Herbalife Deals and Blockchain Dreams

Also pacemakers, imaginary Nazi gold, Jose Canseco, Uber and bond market liquidity.



Carl Icahn has recently discussed selling his stake in Herbalife Ltd. to a group including the company’s arch-nemesis William Ackman, another surprising twist in a battle between billionaires that has riveted Wall Street for years.

It's not clear what the status of those discussions is, but it's such a pleasing trade. Like the ideal schematic mechanics go like this:

  1. Icahn owns 17 million shares.
  2. Ackman is short perhaps 20 million shares, in one form or another (that number is mostly made up; here is some guesswork about his position).
  3. The stock is at, say, $62.
  4. Icahn sells his 17 million shares to a group of buyers at, say, $60.
  5. Ackman buys, say, 8 million of them, leaving him short 12 million shares.
  6. Icahn announces that he is out of the stock, and without his support, the stock falls to $50.
  7. Icahn has avoided $170 million in losses (17 million shares times the difference between his $60 sale price and the new $50 price).
  8. Ackman has made $144 million in profits (12 million net short shares times the difference between the $62 price with Icahn in the stock and the $50 price with him out).

Both sides win! If Icahn can sell his whole stake at once without letting on that he's getting out, he can avoid moving the market against him. And if Ackman can facilitate that trade, he will be up on his remaining short position if the stock really does fall on the news that Icahn is out of it. (The people buying Icahn's shares at $60 for a long trade lose, but presumably they have a different view. And of course Ackman's short position is probably still in the red overall.) Also they get to be friends again. And they get a good story about the time that they toyed with a public company's stock and then ultimately decided to split the difference.

I have sometimes mused that the right way for Icahn and Ackman to battle over Herbalife would have been for them to just write a swap with each other referencing, like, a billion dollars worth of Herbalife stock. If the stock goes up, Ackman pays Icahn; if it goes down, Icahn pays Ackman. It's a pure zero-sum bet, and no one buys or sells any actual stock. It would be neat and clean and avoid all the irritating second-order mechanics of actually trading stock: stock borrow costs for Ackman, 13D and antitrust filings for Icahn, and for both of them the frictions of moving the market with their own trading activity. But of course those second-order mechanics are so much of what makes things fun for them. Icahn talked about a short squeeze, in which rising stock borrow and financing costs might have forced Ackman out of his short position; his 13D filings might have hinted about a possible Herbalife takeover and pushed up the price. The skill and joy of being Icahn or Ackman is not just about picking a stock that will go up or down, it's about knowing the right tactical moves to get the most out of that call. And now it's quite possible that the right tactical move for both of them is for Icahn to sell some shares to Ackman. It is not the most obvious move, to the casual observer, but Ackman and Icahn didn't get where they are by making obvious moves.

Blockchain blockchain blockchain.

Okay I mean look:

According to CoinDesk, an online publisher, a couple in Singapore recorded their prenup on a blockchain, specifying that “every 10 days, 100 minutes must be spent on a date night, that shopping sprees shall be limited to once per fortnight ‘unless it’s for food,’ and that [Sayalee] Kaluskar must agree to watch The Walking Dead after [Gaurang] Torvekar finishes watching every season of Seinfeld.”

Hahahaha good job dorks. They've written a smart contract on the blockchain! It's a self-executing piece of code! It pulls in date-night data from their Apple Watches, shopping data from their credit card companies, and viewing data from their smart TV, and if it determines that Torvekar has finished "Seinfeld," but Kaluskar hasn't started "The Walking Dead" within a pre-programmed time period, it will automatically file their pre-written divorce papers!

No of course not, come on. It's not a smart contract. It's not even really a contract. They just wrote down some stuff they wanted to do, and then were like "where should we put this stuff that we wrote down," and instead of putting it in a desk drawer or a safe or hanging it on the fridge or whatever, they were like "I know: the blockchain!" Because if you want to make your TV-watching prenup just a little bit more embarrassing, the blockchain is the place for you.

That anecdote is from this Bloomberg Businessweek article about how the blockchain will revolutionize human behavior, and not just by creating new opportunities to advertise marital quirks. The biggest opportunity is in business organizations. The trustless peer-to-peer magic of the blockchain will allow people to stop dealing with (and working for) old-style corporations; instead, each individual will be an independent atom in an economic system run on the blockchain:

After streamlining companies, the next step for blockchain will be blowing them up. Ethereum, for one, goes beyond the ledger function to work more like Google Docs—shared software that can be used by all but is tamperproof. You can safely do business with someone you don’t know, because terms are spelled out in a “smart contract” embedded in the blockchain. There could be blockchain versions of Uber and Airbnb that are peer-to-peer: No company would need to sit in the middle of the transaction to gather data about your spending habits or collect a fee.

