedge.com/news/2013-02-28/herbalife-appoint-two-icahn-directors-icahn-gets-right-boost-hlf-holdings-25

If I were Bill Ackman's, I would be bricking it.

JCP's move is fundamental. The company's results were very poor. 

It seems as if the superstar manager that Ackman spent so much time praising suffers from the same blindspots as he does. Massive overconfidence and an apparent unwillingness to change course even when data and events contradict their model of the world.

As a manager this is bad. As an investor this is lethal. 

The biggest and most dramatic blow ups occur when overconfidence and a stubborn reluctance to change your view meet the market.

The market is telling Mr. Ackman he is wrong.

You can't change your mind every time a position ticks against you, but there should always be a fixed regular periods in both price and time that one re-evaluates the investment thesis. Buying a stock that falls 25% before it begins to rise, is not "early", it is wrong. And looking at Ackman's investment record it appears he's made plenty of mistakes, yet seems to leave himself no room for error.

Being a concentrated investor has its merits, however if you are shorting and using leverage then that concentration becomes a weakness. Other traders and investors are now talking about what he holds, that is chilling. 

I've bought Herbalife today, because I think he is wrong, the chart looks good and it makes a lot of sense that other investors begin to see that too. 

The more noise and adverse price action he faces the tougher his position becomes and the more likely he is to face redemption requests and be forced to liquidate.

Time to buckle up, it's about to get bumpy.

Herbalife - bet sizing

I don't have much to add that hasn't been said already better by other bloggers and media outlets.

to summarize;
1) Bill Ackman is short ~20mm shares (#113mm shares outstanding) ie 17.7% of the company at current price of $45 that is a $900mm short.
2) Dan Loeb is long about 8.9mm shares.
3) John Hempton was (I don't know if he still is) long shares. He's done some digging on Ackman's short thesis. (bronte capital commentary)
4) One suspects that Icahn is long.

I've read most the the secondary commentary on the stock and have done no work on it on my own. Ackman's short thesis should be on the web, I've linked to Hempton's comments which I think work well as a rebuttal. Loeb's description can be found in Third Point's investor letter from last quarter.

The major point I wanted to make one of appropriate "bet sizing".

I believe Pershing Square (PSCM) has an AUM of ~$9bn.

Shorting $900mm of a stock, ie 10% of AUM is just too big. Way too big.

Shorting 18% of a company is too big a position.

I guess they have sized this position based on number of days volume, because on this metric (looking back) it is 10days volume.

That is terrible, naive risk management.

Being short is a different risk profile to being long, and being publicly short increases the risk.

Icahn, although rude, is right, what is Ackman going to do if there is a short squeeze, or if the company starts to use FCF to buy back shares??

Conservatively the volatility on the stock is 50%, it is not hard to see it moving up ~30% in a month to $60. That is a $300mm loss.

~3% of aum.

But then you haven't even started trying to get out of your position, which you are likely going to have to at that point. I think the slippage on trying to get out is going to be horrific. I wouldn't be surprised if it was 5-10%.

This is the sort of position that would give me ulcers. This size trade is the sort that you can lose your company and name with when it goes very badly wrong.

Volkswagen shares traded as high as €1000 during their short squeeze in 2008 ie a squeeze of 600%. PSCM would have been liquidated long before it got close to that.

Even if he was proved to be eventually right, there are many potential paths where he loses hundreds of millions of dollars and gets stopped out. Personally I would never want a short to be more than 2.5% of AUM. In fact I'd much prefer to bet on something like this shorting credit or buying options, where one's downside is fixed and limited.

status update....

I've not pushed anything out there recently, because I don't think there is too much to say. I thought the Greeks would look to repudiate their existing debt when they started running a balanced primary budget, it looks like we are getting closer to that point. I think the pressures in the eurozone system are definitely increasing, and the press trying to whip up panic with stories of deposit flight and bank runs is certainly not going to help.

It is the mechanism that I thought could pull the rug out from the system, but would be hard to predict. I guess the ECB is falling over itself to provide liquidity to those banks who are losing deposits. I am not sure whether it should or not, given the uncertainty of the solvency and the questionable collateral they have accepted. Additionally there is the risk to the system they add as the subordinate other creditors, without the political mandate. But then I am a euroskeptic and I don't feel that the project has any democratic legitimacy.

I'd like to have a quick moan though, I find it increasingly difficult to read newspapers, magazines or watch the news. Maybe it is just my inevitable middle aged crankiness, but the ratio of factual reporting to opinion and "analysis" seems to be at an all time low. I like the next punter enjoy a bit of gossip, and hearing opinions, but surely not every article should soley consist of dumb down clichés, rhetoric and the journos political views. The place for rants and froth is opinion pieces, editorials, letters and blogs, not leading stories and bulletin pieces surely.

The media, economist covers and consensus is definitely focussed on the euro, with a shocked belief that they will muddle through. A lot of the better macro commentary is talking about the slow down in China, which I agree remains the biggest risk, not that I feel I have any edge calling that or finding ways to express it. With complete consensus that the US is recovering better than 'expected'.

I'll resist the urge to slate the bookrunning skills of MS.