Money being pulled out of equities over the last year. And yet were at record highs. This rally in my mind is not i dont think we have evidence to justify these levels in the equity market at this moment. With us for the hour today is our panel. Pete, you first. Is larry right. I think hes right, where are we going to go. I think the thing that larry talked about is some money has left and is on the sideline but some of that money has returned. Theres no doubt when you look at some of the performance whether it be the utility space, the Telecom Space but the good news is that rotation to some of the other areas where you do still have the right types of valuations. Its not extremely extended like the two i mentioned and i think thats where youre seeing some of the flows and its been some of those areas where youve seen this great spike. I tell you what steve, larry said dont be surprised if you see a. 75 on the ten year. Yeah. I agree with everything you said and i have no problem taking issue with anybody but hes dead on. Stocks shouldnt be where they are necessarily but theres so much cash on the sidelines i was talking to another big platform guy and they lost about onethird of their cash. Theres a huge penalty for getting back into the markets. In terms of bonds, i dont know about. 75, i wouldnt be surprised with germany issuing bonds with a negative yield, whose buying those except for other sovereigns maybe if they can. Today was an important number in terms of inflation and more so than the jp morgan earnings numbers. Thats what got the officials going. Metlife, very little correlation with jp morgan but that stock is up 5 . Right now everything feels good but valuations are stretched. We wont know how the market is going to move until we get through the earning season. Weve been asking this question every day whether we were in the early stages of what could be finally that great rotation out of bonds, into stocks, out of bond like stocks into more cycleal offensive areas of the market. What larry fink says today not in so many words not so fast. Fundamentally he has a point. If you look at earnings in the s p 500 for the last two years theyve been flat. Youre predicting theres going to be growth in 2017. I would have said you need to wait and see that come through before you get to these multiples but you cant ignore the psychology of the markets right now which is getting euphoric and its going to continue higher regardless of what the fundamentals are seeing. The one thing that would worry me is a 1. 57 call on the ten year. From a discounted cash flow basis that would give you a higher price on stocks but that would be indicating such low growth in the world that i dont see how you can get the profit growths to support the higher multiples. We want to get to this story for us today. Bill ackman releasing a video today. The 18th in the last 18 Business Days warning investors about what he calls the evils of herbalife. Today shows a pitchman giving a hard sale recruiting members. My check went up 10,000 because of 2 . Make them pay you youre money. Those quotes cant diktd with facts that said that less than 1 distributors are earning more than minimum wage from that company. 90 of distributors drop out in their first year. Joining us now is bill ackman. Welcome back. Thank you. 18 videos in 18 Business Days. Whats going on. Why so many . Versefying into the movie production business. Whats interesting is this year they said they were in discussions with the fdc about a potential resolution of the investigation. And really over the last year theyve been saying well maybe there was some roeg distributors out there but weve reformed our practices and were building it better and in may the company said were in advanced we have discussions in advanced stages with the ftc and there were anchors talking about a slap in on the wrist and the stock has run on the possibility of a settlement where they pay what looks like a modest fine in the context of their market cap and they go about their business. You would have to assume that during this period of negotiating a seattlement with the ftc the company would be incredibly skrup lous about making sure none of his distributors are doing anything that would harm their ability to settle with the regulators. In fact, every day thousands of distributors go on the web to host webben narz and they attempt to recruit people with false statements about the potential for business opportunities. These people that go online we featured 18 of them over the last 18 Business Days and you can expect another one tomorrow and monday and tuesday and wednesday. We have thousands of hours of footage of these be distributors bilking other people out of their hard earned money. What about some of the criticism that i know youve heard yourself that you use selective editing lets say in these videos to tell your story. How do you respond to that . Theres no selective editing at all. We have all the source material. We provided it to the government. The government can if people would watch a two hour long webinar wed release those as well as. This is not selective. Whats interesting is you cant find on the web and there are thousands of these videos on the web, theres not one of a distributor talking to his recruits about how to sell the product, about how to make a retail sale of a product. Its about how to recruit people to become distributors because thats the only way you can make money. The point were making with these videos is the problem with the company is they hired a former ftc commissioner to make a splash about having a compliance department. The problem isnt the department as is the incentives of the marketing plan. The only way you can make money at the company, and thats a very small fraction of the people involved here, certainly well below 1 of the distributors, is by recruiting other people heavily and getting them to invest thousands and thousands of dollars. Thats the only hope you have of making money. The other problem is its effectively impossible to sell tons of white powder in a cannister to people you dont know. Its a difficult Business Model and they are willing to dump product at product at cost or below cost. Its now july so its two months after they said they were in