Friday, February 9, 2018

Nasdaq and the New York Stock Exchange (and possibly Herbalife) team up to help organised crime

Charlie Gasparino suggested in a tweet and a story that Herbalife, the Nasdaq and the New York Stock Exchange have teamed up to produce an anti-short-seller Bill. The Bill forces disclosure standards on short sellers.




I have no conclusive evidence either way as to whether Herbalife is involved behind the scenes or not. However the Bill is real and Charlie is usually a fairly thorough reporter and I have no reason to disbelieve him. And Herbalife has not denied the story.

The Bill is a threat to my physical safety. 

I want to assure readers that I am not exaggerating in the slightest. 

Bronte has a business model on the short side of maintaining a large database of people we regard as crooked and finding stocks associated with them and shorting those stocks. Often we do not know the full extent of the crook's business - we are just running on pattern recognition.

One such stock was China Agritech. We were short it originally because there was a minor crook associated with it. We worked out plenty including some ridiculous disclosures such as "proprietary nano-honeycomb embedding and microelement deep complexing technologies" in their organic fertiliser. Shorting a company associated with low-level scammers that literally claims to sell high-tech shit is just my style. 

Unbeknownst to me at the time however the Chief Financial Officer of China Agritech - Mr Yau Sing (Gareth) Tang- had a history. Mr Tang and Mr Jimmy Hueng were the directors of a Hong Kong Company called Win's Prosperity Group which collapsed. The story is told by Professor T. Wing Lo in the British Journal of Criminology. The direct quote (about a Hong Kong stock scam) is:
This case began with the renaming of a listed construction company, OLS Group, as China Prosperity Holdings (CPH) on 29 April 1999. Coincidentally, both the Chinese and English words for ‘Prosperity’ were the same as in Jimmy’s company, Win’s Prosperity Group. Jimmy Heung and a Mr Tang were the only directors of Win’s Prosperity Group. Tang was also the Executive Director of CPH, but Jimmy, as a triad figure, is not allowed to hold directorship of any listed company.
Jimmy Heung - now deceased but then Gareth Tang's regular business partner - was easy to find. His father was the founder of the Sun Yee On Triad. It was widely reported he was the Triad boss at the time China Agritech was fleecing American shareholders.

Anyway I publicly ridiculed China Agritech on this blog. Obviously I did not know of Triad involvement when I did this as I am not stupid or reckless. But not knowing Triads are involved does not obviate their involvement.

I stopped talking about China Agritech when I received threats of violence by phone from China from people who made very clear that the threats were credible. I reported these threats at the time to the Federal and local police which made it apparent to me that the Australian system wasn't well equipped to handle cross-border threats from China.

And more importantly I vowed to become far more restrictive about what I would say about short positions and what I would disclose about short positions in the future


Whatever - China Agritech was listed on the NASDAQ. It wasn't a small pink-sheet company and it had institutional shareholders. 

China Agritech is dead and buried now - and so is the Triad figure who was responsible for this fraud - so I feel safe enough talking now. I do not feel safe talking about this stuff generally. Indeed I would never willingly disclose such a short. Unless forced to by this Bill.

What this Bill will do is allow Triads and other organised crime gangs to list stocks on American stock exchanges and not worry about market participants anonymously exposing the natures of their crimes. The short-sellers will have to disclose themselves, not only to the SEC, but also to the those that will do them harm.

I say - without fear of exaggeration - that this is the Organised Crime Stock Fraud Protection Bill.

I can understand why crooked companies might support this Bill. And it gives me pause that Charlie reports a company that I own supports this Bill. But I have no understanding (other than a cynical grab for listing fees) as to why the NYSE and NASDAQ are happy for Sun Yee On Triad companies to list on their exchanges and why they support a Bill to protect them.


--------------

Why should shareholders have to disclose positions anyway?

Running a funds management company you only really have one output. Positions in stock market. That is your intellectual property. 

There is no other business I know where the business is forced to disclose the entirety of their intellectual property.

That said - I can think of a decent reason to force disclosure of long positions. If I own a share I own a vote. If you own a share you also own a vote. If own 30 percent of a company in most cases I can effectively control it. My votes impinge on the power of your votes. 

