It used to be that the market was a reasonable place where people could exchange one asset for another – cash for stock. Now it’s simply a game.
Who can beat the earnings number? Who can give the appearance of opportunity? Who can convince enough suckers to join the party? Don’t think for one second it’s about owning equity. It is not.
The worst of this manipulation on Wall Street can be found in the exciting drama surrounding a company called Herbalife (NYSE: HLF). The lengthy fight between the company and a hedge fund manager illustrates how the strings are pulled.
A lesson in manipulation
If you haven’t heard this story, you should. It’s a great lesson in manipulation and how those on both sides of the coin play it.
Hedge fund manager Bill Ackman of Pershing Square Capital Management is at the heart of the controversy. Ackman disclosed a $1 billion short against Herbalife stock more than a year ago. The hedge fund manager jumped all over the stock on the short side through last year, claiming the nutritional supplements company is nothing more than a giant pyramid scheme and should be shut down by regulators.
Nothing really wrong with that until he used his connections with the media to blast his message across the world, knowing full well that in so doing, Herbalife stock would tank.
It did, but then a funny thing happened on the way to him minting a fortune on the billion-dollar trade: other giant hedge fund managers piled in against him on the long side.
Many investors, including, Carl Icahn, saw right through Ackman and his attempted manipulation. They bought the stock en masse last year. That buying crushed Ackman’s shorts as he seemed to be a lone ranger betting against Herbalife.
As for his claims that the company is a fraud, they were refuted by Herbalife vigorously. The company spent millions of dollars defending itself.
Nothing wrong with that defense, either, as it is what any legitimate company should do, but then things went too far.
Things got nastier when Herbalife took its fight directly to investors in Ackman’s hedge fund, attempting to pressure them to withdraw funds from the fund. That’s a bit of dirty pool and again has nothing to do with the company doing what it is supposed to be doing selling its nutritional products.
Ackman would not be deterred. He kept the pressure on in Washington, urging politicians to act.
Last week, Sen. Edward Markey (D-Mass.) did just that, sending letters to the SEC and FTC, asking them to investigate Herbalife. That sent Herbalife stock tumbling.
Talk about a cat fight. Using that sort of influence is disgusting and nauseating and has nothing to do with the purpose of Wall Street. The fact that a politician actually took Ackman’s bait is more disgusting.
The shorts and defenders of Ackman cite all sorts of reasons why the company is a pyramid scheme, but it is not.
If it was, the accounting firm auditing Herbalife would have not signed off on the public release of financial statements.
A hedge fund manager playing the game
Pleading for help from the regulators by Ackman is about as ironic as it gets. The already overly regulated markets in the U.S. work just fine and Ackman darn well knows it. He’s simply trying to play the game.
If you can’t tell, it’s the sort of thing that just drives me crazy. Do you think a small investor with similar claims or concerns would ever get a regulator to listen and more importantly, act?
I think not.
Instead, the little guy has to trust that Wall Street is a fair place to operate and that financial statements are to be relied upon.
If we can trust those financials at Herbalife, the company looks to be a really great investment opportunity . . . but would you put your money in, given the manipulation surrounding the stock?
The well has been poisoned and anyone investing in Herbalife today is simply rolling the dice.
It’s too bad, because it probably isn’t a pyramid scheme and instead is an interesting, fast-growing company trading at a cheap price, but what does that matter in this market?