advanced discussions about a possible resolution with the ftc. Whats really going on is the government is taking this seriously and i think the government understands what we understand if you dont change the incentives of the marketing plan and get rid of the inventory incentives and the requirement to buy thousands of dollars worth of product theres no way for the company to effectively monitor and stop the abuse. Why . Because incentives drive Human Behavior and if you dont change the incentives the behavior isnt going to change. There are a number of things within that. First and foremost herbalife has seen your videos and they knew you were going to be on today. They sent me the following statement. I want to read it and get your reaction to it. This is a quote, its been three years and bill has lost hundreds of mills of dollars. He admitted in a recent piece it was costing more than 100 million a year in carrying costs. When is it time to just say he gave it a try but like others he was just misinformed. That from a spokesperson. It doesnt cost us 100 million a year. The cost to carry the position if we were 1 billion short today. Its probably 20 million. Thats real money. Its interesting they are trying to get us to go away and steer the focus from the facts. The facts here are the number that herbalife is a 200 million settlement number. That would be the Largest Consumer protection fine ever collected by the federal trade commission. So clearly theyve done a lot of things wrong here and thats what they would be willing to pay in a mutual resolution. Thats not what the government is willing to accept. Thats what they have thrown out as a number theyre willing to pay. This is not going to be about a dollar amount that they pay to the government to resolve this. The only way this thing gets resolved is if they make material changes to their incentive structure to stop the incentives to recruit and my guess is thats what the government is pushing for. They realize they cant accept those changes or theyll go bankrupt because no is buying the product. This is going to end up with the government suing herbalife for a scheme. The stock ask nis not going to 0 a share. Thats why weve been a patient investor here, i think this is the most attractive herbalife has been and thats why weve stayed short. Its been a painful investment. To this point theres sort of no getting around that. As you said the stock is sitting at 60 a share. Do you think i was thinking about this and not that ive spoken about any of your investo investors, i cant say i have a view from any of them, but do your investors want you to continue with this fight or do you think some of them say lets just move on, find Something Else . Yeah, the good news here is it doesnt actually consume a lot of our resources. I joke about going into the movie production business but elizabeth and bill have some technology and thousands of hours of footage they put together a five minute clip every day and its a fun activity for them and it makes an important point about how evasive the fraud is. I think thats a useful exercise. I think all our investors would love for this to be resolved and i think the we would certainly like this to be resolved soon and were quite close. Its herbalife thats said theyre in advanced discussions about a potential resolution but they also say that if they cant, if no assurances can be given theyre going to this thing is going to be resolved in a negotiabled settlement and i think the government will only negotiate so long. At some point the government will have to bring a lawsuit here and then the company is done. 18 videos in 18 days and they say ackman is trying to manipulate the ftc. Were putting out videos of distributors. Its not like we created were not making statements on behalf of the company. The facts here speak for themselves and whats happened over the last several years is the herbalife distributors used to be more overt about defrauding people and now theyve gotten more sophisticated and theyre doing these online web nainars and ma are Password Protected and they suck you into a money making opportunity on the web. They dont tell you its herbalife and then they have been quietly going about making these statements and recruiting people. My suspicious is they have been encouraged to or have been pushed this underground but the reality is the fraud continues. I think by outing these top distributors of the last 18 i think three or four of them herbalife recently brought down to washington, d. C. To make their case theyre a legitimate company. The people approximawe have in videos and i encourage you to watch them, its not our words, its the distributors words, these are the same distributors that met with senators and congressmen from their communities talking about what a Wonderful Company it is and the reality is the same people are saying how anyone can make tens of thousands and millions of dollars in this scheme. There is an ftc i guess what they call a closed door session this afternoon. Have no idea obviously if herbalife is scheduled to be discussed today or not but its of your thinking that you think a resolution is coming soon . Look, i dont know how long im relying really more on what herbalife has disclosed which is in a filing theyve been saying now for almost six months that theyre close to a potential resolution but they also say the other alternative is that the the company is currently in discussions. Hold on. Heres the latest words. I have it right in front of me from the filing and that was the discussions have progressed and im quoting here from that filing discussions have progressed to an advanced stage recollection the range of outcomes include litigation or settlement. We announced if a settlement is reached with the ftc it would likely include i think jungtive and a monetary payment with our best estimate of that payment being 200 million. They say if discussions do not continue to progress its likely that litigation would ensue an my interpretation of that that statement was made on may 5th and its more than two months later it doesnt seem to me like a lot of progress has been made. How long does it take to negotiate if there was a settlement that herbalife could accept they would have accepted it already. Its