Because my ownership of shares can change the value of your ownership of shares most countries force disclosure when ownership stakes become large enough to matter (typically, but arbitrarily at five percent). This seems a reasonable compromise between keeping the buyer's intellectual property private and allowing the rights/control issues around a company to be visible to market participants.

However when I short a share I have no rights whatsoever - just an obligation to buy back the stock sometime. My short position doesn't impinge on your long position except in as much as there are deferred buyers in the stock. The above argument for forcing disclosure simply does not apply.

Indeed other than symmetry for symmetry's sake I can't think of a single argument for forcing short disclosure and I can think of strong arguments opposing it.

I would like the NYSE and the NASDAQ to lay out a cogent argument (other than mere symmetry) why disclosure should be forced and why this does not protect organised crime.

If Herbalife is truly behind this Bill (as Charlie Gasparino reports) then I would also like an explanation of why they support the Bill.




John Hempton

Post script: Charlie Gasparino has since contacted me and assures me that Herbalife has confirmed the story. 

Tuesday, January 16, 2018

Further notes on visiting Herbalife clubs in Queens

Preface: I once wrote a blog post - a response to Mr Ackman's campaign on Herbalife - which gave notes on visiting a Herbalife club in Queens. This remains one of the top ten most visited posts ever written on this blog.

On Saturday morning I visited two Herbalife clubs in Queens neither of which I had visited before.

One was a well known one - one of the first hits when searching for them using Google. The other was just found using Google Navigation and was about half a mile away.

Both clubs were pretty marginal businesses - but both were stable and viable. One was ten years old, the other five years. The first one was - believe it or not - prosperous enough to have employees.

My purpose was to check implementation of the Federal Trade Commission (FTC) rules on the ground. The FTC rules come from a settlement the FTC had with Herbalife in July 2016.

I went without someone fluent in Spanish (a skill very few Australians have) and that was a problem because neither of the proprietors (or their staff!) spoke English. Very few customers spoke English either - but we sat in the clubs for some time and a steady (although small) flow of customers came through. My colleague spoke broken Spanish which was enough for a basic - but not a detailed conversation. Sometimes customers translated.

In both clubs our names were taken when we ordered and records were kept of who the customers were. This is to ensure compliance with the rules in the Amway Case (reinforced in the FTC settlement) that require a multi-level marketing scheme to demonstrate that 70 percent of sales were to bona-fide customers and not to distributors. We asked whether this was a response to the FTC rules but were told that they had done this "always" - which meant at least for five years. In other words they had been complying with the core FTC requirement in advance.

In the second club the reason the clubs were marginal businesses however was made clear. We asked how many clubs there were around here - and the proprietor said in Spanish and with a wry look - too many. This is consistent with the first time I visited Herbalife clubs in Queens.

One of the clubs organised exercise groups in a park but not in the winter. The other club did not organise such groups.

At the end we found two fluent English speaking customers - a mum probably in her 40s and her daughter in the latter years of school. Their preferred language was Spanish but their English was excellent.

The mum had been coming for about a year and exercised three times a week (the exercise not organised by the club) and had lost about 45 pounds. She was a true believer - and credited Herbalife with her change.

Her daughter was there as much as anything to keep her mum company - but was also a Herbalife customer. She had successfully sold some of the product too - presumably to her mums friends who were (rightfully) impressed by the mum's loss of body mass and improved health.

But she did not sell it any more - because she did not get paid.

Now it turns out the reason that she did not get paid was that she was signed up as a "preferred customer" and not as a "distributor". The distinction between "preferred customer" and "distributor" did not exist prior to the FTC Settlement described above. It was part of the way that Herbalife was forced to demonstrate that it complied with the guidelines in the Amway case.

To be blunt - the direct result of FTC decision is that a young Hispanic woman did not get paid.

And that was the only direct result of the FTC decision I saw.

And so in summary I conclude that the FTC has been ripping off young Hispanic women since July 2016.

I am not sure that is the intended effect.




John

Saturday, December 30, 2017

Herbalife and Bill Ackman in furious agreement

Today Bill Ackman announced that Pershing Square was settling an insider trading securities class action. To quote:

Pershing Square and Valeant have agreed to split the $290 million total settlement such that Pershing Square will pay $193.75 million and Valeant will pay $96.25 million. 

