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Bill Ackman's Herbalife Short Is Subprime Bet 2.0: Street Whispers

"Despite beguiling and specious reasoning, Ackman will fail to influence/cause a material regulatory response or a HLF distributor exodus," writes Robert Chapman, in a blog post that celebrates a 35% return betting against Ackman.

Hempton of Bronte Capital simply argues Herbalife's earnings and ability to buy back stock can thwart Ackman's bet against the company, even if they are "scumbags," as he writes.

More directly, analysts such as Tim Ramey of D.A. Davidson & Co. simply refute Ackman's allegations that Herbalife could be deemed a pyramid scheme by regulators such as the Federal Trade Commission or the Securities and Exchange Commission.

While Ackman argues 90% of Herbalife's profits come from distributors and not bona fide retail demand, Ramey of D.A. Davidson argues in a January note to clients the majority of Herbalife's earnings come from retail demand, disqualifying it as a pyramid scheme.

In previous research reports, Ramey has discounted Ackman's understanding of Herbalife's retail appeal. Still, the analyst has previously left open the prospect of a distributor exodus. In recent days, Herbalife distributors have expressed confidence in the company to The Wall Street Journal, in on-the-record interviews.

Ultimately, Ackman's accusation that Herbalife is a pyramid scheme isn't likely to be solved in a point-by-point rebuttal of Ackman's 300-plus-age short thesis in the company's Jan. 10 presentation, according to Ramey of D.A. Davidson, who writes in a client note, he expects a more high-level business overview and greater detail on the company's distribution between retail and distributor earnings.

For Ackman's reported billion-dollar short to pay off in the near-term, the question is whether his claims alone can cause a withdrawal of distributor money, which would topple the alleged pyramid scheme.

Such a scenario would be remarkably similar to the U.S. housing market collapse, which helped Ackman collect on his MBIA short.

For more on Ackman's Herbalife short, see why analysts are getting personal.

Also see why MBIA executives are taking money in a case they have to run and why the bond insurers bulls differ on its survival.

-- Written by Antoine Gara in New York

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