clear that the government is holding the line at what theyre willing to accept and herbalife is making whatever case they can but the government is going to pull the trigger on litigation and thats going to be the best outcome here. Let me end this by what happens if youre wrong, what happens if there is a settlement and it is in that monetary ballpark or at least somewhere close, what do you do next . Sure. So think about it this way. The last time the ftc had a meaningful settlement i think it was the lifelock scam and that was a 100 million fine and what they do when they deal with one of these skamz they hold a press conference and they explain why the ftc sought the fine and so imagine theres a press release tomorrow from the ftc and they say theyre holding a press conference and the commissioner gets up and a couple of attorney generals and they say we are now punishing herbalife with the largest fine in the history of the trade protection theyre going to say here are all the evil acts the company has done that has led us to fine the highest fine we can charge and here are the steps they are taking to make sure consumers are not defrauded again. Theyre going to have to announce whatever those steps are and how those steps will be enforced. Its going to be one of the most watched press conferences in the history of the ftc. I wouldnt doubt that. So my point here is the ftc is not going to i cant see any scenario in which thats going to be good for herbalife and theyre going to be allowed to continue to go about their business. Weve yet to find one video the web of a distributor talking about how to sell the product to a consumer. Every distributor whether it takes place in a hotel room or a webinar is about how to recruit others so you can get your check and retire your parents and buy a home for your kids. Its not about retail sales and the company is a par mid scheme. If recruiting is more dominant than retail sales. Have you ever considered what may happen after this is all resolved and you remember those rumors and speculation as much as i do some years ago since this whole thing started whether herbalife would even remain a publicly traded company. Have you thought about the possibility of once this is resolved with the government of herbalife being taken private what that could mean for your position. Again, i feel very good about our investment. I think no private equity firm is going to buy this company. Even if you throughout ought it legitimate business they recruit 2 million distributors a year and they lose that every year. This would be anything near the current share price or a policemenpremium would require a big equity check and believe me if that should have happened would have happened a long time ago. So let me move next topic. Let me move on to valeant because thats the topic of at least the last couple of days at minimum. Our story yesterday which we first reported here was near 5 million sale by the former ceo and netted close to 100 million. Youre on the board of the company. Whats your response to that sale. Its kind of sad. The whole thing is sad and the whole thing is sad for mike. If you remember when the stock first dropped, mike is a guy that bought valeant stock and never sold it and then when the stock collapsed he had margin stock to make a 50 million charitable donation to Duke University and when the stock collapsed he got a margin call from Goldman Sachs and he was sold out of his position. When you buy stock at a low price and it runs up to a high price and you borrow money and that stock collapses. Goldman sachs sells enough stock to pay off the loan but they dont sell enough stock to pay your taxes on that gain. My understanding based on a press release put out today is that the option exercise and which itself is taxable, the net proceeds after tax from that sale were used to pay the taxes on the sale the first position i think he got some net proceeds, but mike is probably not likely to be running forward with a new job soon so i think its kind of sad he was forced to sell out at this price. They say in a Statement Today and they have a quote says the following i continue to believe in valeant and the rest of the Management Team while im trimming my ownership position for personal reasons i plan on holding my remaining shares until the company recovers and returns to being traded on fundamentals. The analysts said as the outgoing ceo we presume he had insight into the state of the business and we consider the selling as a negative sign. Why shouldnt the market view mr. Pearson getting out as a negative sign. Because i think mike was forced to sell. The government unfortunately doesnt wait for you to pay your taxes. But look, i think the company is going to have an Earnings Call the early part of august. Joe will have been at the company for about three months. That certainly is a sufficient period of time for him to clarify the position going forward. The stock still suffers a lot from uncertainty. Obviously theres been a big overhang. Mikes sold a bunch of stock and new investors theres still a lot to be clarified about the story so joe will be very prepared for that conference call. To give you a couple of items, a lot of questions weve been getting from investors, why hasnt the company sold assets, shouldnt the company be selling assets, valeant doesnt own a securities portfolio. The phone is ringing off the hook from buyers who want to buy some of the noncore assets the company is open to selling. A number of analysts said its not going to do valeant any good to sell a few hundred Million Dollars worth of assets and one thing mike was good at was identifying and acquiring good assets and they have a divers y diversified port and i think joe will provide more clarity but the company can sell billions of dollars of assets without effecting any of the core franchises of the company. Thats not going to happen overnight but the company has hired bankers and books are being put together and those assets will be shown to interested buyers and my guess is around year end the company will announce fairly significant asset sales so the company will delever. Joe is working to fix the dermatology business. Walgreens is interested in fixing that Distribution Channel but they would love to