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How Ackman may have manipulated the world

How Ackman may have manipulated the world

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How Ackman may have manipulated the world

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Here's some more Washington intrigue for conspiracy theorists (as if they didn't have enough on their plates). This one involves several feuding billionaires, members of Congress, money changing hands, and potential abuse of power.

Naturally, this has to do with Herbalife, the company selling nutrition supplements using multilevel marketing.

Let's start off with a retweet by the Federal Trade Commission last week:

That was followed by this response from the FTC:

Now, that doesn't seem like a big deal except the FTC doesn't usually retweet private individuals or answer that many questions. And, this particular tweeter, @arbitrageit, is otherwise an account of little consequence in the Twittersphere with just 44 followers.

That led the bloggers over at ZeroHedge to ask if the retweet was "a hint that something bigger is coming".

Then this past weekend saw the publishing of "the" New York Times article about how Bill Ackman has been lobbying Washington lawmakers and others to get an investigation going on Herbalife. Ackman's nearly $12 billion Pershing Square Capital took on a $1 billion short position in the company in 2012, a move that set him on a collision course with other fund managers who went long the Herbalife's stock, including Dan Loeb, Carl Icahn, and George Soros.

(Read: Ackman vs. Herbalife, a history)

Then Tuesday brought another charge by Ackman, this time saying his investigation has shown Herbalife broke laws in China.

Then on Wednesday came a surprise announcement of an FTC investigation into Herbalife – a week after ZeroHedge pondered if something big was coming – that sent the stock down nearly 13%.

According to Enis Taner, Global Macro Editor at RiskReversal.com, it's the nuance of what Ackman was charging that is important to understanding why so many big investors are taking the other side of Ackman's short.

"Here's why this investigation is so key," says Tanner. "From the very beginning when Bill Ackman put out his short thesis on Herbalife, he never questioned the cash flows, the business model, [or] investment thesis. He said this (Herbalife) is fraudulent, illegal behavior. That's what he has always questioned."

Taner notes that Icahn and other investors have been drawn to the company's large cash flow and low relative valuation. The stock price trades at less than 10 times its projected 2014 earnings. But that doesn't necessarily make the stock a buy, according to Taner.

"The crux is, will the FTC shut them down at which point," says Taner, "it's a very dangerous investment to own. I view it as a binary situation hinging on this FTC investigation more than anything else related to Herbalife fundamentals."

(Read: Herbalife says U.S. FTC opens inquiry long sought by Ackman)

CNBC contributor Andrew Busch, editor and publisher of The Busch Update, Ackman's calls for an investigation would require at least some examination by the regulators into Herbalife's practices if only because of public perception.

"The government has to say to themselves, 'look, if we don't even look at it, we're going to look like idiots compared to what happened with Madoff,'" says Busch.

Unlike Taner, Busch believes investors could get involved in this stock but should be on the short side and with only a small amount of money. Busch notes the stock consistently made higher lows during its run from $34 to $83. However, in 2014, it began making lows below its December 2013 low of roughly around $68.

"Looking at Herbalife not even knowing what the outcome is," says Busch, "just the uncertainty surrounding it makes me want to sell the stock with a stop on a close above $68… [There is] tremendous volatility in this stock so if you're going to put any money to work, make sure it's a small portion of what your portfolio is. But, you can trade this thing and take a shot at going short of it.... If the thing goes to zero, you're going to make a lot of money."

Taner still doesn't like the odds and recommends investors hold back either as longs or as shorts.
"I would stay away from it on either side because it's such a high headline risk," says Taner.  "The FTC could say in a few months that the investigation reveals no reason to shut the company down and it would be up 25% or 30%."

"Men with billions of dollars are fighting it out among very influential policymakers," Taner says. "I don't suggest it for the rest of us."

Answering that question and others on Herbalife and what's next for the stock is Talking Numbers contributor Enis Taner, Global Macro Editor at RiskReversal.com on the fundamentals and Andrew Busch, editor and publisher of The Busch Update.

To see the full discussion and Busch's chart on Herbalife, watch the video above.

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