But Mr Ackman seems to think that a settlement of approximately $200 million does not say anything at all about the legitimacy of the case. Again to quote:
“We continue to believe the case had absolutely no merit,” said Pershing Square CEO Bill Ackman. “We decided, however, that it was in the best interest of our investors to settle the case now instead of continuing to spend substantial time and resources pursuing the litigation.”
Herbalife - who previously settled a case for a roughly $200 million payment - is of course in full agreement.

I think it is the first time Mr Ackman and Herbalife have agreed on anything.

So let us savour it.




John


Monday, December 25, 2017

The Urban Dictionary is surprisingly up-to-date: nocoiner edition

Nocoiner is a person who has no Bitcoin. Nocoiners (usually Socialists, Lawyers or MBA Economists ) are people who missed their opportunity to buy Bitcoin at a low price because they thought it was a scam, and who is now bitter at having missed out. The nocoiner takes out his or her bitterness on Bitcoin Hodlers, by constantly claiming that Bitcoin will crash, is a scam, is a bubble, or other types of easily refuted FUD. Nocoiners have little to no computer skills or imagination; even when they see the price of Bitcoin go up and its adoption spread they consider all Bitcoin users to be in a collective delusion, with only themselves as the ones who can see what is happening. This attitude comes from being steeped in the elitist priest cultures found at Harvard, Yale and Columbia, where anyone who is not part of their clique is treated with suspicion by default. The worst nocoiners are tenured academics and goldbugs. Nocoiners believe that the world owes them everything they want because they are part of an elite; they are hysterical liars, brats, prostitutes and losers.
I'm pretty sure Emin is a Nocoiner. Yesterday he made a Tweet about how Bitcoin going up was just a fad, and that a crash was inevitable. He's always talking Bitcoin down; if he had Bitcoin, he would never trash his own stash.

Wednesday, December 20, 2017

Wednesday, November 15, 2017

An initial coin offering for augmented reality smart glasses: you only live once...

This advert - offering another cyrptocoin - specifically for *really smart* augmented reality smart glasses marks the new crypto-high.








Wednesday, October 25, 2017

Apple pulls a Dell

The keyboard on my new (current model) MacBook Pro is sticking. So I take it to the Genius Bar.

It was two hours for an appointment - and that was fine - so they texted me and I came back in two hours. So I came back in five minutes.

The staff member cleaned most the keys but broke one off. Ugh.

So they want me to check the machine in so they can replace the top-plate to which the keyboard is irrevocably stuck. Fair, unpleasant.

But now they want it for three to five days AFTER the top plate has come into the shop. They won't accept me dropping it in the morning they are fixing it. Instead it needs to wait in queue whilst they let the time elapse. (I can and do use the machine with a remote keyboard.)

I never thought I would say this - but this was the sort of behaviour exhibited by Dell before Dell blew up. Intransigent, arrogant, and actually not caring about the needs of customers.

I am genuinely surprised. I thought this company charged premium prices and gave premium products and premium service.

At least on the service I was wrong.





John

PS. Apple Bondi Junction. Customer service officer Morin.

PPS. Many have pointed out consistent problems with this keyboard. Try this... https://theoutline.com/post/2402/the-new-macbook-keyboard-is-ruining-my-life

I am getting close to just asking for a refund of the machine (faulty design) and going back to a Dell.

Saturday, August 12, 2017

Some thoughts on the firing of James Damore from Google

As the world knows by now James Damore was fired from Google for writing a memo that questioned Google's diversity policies.

As a holder of Google stock I have a few thoughts on this.

Software engineering is a job where you cannot replace one brilliant software engineer with six adequate ones. It really is a job where the best people can lever their work over millions of computers and the whole world.

If you are Sundar Pichai (the CEO of Google) your job is to attract, hold, motivate and direct the very best software engineers - and to make sure their work does scale over the whole world.

In doing this he literally should not care whether men are better software engineers or mathematicians on average than women. Google should not interested in average. Google should be interested in the best.

I will hold Emmy Noether up as better than pretty well all men in all current mathematics and physics faculties. There may be a dozen in the world who can match her.  Probably less. If she pops along you should hire her. Even if women are less good on average at maths than men that should not matter. Emmy Noether is clearly better than anyone else you are going to hire this year.

