Do you know the saying “under promise and over deliver?” Hedge fund jackass extraordinaire Bill Ackman sure doesn’t.
Everyone is most likely familiar with Bill’s ongoing battle with Herbalife. In late 2012 Bill made some very aggressive claims in a very public forum that alleged Herbalife was a giant ponzi scheme. Ackman admitted that he had a sizeable short position of which he was going to give the profits to charity.
I sure hope that charity had some other sources of revenue because what developed was one of the greatest short squeezes of all time. The other hedge fund managers, sensing that Bill had overplayed his hand, started buying up the stock. Within the space of nine months they managed to rally the stock from the $26 to $82. Ackman suffered not only in a financial sense, but more importantly, his reputation took a huge hit.
You would think that Bill would have learned his lesson. Most hedge fund managers are reluctant to ever divulge their short positions for the very reason that they don’t want to be squeezed. They also usually just let their results speak for themselves. There is no need to make 200 page presentations and hold webcasts. These hedge fund managers might leak the bad news to the press, but Bill’s absurd theatrics are virtually unprecedented.
That is why yesterday’s news from Bill Ackman was all the more amazing. Apparently Bill’s ego has refused to let the Herbalife issue die. Instead of just driving on and learning his lesson, Bill has spent $50 million in a massive investigation of the company. I don’t even know how you could spend that sort of money on investigating a company, but somehow Bill managed.
Now, with the results firmly in hand, Bill announced yesterday that he was going to give “the most important presentation of his career.” Again, why he just didn’t release the report to the news media is beyond me. Instead he scheduled a webcast for 10am and invited everyone to it. He ran around to all the financial news channels and talked up the event.
In fact he claimed that he was going to deliver the final “death blow” against Herbalife.
His arrogance is just awesome. I can’t put into words the stupidity of this ego trip. He didn’t need to hype this event – he could have simply had a quick webcast, dropped it on the web and let the news take care of itself. But no, he had to spend a day whipping the media into a frenzy over it.
I am lucky enough to work with one of the preeminent Seinfeld experts who quickly recognized that “Death Blow” was the movie that Kramer’s friend Brody asked Jerry to bootleg.
“When someone tries to blow you up, not because of who you are – but for different reasons all together.” – Kramer “Little Kicks” Episode – Seinfeld
This quote about delivering the death blow is all too fitting.
Ackman is no longer thinking straight. After the embarrassment of the epic short squeeze organized by his hedge fund competitors, he has taken it personally. If Bill is indeed correct, he should have learned his lesson and quietly shorted much more – having the last laugh while counting his money after the stock collapsed. But for him, the hit to his reputation was more hurtful than the financial loss.
Let’s hope that in his desperate mad scramble to show the other hedge fund managers that he is still “cool” he hasn’t made it all the worse. In hyping this presentation, he has set the bar extremely high. Probably as high a bar as I have ever seen set. It seems like a really stupid thing to do. The chances of disappointment are so very high.
I would have gone the other way and set the bar low so that on the day of the presentation, the stock would have moved more, not less. But hey, I am no Bill Ackman…
One last comment about Herbalife and I will move on to actual news – I promise. Do you know who is the largest holder of Herbalife stock?
You got it! Carl Icahn! It doesn’t get any better than this!
It was only a few days ago that Carl and Bill were bro-hugging on the CNBC “Chasing Beta” stage.
Now Bill is delivering the “Death Blow” to Carl’s position. Somehow I don’t think that Carl is the type to simply say all is fair in love and war. I suspect that these two lovers will once again be feuding on national TV before the summer is through…
Small vs. Big
In my personal retirement accounts I have been playing the short side of the market. Given that the Government of Canada does not think that short e-mini S&P 500 futures is an acceptable investment vehicle for an RSP (the Canadian equivalent of a IRA), I have been forced to trade leveraged inverse ETF funds. I know that holding these funds over the long term is a mugs game due to being chopped up with the implicit long gamma nature of these products, but the trader in me can’t resist the ability to lever up my RSP.
One of my favourite sayings is that “some were lucky enough to be born smart, while others were smart enough to be born lucky.” I am not sure that I am much of either, but in this case, I have indeed been lucky.
Instead of shorting the S&P 500, I have been trading TZA which is the 3 times inverse IWM (Russell 2000) ETF. When it comes to trading in the company account, I am attracted to the most liquid product, but in this case, I chose the index that seemed to be the most over priced.
Quantitative shops like GMO have been warning about small caps’ pricey nature for some time now. It looks like their warnings have finally born some fruit. Small caps have dramatically underperformed their larger cap brothers over the last couple of months.
IWM (white line) vs. S&P 500 (yellow line)</a> </div>
I am not sure if the small cap weakness is a harbinger of a large cap sell off (although I sure hope so), or if this is a simple wringing out of the speculative excesses from the smaller stocks.
But I do worry that this short small cap trade is getting crowded. There are some recent reports that show that Russell shorts are approaching all time high levels since the 2008 credit crisis.
Russell positioning</a> </div>
And when you drill in a little closer to the recent trading, you realize that this relationship is very extended.
Buy SPY Sell IWM spread analysis</a> </div>
I hated crowded trades, and I get the sense that this short IWM trade is crowded.
For my personal accounts, I have moved my long TZA into SQQQ which is the 3 times short Nasdaq ETF. Let’s hope that I am once again luckier than smart.