Stock Report: Nu Skin (NUS)

Takeaway: We added NUS to Investing Ideas on the short side on 11/27.

Stock Report: Nu Skin (NUS) - HE NUS table 12 2 15


Broken Business Model

Multi-Level Marketing (MLM) companies should not be public companies. NUS can only grow its revenues by recruiting new distributors into the system. This requires either growth in new markets, and/or new products in order to attract new distributors.


At market saturation, all this is really illusory: there’s not enough addressable market left, and not enough margin so that a new distributor can actually make a profit. It all falls apart when a light is shone on the company’s business practices. In our view, Nu Skin’s questionable business practices have been a part of the company's since it was founded.


VitaMeal Hiding in Plain Sight

Selling VitaMeal as a charitable donation is a genius idea! Unfortunately, it appears those days are over, or we should say, are nearly over. Until recently, VitaMeal has been the secret weapon of NUS: the ultimate pyramid scheme within a pyramid scheme, and presented as a charity. The unwinding of this product could have significant implications for NUS financially.  


SEC Investigation and the Lack of Disclosures

NUS is under investigation by the SEC. Given how significant VitaMeal is to the earnings of the company and the significant conflicts of interest that it appears to present, we think it’s just a matter of time before the SEC expands its investigation into the company’s business practices. Any new allegations of improper behavior will be financially devastating to the company on the heels of the ongoing 2014 scandal in China and the already challenging financial statements.



The SEC is already investigating NUS for charitable giving the company made in China. With the SEC already under the hood, what else might they find? We believe that there is a high likelihood that they will uncover more than they were expecting. 


The increased level of scrutiny surrounding VitaMeal, combined with how the company/distributors promote the sale or “donation” of the product, cannot be overlooked. If, in fact, the SEC brings the hammer down on NUS regarding actions in China and they are required to change the way they represent VitaMeal, it could greatly diminish their ability to recruit new distributors. This is key because distributor growth is the only way that NUS revenues really grow, as revenue per distributor has been in a precipitous decline since 3Q12. 



If what we think comes to fruition in the intermediate term, there won’t be a long-term for NUS. However, if we are wrong we still predict a precipitous deterioration of the company fundamentals. As the company continues to burn through cash, it will be hard to maintain their share buybacks to prop up the stock, especially while under immense pressure from regulators. Additionally, the allegations of the DOJ against USPlabs, among others, specifically called out anti-aging regimens as a focus for current and future investigations. The dietary supplement industry is under enormous pressure from regulators, and MLM’s add an additional layer of risk to the equation.


Stock Report: Nu Skin (NUS) - HE NUS chart 12 2 15


Cartoon of the Day: Naughty Fed

Cartoon of the Day: Naughty Fed - Fed cartoon 12.02.2015


"Janet Yellen is a Democrat so she had to obfuscate the actual state of the US economy," Hedgeye CEO Keith McCullough wrote following the Fed chair's speech earlier today. "Make no mistake, though, Yellen will go down in history as one of the few Fed Heads who tightened into a recession."

Dear Janet, Go Ahead. Hike. See What Happens

Takeaway: In today’s speech, Yellen sounded as hawkish as she has all year, even while growth is as slow as it’s been all year.

“When the Committee begins to normalize the stance of policy, doing so will be a testament, also, to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession. In that sense, it is a day that I expect we all are looking forward to.”

-Janet Yellen, Fed Chair speaking at Economic Club of Washington (12/2/2015)


Newsflash: Yellen is a Democrat so she had to obfuscate the actual state of the US economy. Make no mistake, though, Yellen will go down in history as one of the few Fed Heads who tightened into a recession.


In today’s speech, Yellen sounded as hawkish as she has all year, even while growth is as slow as it’s been all year. She spent today’s speech talking up "consumer confidence,” even though that has slowed since seeing its cycle peak in Q1.


Dear Janet, Go Ahead. Hike. See What Happens - Rate hike cartoon 09.04.2015


She didn’t mention yesterday’s recessionary ISM and PMIs that don’t corroborate her rate hike calculus. You can't draw a line (sine curve) that is "accelerating" in almost any US economic data series right now. In fact, Autos and Housing are the only two data points that are accelerating, but both are highly dependent on no hike.


She tried to blame every component of US #GrowthSlowing on non-US factors, while citing higher foreign exchange rates and the statement that “foreign economies still pose risks to U.S. economic growth” but that this risk had “lessened since late Summer.”


It was really sad to watch.


The pinnacle of Yellen’s economic song and dance, however, had to be her touting of the exceedingly rosy "Blue Chip" (Old Wall) economic forecasts. No real help there. They have been consistently wrong on growth by a seriously wide margin, by 50% in 2015 alone. That’s almost as bad as the Fed's own "expectations,” which have been wrong 70% of the time since Bernanke's reign. 


