In the mid-1990’s I was watching an interview with Bill Clinton’s then Secretary of Labor, Robert Reich. At some point he said (paraphrasing), “I don’t know who this guy Bond Market is, but he’s running the world. Every time a policy topic comes up, the President turns to Bob Rubin and Rubin either says, the Bond Market will like that or not like that. And that’s how decisions get made.”
Bill Ackman gave his Herbalife “death blow, nail in the coffin, presentation of a lifetime”, whatever you want to call it. And the equity market spoke – it popped like a cork. As Ben Graham described many years ago, Mr. Market can be a hyper-active, sometimes optimistic, misguided, ignorant or amoral fellow. But Mr. Bond Market tends to be much more deliberate, methodical, careful in his analysis. Swift to act when things don’t look good. No doubt the Bond Market took note of Ackman’s presentation and digested the information. Then Herbalife reported earnings and the Bond Market spoke. Who knows whether the Bond Market was speaking about one or the other, or both. Either way, Bond investors precipitated the move in the stock lower, as they adjusted to protect themselves. Certainly some longs got spooked and headed for the exits, too. Herbalife is one of those stocks that just drops like a brick on any hint of bad news.
I’m an equity value investor. But I’ve learned as an investor, as in life, it is useful to understand other points of view, incorporate them as early as possible, particularly when I’m showing up late to the conversation. I don’t have to change my point of view or conviction, but I might express it differently in order to be more effective. For instance, when I formed a conviction that Herbalife was going to $0, I wanted to avoid the interim potential parabolic VW/Porsche squeeze, so I spoke with a friend who trades options for a living. We came up with long dated, deep out of the money put options, knowing in advance I might need more time and have to pay the premium again, so I should commit/allocate capital accordingly. I laugh because sometimes it’s like he’s talking Chinese. Recently, I described to him in equity/layman’s terms what I wanted to accomplish in potentially repositioning (“leveraging to catastrophe” with the same dollar of premium exposure) and I think he said that was called a “Ratio Put Spread.”
My wheelhouse isn’t Converts either, but I follow along pretty well and separate who’s making sense and who’s not. This is an excellent article written by Bill Feingold who publishes Hybrid Vigor. My personal opinion is that the Bond Market is underestimating the potential for catastrophe, too. But the walls are closing in. Here are some quotes from the article, but you should read the whole thing for context and visit his website.
“…you should be paying attention to Herbalife’s convertible bond, because what it’s signaling about the credit is not good.
In itself, this yield today suggests a fairly—not wildly–speculative credit.
In other words, the convertible bond market would much rather buy a revenue-free exploration firm with a Wells notice than Herbalife.
..the company’s statement that its convertible bonds have simply followed the stock lower is understandable but disingenuous.”