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.
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Steamboat Capital was down 6.93% net for the fourth quarter, bringing its year-to-date return to 7.3%. The S&P 500 was up 12.15%, while the Russell 2000 gained 31.37%, and the Credit Suisse Hedge Fund Index was up 6.38% for the fourth quarter. Q4 2020 hedge fund letters, conferences and more In his fourth-quarter letter . Read More
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 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, a Federal Reserve regulation took effect requiring banks to get customers’ permission to opt into a service that would allow debit-card and ATM transactions to clear, and a fee to result, even if a checking account doesn’t have sufficient funds.
Before 2010, banks didn’t need customers’ permission in most states for the service and welcomed the fee income. Banks became concerned the regulation would crimp this income stream.
That prompted individual managers at Wells Fargo to push personal bankers, staff in bank branches who deal with retail customers, to find new ways to get customers into the service, according to current and former personal bankers and managers in Florida, California, Georgia, Nebraska, Virginia and Texas.
At a Tucker, Ga., Wells Fargo branch, managers told personal bankers in staff meetings to present debit-card overdraft protection as a requirement for checking-account customers, according to Oscar Sevilla, a Wells Fargo personal banker from 2012 to 2013.
“We just used to say it comes with it to basically suggest that there wasn’t an option,” said Mr. Sevilla, now self-employed in the exporting business. He is also one of six named plaintiffs in a recently filed federal class-action lawsuit in California against Wells Fargo alleging employees were “encouraged and directed” by managers “to use various illegal schemes to open accounts fraudulently.”
5) Thank goodness the CFPB blew the whistle on Wells Fargo – as it has in so many other areas in which the financial industry preys on average Americans. That’s why the recent court ruling, which could have really crimped the CFPB, is so important – it made only a small change, as this editorial in today’s NYT notes:
A Consumer Watchdog Lives for Another Day
OCT. 17, 2016
The Consumer Financial Protection Bureau, which has had an enormously beneficial effect on consumers since it began operating in 2011, has survived the latest legal challenge to its existence with its powers intact.
But foes of the bureau, including the financial industry and its mostly Republican allies in Congress, would have you believe that the agency has been badly punished for posing an un-American threat to consumers — and to freedom itself.
For now, however, Americans can rest assured that the consumer bureau is still looking out for their interests.
6) Good for Buffett for rebutting Con Man Don’s lie (one of dozens) (does ANYONE now doubt that he’s a total madman???) in the last debate:
Warren E. Buffett is not running for president. But on Monday, Mr. Buffett, the billionaire investor, volunteered more detailed information about his income taxes than Donald J. Trump, the Republican nominee, ever has.
Acknowledging for the first time that he had avoided paying federal income taxes for years by claiming nearly a billion dollars in losses in 1995, Mr. Trump then tried to shift attention to his Democratic opponent, Hillary Clinton, accusing some of her wealthy supporters of exploiting tax laws to their own advantage.
“Many of her friends took bigger deductions,” Mr. Trump said. “Warren Buffett took a massive deduction.”
Actually, he did not.
“I have paid federal income tax every year since 1944,” Mr. Buffett wrote in a letter released Monday.
7) Never let it be said that I won’t share anything positive about the madman/con man. Here’s an article in 538.com which argues that a surprise Trump win might not crash the stock market or economy (in contrast to the article I sent around a week or two ago):
So it’s possible that a Trump win could cause a crash. Or that it could cause a market rally. Or, perhaps most likely, that there could be little market response at all beyond a few days of volatility. (Historically, U.S. presidential elections haven’t had much impact on the markets.) Be skeptical of any economist who claims to know for sure.
What about the effect on the broader economy? Citigroup’s economists argued that a Trump win would create much more uncertainty about government policy, which would lead to tighter financial conditions — banks would become less willing to lend and investors less willing to take risks. That, in turn, would be enough to “trigger a significant slowdown” in this country and around the world.
All of that is plausible but far from certain. Economists have only recently begun to develop ways to estimate the effect of “policy uncertainty” on the economy; the field isn’t nearly advanced enough to make confident assertions about how a single event like an election surprise would affect the global economy. More generally, the dismal science’s record of forecasting recessions is, well, dismal. Few economists saw the global financial crisis coming (despite what were, in retrospect, numerous warning signs); on the other hand, economists are famous for predicting recessions that never occur. The same Citigroup team that’s forecasting doom from a Trump victory has for more than a year been predicting a global recession triggered by China.
8) Post-presidency, Obama might want to consider opening a hedge fund, as he appears to be a heck of a stock market timer. Check out the chart below — the very week the market bottomed in March 2009, he said: “…what you’re seeing now is profit and earning ratios are starting to get to the point where buying stocks is potentially a good deal, if you have a long-term perspective on it.” Since then, the market has TRIPLED!
The full quote is in an article in Investor’s Business Daily (at the end of this email), which mocks Obama (“We didn’t realize that our president was such a market maven.”) and notes that “the Dow industrial average has sold off 30% since Obama was elected” and “the downdraft has accelerated since he came on the scene” because “investors obviously have yet to see anything constructive on the horizon.”
As usual, Obama has the last laugh!