No matter. After this speech, financial markets will be shocked if Yellen doesn’t hike. So I say “Hike baby, hike into the slow-down.” Any tightening into a slow-down will surely "disrupt" financials markets. It's already disrupting them. During and after Yellen’s hawkish speech, the Treasury market sold off, equities fell, and the dollar rose.


Most people who blindly believe the Fed are paid to but so-called “central bankers” have turned America into a socialized state of centrally-planned markets. The obfuscation of U.S. economic data needs to be audited. It is un-elected, un-accountable, and un-American.

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McCullough: The Astonishing Audacity of Central Planners


Does it make sense for the ECB to increase QE? An eagle-eyed viewer of The Macro Show doesn’t think so, and Hedgeye CEO Keith McCullough agrees. But whether it’s rational or not doesn’t matter. McCullough explains why in this brief excerpt.


Subscribe to The Macro Show today for access to this and all other episodes. 


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Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast?

Takeaway: Is the Fed fibbing about being 'data dependent' or is it just delusional?

Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - Yellen data dependent cartoon 11.18.2015


The Fed continues to say that they are “data dependent.” We just don’t believe them.


In case you missed it, Atlanta Fed president Dennis Lockhart said there was a “compelling” case for a December rate hike earlier today. Maybe we’re missing something here, but didn’t the Atlanta Fed just cut its GDP forecast yesterday? And didn't they ratchet down their GDP forecast the prior week as well?


Apparently cutting your GDP estimate is the new bullish case for liftoff…


Does this make sense?


We’re still scratching our heads. But let’s take a closer look at Lockhart’s speech. We think there are a few revealing insights for investors heading into the Fed’s December policy meeting.


A few excerpts for your consideration:

  • “Absent information that drastically changes the economic picture and outlook, the case for liftoff is compelling.”
  • “The economy is growing at a solid pace in spite of ongoing headwinds coming from global conditions and the strong dollar.”
  • “To circle back to growth drivers, solid job gains and rising household incomes should contribute to a favorable spending outlook.”


Perhaps most important was this story Lockhart told to conclude his remarks:


“To wrap up, I've given you just the highlights of what I can assure you is a comprehensive review of the economic data that my staff and I perform before any FOMC meeting. Policy considerations at the upcoming meeting call for an especially deliberate process. There are two weeks to go, with additional data still to arrive. That said, absent information that drastically changes the economic picture and outlook, I feel the case for liftoff is compelling.”


Wait. Did Lockhart’s “comprehensive review” include his own GDP forecast?


Just yesterday, Lockhart’s Atlanta Fed cut its fourth quarter U.S. GDP estimate to 1.4%. This was down from 1.8% last Wednesday and lower than its 2.2% forecast from less than two weeks ago. Quick rhetorical question:


Q: What did Lockhart et al cite for taking a hatchet to their estimates?

A: Yesterday’s data


Here’s the Atlanta Fed’s explanation accompanying the GDP downgrade:


"The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 1.4 percent on December 1, down from 1.8 percent on November 25. The decline occurred this morning after the Manufacturing ISM Report On Business from the Institute of Supply Management and the construction spending release from the U.S. Census Bureau."




Interestingly, that cut now puts the Atlanta Fed estimate in-line with Hedgeye’s Q4 GDP forecast. 


Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - atlanta fed


To be clear, our recent market commentary is nowhere near Lockhart's (illusionary) outlook. In fact, we've been very vocal about the rising probability of a recession in the next 6 to 12 months. 


Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - 50 percent consensus


So forgive us for thinking Lockhart is being a bit disingenuous when he says that after his “comprehensive review” of the data he still sees a favorable outlook for U.S. growth. (Editor’s Note: In his speech, the Atlanta Fed head didn’t even mention that his team of economists decided to cut their GDP forecast yesterday.)


But we digress...


Lockhart also called the December 15th and 16th Fed policy meeting “historic.”


Finally, something we can agree on...


As Hedgeye CEO Keith McCullough has reiterated in the past few days, a December rate hike would be the first time the Fed raised rates into an economic slowdown. 


So to piece together the reality that Lockhart won't tell you:


Huh? Atlanta Fed Head Calls Rate Hike "Compelling" But Slashes GDP Forecast? - tweet data 

On Fox Business: What Does A Fed Rate Hike Mean For U.S. Banks?

On Fox Business' Mornings With Maria today, Hedgeye CEO Keith McCullough discussed the implications a December rate hike and how to play the banking sector with SkyBridge Capital’s Anthony Scaramucci and Anton Schutz of Mendon Capital Advisors, 


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