The truth or falsity of James Damore's assertions in the memo literally do not interest me and should not interest Sundar Pichai. His memo made his job of hiring the the best harder. If the best happened to be a woman or another minority they might prefer work somewhere more welcoming.

If I were the Google CEO I would not have just fired James Damore. I would have been proud to fire him.

There is a lot of talk about Mr Damore receiving compensation from Google for his firing. For what? He broke the Google code of conduct and was fired for cause.

Yes, his feelings and the feelings of many delicate petals on the right are hurt.

But they are no more entitled to compensation for hurt feelings than anyone else.

If Sundar Pichai wastes shareholder funds compensating him I will be disappointed.

And don't think for a moment that this is a liberal line. Google is and should be a proudly elitist place for a software engineer to work. And Mr Damore was fired because he offered a phoney elitism (based on gender rather than competence).

Phoney elitists like him don't deserve to work in such a place.

Mr Damore was right on one thing. Diversity shouldn't be valued for its own sake in such a place either. But I haven't noticed a lack of elitism in Google staff I have met. They positively drip elitism.

Diversity is valued though and it seems is valued for the right reason. It gets you a better chance of recruiting the best.




John

Thursday, August 3, 2017

E&P decoding - Pioneer Natural Resources edition

I think I know what this means but as per usual the internet is full of people who know far more than me. You dear readers are my 20 thousand person expert network. 

This is from the Pioneer Natural Resources conference call. I would really love people to explain it - preferably word-by-word in the comments. In particular I want to understand the drivers of the pressure changes (which matters for proppants for instance) and how the four-string casing deals with the problem.

Thanks in advance:

We've mentioned this in all the slides and such, but we did fall behind operationally on our completions in the Spraberry/Wolfcamp, in large part due to unforeseen drilling delays. What happened is the delays were really the result of unexpected changes in pressure regimes in the field.  
So what we've seen is increasing pressures in some of the shallow formations that means we have to mud up substantially to deal with that problem and then we immediately then are drilling into lower pressure depleted zones. And we were at the knife's edge of this really through all 2016. But these pressures have changed in a subtle manner such that we now find we had a higher percentage of what we refer to as train-wreck wells, where we have all kinds of problems with lost circulation and other issues because of this pressure change. 
The easiest way to remediate this is with a drilling plan takes us from a three-string casing design to a four-string casing design. So that's exactly what we've done. We solved this issue. We have addressed it and we've done so by changing the casing design, which has proven to be very successful. 
One thing it does is it does increase the well cost substantially, about $300,000 to $400,000 per well, and it does increase our time of drilling five days or so. But we're also nickel-and-diming away other costs in these wells to try to get that money back, including changing out surfactants and other things to try to reduce costs and reduce days. So we're not going to stand pat with this increase. We're going to chip away at it and reduce it. 
Cumulatively, though, what happens is because we've impacted the schedule, we've also then reduced the number of POPs we're going to be completing this year by about 30. Those essentially will move into 2018. That's 100% due to these drilling delays I mentioned, which I believe we now have mitigated. But you have to also factor in the delays not only result in the deferral of wells you put on production, but also loses production days for all the wells that get delayed that are going to be POP'd in the future, particularly later in the next year. But the point is we're now dealing with that. I think we have that squared away. I have a later slide we'll talk about more detail on that.



Saturday, July 15, 2017

The cyclicality of share buy-backs: Costco edition

Currently looking through Costco - one of the finest companies I know. (We do not own a stake...)

Anyway this is hardly a Costco specific comment - but here is a run of their buy-backs (after issuance/option exercise etc). Negative numbers are net repurchases.


Year Ended
Cash from stock issuance
($million)
 2,016 -412
 2,015 -395
 2,014 -212
 2,013 77
 2,012 -459
 2,011 -355
 2,010 -348
 2,009 2
 2,008 -548
 2,007 -1644
 2,006 -1039
 2,005 -135


The company - as you can see - has bought back a lot of stock. The lack of a buyback in 2013 followed a purchase of a non-controlling stake in Costco Mexico.

But whatever - the company stopped repurchasing stock at the bottom of the market in 2009 - only to start again in earnest as the market and their stock price went up.

This happens in almost only cases - and in this case I do not think the board is mendacious in manipulating their stock. It just happens.

And it even happened with Charlie Munger (who is more than passingly rational) on the board.

Just saying.





J

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.