From Whitney Tilson’s email to investors – does he think the president plays a large role in the stock market?

1) Christine Richard with an insightful and critically important analysis about Herbalife (which I am short):


In this article, we estimate how many individuals make up the first group, Preferred Customers, and how much product they’re consuming. To do this, we reconstruct a metric that the company stopped regularly disclosing in 2012 – the percentage of distributors Herbalife considers to be “Discount Buyers” or people who signed up just to get the product as a discount.

When it stopped including this information in its filings with the Securities and Exchange Commission, management said it believed the information was not valuable to the business or to investors. In fact, this data may be one of the single most important pieces of information for determining whether Herbalife operates as a legitimate direct selling business in the US and whether Herbalife’s US business will be able to survive the FTC settlement.

…Let’s review: The FTC says sales to Preferred Customers and to distributors who sell on to Retail Customers must account for two-thirds of Herbalife’s sales, if the company is to continue to pay the same level of commissions to its distributors. We considered one category in this article – Preferred Customers – and estimated the size and importance of this group by reconstructing the ranks of Discount Buyers, a metric Herbalife stopped regularly disclosing in 2012.

Recall that Herbalife set our expectations very high for this group, with periodic claims such as CEO Michael Johnson’s statement in 2013 that 90% of distributors sign up for one reason only – to consume the product.

Discount Buyers are vital to legitimizing Herbalife’s U.S. business because they have no interest in pursuing the business. They are a testament to the underlying demand for the products. These individuals are so pleased with Herbalife products that they are willing to make an upfront payment in order to get discounts on future purchases and they’re willing to go through the hassle of signing a contract in order to get that discount. They are what one might call “loyal customers.”

The problem is that they make up only 22% of all distributors, and they buy less than 2% of the product Herbalife sells in the US.

They are essentially irrelevant.

2) This story about Walmart’s decision to invest more in its people, by paying them more, investing more in training, creating career paths, etc., is important not just for WMT and not just for investors and Corporate America, but for ALL of America, given that WMT is the nation’s largest private employer. So far, the results are mixed:

A couple of years ago, Walmart, which once built its entire branding around a big yellow smiley face, was creating more than its share of frowns.

Shoppers were fed up. They complained of dirty bathrooms, empty shelves, endless checkout lines and impossible-to-find employees. Only 16 percent of stores were meeting the company’s customer service goals.

The dissatisfaction showed up where it counts. Sales at stores open at least a year fell for five straight quarters; the company’s revenue fell for the first time in Walmart’s 45-year run as a public company in 2015 (currency fluctuations were a big factor, too).

To fix it, executives came up with what, for Walmart, counted as a revolutionary idea. This is, after all, a company famous for squeezing pennies so successfully that labor groups accuse it of depressing wages across the American economy. As an efficient, multinational selling machine, the company had a reputation for treating employee pay as a cost to be minimized.

But in early 2015, Walmart announced it would actually pay its workers more.

That set in motion the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less?

…The question for Walmart, and perhaps the economy as a whole, is whether these changes turn out to be one-off, or part of a shifting philosophy of how work and compensation should work in a 21st-century megacorporation.

“Out of the gate, they’ve seen some improvement, but I think that’s because they were doing Retail 101 so poorly,” said Brian Yarbrough, a retail analyst at Edward Jones & Company. “The better question is what happens next year and the following year. The low-hanging fruit has been harvested.”

Ms. McKenna declined to be specific about what might come next. And of course in a volatile corporate world, an unexpected recession or management change, or rise of a new competitor, could upend any plans. But she suggests that the company’s changes should not be viewed as a one-time event.

“This is a journey,” she said.

In the short term, the Walmart experiment shows pretty clearly that paying people better improves both the work force and the shoppers’ experience, but not profitability, at least not yet.

3) A very interesting take on how income inequality is tied to corporate profit inequality:

Imagine two workers—the same age, same gender, same race, same education, same geography, same occupation, same industry. In theory, you might expect them over time to have similar earnings. In practice, they don’t.

The reason, according to a new paper from Harvard University’s Richard Freemanis that over time inequality is growing between different companies.

“The earnings of workers with near-clone similarity in attributes diverged so much by the place they worked that rising inequality in pay among employers has become the major factor,” in rising inequality, Mr. Freeman said.

This may sound obvious: Of course some firms do well and others don’t. But if inequality is growing sharply among workers with the same attributes, it casts doubt on theories that peg inequality to primarily demographic, educational or geographic factors. The link is tighter than one might expect. From 1992 to 2007 (the period in which the data in this study was available, and also the period over which much of the rise in inequality occurred), the average worker at a given percentile, and the average firm of a worker at that same percentile had almost equal earnings increases.

4) More on the ongoing Well Fargo debacle/disgrace:

Wells Fargo & Co. managers pushed bankers to sign up customers for potentially costly overdraft protection that they didn’t always need or realize they were getting, according to current and former bankers and managers.

Members of Congress expressed concern about potential overdraft problems at the bank during two hearings last month with Wells Fargo Chief Executive John Stumpf. He was called to Capitol Hill after the bank in September agreed to a $185 million fine and enforcement action over what the Consumer Financial Protection Bureau called the “widespread illegal practice” of opening unauthorized accounts.

The CFPB is also reviewing overdraft-fee practices broadly at banks, the agency has said.

…Overdraft fees have been a concern of regulators for some time. This is because of costs and moves by some banks in recent years to reorder transactions, posting larger transactions against an account first to increase chances a customer will overdraw the account and be charged numerous fees.

In 2010,

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