The Market Acts Like It's the End of the World

It might not be the end of the world, but the toy market is acting like it is -- and just before Christmas, which should be a time of rising prospects, no? Much of the decline the sector has suffered over the past week boils down to game maker THQ's declaration of bankruptcy, but the tragic shooting in Connecticut is weighing heavily on the rest of the video game market, with TakeTwo Interactive (NASDAQ: TTWO  ) down 10% and social-networking game site Zynga (NASDAQ: ZNGA  ) falling 9%. The possibility for greater regulation looms large, though Zynga's decline has more to do with Facebook's (NASDAQ: FB  ) repositioning itself than with violence in Farmville.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) was actually up 1% as these stocks were falling, but the market swooned at the end of the week, threatening to wipe out the week's gains. It seems all the world is falling apart -- though a short attack against Herbalife (NYSE: HLF  ) knocked off a quarter off its value suggests there's more at play than just Mayan calendars.

On the other hand, the steel industry was the market's biggest winner for the week, yet that seems like it will be short-lived, as most analysts expect the industry to be bogged down by excess capacity both in the U.S. and in China. Yet U.S. Steel (NYSE: X  ) and AK Steel (NYSE: AKS  ) were both up about 10% over the past five trading days, though it was left to telecom equipment maker Alcatel-Lucent (NYSE: ALU  ) to be the real market winner, rising 30% despite giving back some of those gains today.

A palace coup
The notable decline in Herbalife shares must have investors feeling like short sellers are piling on. After hedge fund operator David Einhorn weighed in questioning the operations of the nutritional supplements seller earlier this year -- though he didn't take a position at the time -- Pershing Square Management's Bill Ackman jumped into the fray last week, calling Herbalife "the best-managed pyramid scheme in history of the world."

Multi-leveling market companies like Herbalife, Nu-Skin Enterprises (NYSE: NUS  ) , or Usana Health Sciences (NYSE: USNA  ) have the weight of history working against them. For its salespeople to be really successful, it requires ever-greater numbers of people signing on downstream to sell product. Soon, there's just not enough of a global population to support the ranks.

In the interim, the companies subsist often on having their own people buying their product. In the exchange with Einhorn earlier this year, it was mentioned that as many as 30% of its distributors are "self-consumers." Sure, they can like the products so much they use them themselves, but that's also a large amount of individuals propping up the company's revenues.

As leery as I am of MLMs, I've noted I thought Herbalife's response to a lot of the questions raised after the exchange were examples of responsible management: They didn't duck and hide, they answered forthrightly, and they even became more transparent in what they disclosed to the market. It seems they're going to be doing the same thing again in the wake of Ackman's accusations, as they'll be holding an analyst day conference call to refute them.

Let me know in the comments section below if you agree MLM-based businesses like Herbalife's are inherently a pyramid scheme, or is that a "distorted, outdated, and inaccurate" outlook as management maintains?

A perfect storm
Hanging over its head like a Sword of Damocles is the concern that Alcatel-Lucent will go bankrupt before its growth initiatives can bear fruit, but a lifeline thrown to it by Goldman Sachs (NYSE: GS  ) and Credit Suisse (NYSE: CS  ) at least puts the day of reckoning off for a few more years.

The investment bankers are providing Alcatel with 1.6 billion euros, around $2.1 billion, to refinance its existing debt and extend its maturities until 2018. That should give the equipment maker enough breathing room to allow carriers like Verizon (NYSE: VZ  ) , AT&T (NYSE: T  ) , and Sprint Nextel (NYSE: S  ) to reinvigorate their capital spending plans, which have largely been put on ice.

I noted last month that Ma Bell will be spending $14 billion over the next three years to build out its high-speed networks, relying in large part on the sort of small-cell technology that Alcatel specializes in. It's been my contention for some time the equipment maker will be the primary beneficiary of carriers' deploying of small-cell "towers," and this appears to be the first mass usage of them.

AT&T, along with Verizon, accounts for 10% of Alcatel's annual revenues. It signed an agreement recently with Sprint to deploy its LightRadio small-cell equipment to expand its 4G-LTE coverage, which has become imperative for the carrier after getting Apple's (Nasdaq: AAPL) iPhone. Small-cell technology solves a lot of those problems easily.

With Alcatel's depressed pricing even after the large gains it's made, I still find it a compelling investment.

Stop, look, listen
After the world's most-hyped IPO turned out to be a dud, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2012, at 10:51 PM, ipurohit wrote:

    In May of this year, David Einhorn asked a few simple questions during the HLF earnings call which were properly answered. The stock took a plunge from $73 to low $40's in its wake. Though Mr. Einhorn never confirmed his stand on the company he fully knew the impact that he would cause because of his reputation as a short seller. It would have been a responsible and honorable move on his part to clear the air about his stand on Herbalife which he never did.

    Now Bill Ackman did the same and took a stand and made it public as he was heavily short and wanted to cover his position before the end of fiscal year. HLF is a company that has fully complied with all requests for information both from Hedge fund managers as well as SEC. Whether you like their answers or choose not to believe them is your problem. It has consistently outperformed itself and provided true value to its investors and employees. Then why is this happening repeatedly and why are honest investors taking a hit here? Do we trust hedge fund managers because they have altruistic motives for the general public with no personal agenda at stake? Wake up people....

    It is depressing to see value investors losing their money either on paper if they continue to hold on to the stock or for real when they sell it in panic. What they sell is bought by these short sellers to cover the position in a market that is manipulated by them in the first place. These guys take away millions from hard working folks who do value investment to line their own pockets under the garb of being altruistic.

    There are two ways to stop this:

    1. Dont pay any attention to such hedge fund managers and completely ignore them and do your own research to figure out the truth.

    2. Instruct your brokerage firms to not allow your shares to be shorted.

    As an investor if you don't want to follow the above two ways then for the sake of general public don't invest and create additional panic in a market that is already volatile and ultra-sensitive.

  • Report this Comment On December 23, 2012, at 6:48 AM, ajnapower wrote:

    I think one thing: the work of Einhorn and Bill Ackman, I'm just a huge speculation that in some way, directly or indirectly, has been to their advantage. It 'requires that the CEO of HL M Jhonson should be clear, determined definitively on the LEGALITY of herbalife. A good answer, since the decline of the shares, would be to repurchase them as they have already done and I think they will. Personally, I can not believe that a company operating for 32 years in the illegal regime in America, which is a listed company, that creates illegal profits and threaten the small shareholders who believe in the growth of this company. What is the law on pyramid scheme? what is meant by pyramidal system in America? How does herbalife? Simple questions that I think the authorities have already made ​​and have already given an answer. As far as I can tell, I'm in Italy, and the Italian law is clear on pyramid schemes, illegal. Herbalife is not an illegal because it can not be considered pyramidal. In herbalife earn those who work and those who do not come first. I think those who buy today will have good results in a company that will knock the 6 billion this year and continues to grow for 10 years now. Good luck and Merry Christmas

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