Or there might be companies, but only barely:

To some visionaries, the logical endpoint is a third stage in which entire companies move onto the blockchain and even the functions of the CEO and the board of directors are reduced to contracts rendered in computer code. Shareholders, through online voting, would make any decisions that aren’t programmed in. “One of the many advantages of having a robot run your organization is that it is immune to any outside influence, as it’s guaranteed to execute only what it was programmed to,” says Ethereum’s website.

This vision of constant competition of all against all based on computerized rules, without the job security and risk-spreading of established human institutions, is obviously dystopian, though everyone in the article seems pretty jazzed about it. But it actually undersells the potential of the Ethereum blockchain, which has already revolutionized companies. Like:

  1. The old way was that some humans got together to build an enterprise for some commercial purpose, and some of them put up the money, and others ran the business, and still others worked in it, and there were difficult decisions to be made about sharing the benefits and monitoring the managers and workers.
  2. The new way is that some humans send their money to a company organized with smart contracts on the blockchain, and then a hacker steals it, obviating any further difficult decisions, except the (surprisingly deep!) one about how and whether to get the money back.

I think everyone can agree that the Ethereum approach is far more elegant than the old one, which required actual messy human activity in the real world. 

Elsewhere, here is Izabella Kaminska on exchanges and distributed ledger technology.

The internet of things.

Speaking of dystopian systems enabled by computing technology, Carson Block of Muddy Waters is short St. Jude Medical:

In a report to investors Thursday, Block warned that tens of thousands of Americans are living with ticking time bombs: St. Jude pacemakers and defibrillators that are easily compromised, causing potentially fatal disruptions.

“The allegations are absolutely untrue,” said Phil Ebeling, St. Jude’s chief technology officer. “There are several layers of security measures in place. We conduct security assessments on an ongoing basis and work with external experts specifically on Merlin@home and on all our devices.”

Here is the Muddy Waters report. One thing I wonder about is: Even if Block is right, why would you hack someone's pacemaker? It is just so ... mean. And complicated. Like, if you wanted to murder someone with a pacemaker, it seems like it would be easier to walk up to him and shoot him with a gun than to buy the hardware and develop the expertise to hack his pacemaker, get within hacking range, and then do it. Pacemaker-hacking does not seem like an optimal method if your goal is just regular murder. (Not legal advice!) 

I guess one reason to hack a pacemaker is financial: You could short a ton of St. Jude's stock, hack some of its pacemakers, kill some people and wait for the stock to crash. (This is again not legal advice, though it is a free plot for a financial thriller if anyone's working on one.) But if you are a hacker looking to make money by shorting St. Jude's stock, and you have figured out how to hack its pacemakers, actually going and murdering a bunch of people seems mean and unnecessary and really extremely illegal. You should just short the stock and then tell people that you can hack the pacemakers.

And in fact Block's short idea came from the hackers:

When a team of hackers discovered that St. Jude Medical Inc.’s pacemakers and defibrillators had security vulnerabilities that could put lives at risk, they didn’t warn St. Jude. Instead, the hackers, who work for cybersecurity startup MedSec, e-mailed Carson Block, who runs the Muddy Waters Capital LLC investment firm, in May. They had a money-making proposal.

MedSec suggested an unprecedented partnership: The hackers would provide data proving the medical devices were life-threatening, with Block taking a short position against St. Jude. The hackers’ fee for the information increases as the price of St. Jude’s shares fall, meaning both Muddy Waters and MedSec stand to profit.

Elsewhere, here is Elaine Ou at Bloomberg View on the economics of ransomware.

Keynesian Nazi gold train!

I love this little story about a Nazi gold train that is apparently not buried underground in Poland, probably because it did not exist. In any case, the treasure hunters who were digging for the train have given up for now, though they'll be back in September. But the train itself was never really the point:

“I am 100 percent certain they will find something sooner or later,” she said. “If not here, then in another place. Walbrzych is full of mysteries. But we are already benefiting: We have been booked up all summer.”

Arkadiusz Grudzien, the spokesman for the mayor of Walbrzych and head of the City Promotion Office, said in an interview that tourism in the town was up 44 percent from the previous year.

“The publicity the town has gotten in the global media is worth roughly around $200 million,” he said. “Our annual budget for promotion is $380,000, so think about that. Whether the explorers find anything or not, that gold train has already arrived.”

It is a lovely parable of Keynesian economics: You can spur economic activity by burying imaginary Nazi gold trains in the ground and then leaving it to private enterprise to pretend to dig them up. But it is also a lovely parable of the post-industrial economy generally. For so much of human history, the way to obtain wealth was to dig in the ground for gold. It still is! Except that now actually finding the gold has become irrelevant. The concept has become so powerful that we can dispense with the thing itself.

It's August.

Oh man is it. Here is perhaps the August-iest markets story I've ever read, a Wall Street Journal A-hed about Jose Canseco's reinvention as an economics pundit. It is pointless for me to excerpt it here, or offer any comments, because each sentence is uniformly hilarious, so just read it. If I had to pick a favorite, though, it would be "Mr. Canseco, through his manager, declined to comment for this article without financial compensation." That's the way to do it!

Elsewhere: "It really is very quiet." On the other hand: "Janet Yellen Might Ruin Your Summer Vacation."

People are worried about unicorns.

I guess people are a little worried about Uber, whose "losses in the first half of 2016 totaled at least $1.27 billion," mostly due to driver subsidies. I mean, a moderate amount of worry. Uber has a lot of money. "You won't find too many technology companies that could lose this much money, this quickly," says Aswath Damodaran; he's bearish on Uber, but I feel like a lot of tech investors and entrepreneurs would say that with pride. If you can consume the equivalent of one and a quarter unicorns in six months, you must be the king of the unicorns.

In other Uber news, it is teaming up with Betterment to offer individual retirement accounts for its drivers, though not over the blockchain. Just, like, regular. In other giant tech company news, WhatsApp is "relaxing" its "privacy vow" to share more data with Facebook, which is quite a locution. And in tech-culture news, apparently bikes are cool now.

People are worried about bond market liquidity.

Here is Josh Brown:

David Plecha, the global head of fixed income at DFA, doesn’t believe in the bond market “liquidity crisis” meme that the newspapers like to trot out every few weeks.

Rather, he views what’s going on as an evolution and not a crisis or a problem – the fixed income market is about 20 years behind the stock market’s evolution but headed in the right direction. Peer to peer trading between buyside shops is the future and the new source of liquidity. These days, buyers can also be sellers and anyone can submit a quote for bids or offers.

I am broadly sympathetic with that view but hang on: "every few weeks"? Every few weeks? Around here I trot it out every day, five days a week, rain or shine or frankly lack of anyone actually worrying about bond market liquidity. I mused yesterday about limiting "people are worried about bond market liquidity" to stories of people who worry about bond market liquidity while citing "people are worried about bond market liquidity" in their worrying, but this feels almost like a personal affront.

Elsewhere, here is Alexandra Scaggs on the taxonomy of Treasury trading venues. And: "There's Basically No Alternative to U.S. Corporate Bonds Right Now." And: "What to Learn From the ECB’s Great European Corporate Bond Squeeze."

Things happen.

Boutiques catch up with global firms in M&A. Years of Fed Missteps Fueled Disillusion With the Economy and Washington. How Philippe Dauman Lost the Battle for ViacomHow Apple's Nifty Compensation Tweak Saved Tim Cook's $373 Million Payday. Why Banks Can’t Pay Enough To Attract Tech Talent. Banks Have Had Enough of Oil’s Wild Ride. "The Federal Reserve and other agencies are poised to issue a long-overdue report required by the law that lays out recommendations beyond the Volcker Rule to prevent financial firms from blowing up the economy." Lampert’s Lifeline Renews Debate Over Whether Sears Can Be Saved. Japan’s government pension fund hit by $52bn quarterly loss. Puerto Rico’s Pensions: $2 Billion in Assets, $45 Billion in Liabilities. Vladislav Zubkis is leaving Neuromama. Fannie Mae, Freddie Mac Extend Crisis-Era Refinance Program. Economists Who’ve Advised Presidents Are No Fans of Donald Trump. How President Donald Trump could ruin his enemies’ lives. The Robot Surgeon of Your Nightmares Can Wiggle Its Way Inside You. Bugs on the D train. Fish on the G train. Howdy the Good Outdoor Manners Raccoon. Sorry I Didn’t Respond To Your Text! I Get Overwhelmed By Simple Tasks. Happy National Dog Day!

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