Herbalife (NYSE:HLF) disclosed today that The Federal Trade Commission is opening a civil probe into the business activities of the MLM supplements maker. After being briefly halted, shares of Herbalife dropped 17% before rebounding and closing down more than 7% for the day.

While I have no position in the shares of Herbalife, it has been interesting to watch this Wall Street Soap Opera unfold over the last 14 months ever since Bill Ackman from Hedge Fund Pershing Square unveiled his short position back in December 2012.

It will very likely take some time (more than 6 months) before we know what the outcome of the FTC investigation but while no one knows for sure what the outcome will be; it is a safe bet that it will be one of the following 3:

Herbalife will be exonerated and, effectively, given a clean bill of health by the FTC

Herbalife will be found in violation of some FTC rules and will be fined several million dollars but will continue as a going concern.

Herbalife will be found to have material violations and will be forced to materially change the way it conducts its business and forced to pay a very sizable and material fine (hundreds of millions of dollars).

Those bullish on Herbalife will be expecting the first outcome or full exoneration while those who agree with Bill Ackman will be expecting the third outcome or material violations in the way the company conducts its business.

Given the fact that Herbalife has been in business for a long period of time in a fairly heavily regulated industry and has been scrutinized by regulators in the past, it is hard to believe that it can be significantly running afoul of the law for so long. It is of course not impossible but I see it as improbable.

Likewise, expecting the FTC to give a clean bill of health to Herbalife is also unlikely as it never is a good thing to be investigated by the government. Is it likely that Herbalife has cut some corners when it comes to adopting best practices in its industry and that any compliance slack will be identified by this FTC investigation? I say the odds are significantly greater than zero. But, will those violations be material from a financial or business standpoint? I believe that any violations, if any, will likely not be material.

So what happens to the stock in the meantime?

Herbalife shares hit a 2014 high of $83.51 on January 8th and have been trading lower ever since closing at $65.39 on the day preceding the FTC announcement. One can make the argument that investors have been anticipating some bad news but nevertheless, a 22% decline off the January highs is noteworthy. The company is expected to announce quarterly earnings in late April and until then the stock is likely to move based on the actions, rather than the words, of the main antagonists in this saga. Carl Icahn who currently owns 16% of the company sits on the Board and is likely restricted from trading in the company’s shares until after the next earnings report – that is if he has any interest in increasing his already sizable stake. So essentially, the stock will likely continue to be volatile without any major catalysts on the upside or downside until the company announces earnings. Professional options traders selling volatility are likely the ones to be making any money trading Herbalife in the near future.

At this point, it looks like both sides of the fight have expended most of their bullets. Carl Icahn and the company have been pitching a flawless game up until this point while Ackman’s relentless lobbying has finally gotten him to first base today with this FTC probe. The game is far from over and the score is heavily in favor of the HLF longs up to this point.

LinkedIn announced today that it has reached 200 million members. It added an average of 6.5 million members a month in November and December 2012 and has doubled its membership since reaching 100 million members in March 2011. Meanwhile, Facebook back in October disclosed that it has passed the 1 billion users threshold.

On the surface it looks like Facebook dwarfs LinkedIn in number of users and more importantly in stock market capitalization. However, when you adjust for number of users, you realize that both companies trade at a much closer valuation per user. After rallying from under $19 a share in November to almost $30 this month, Facebook is currently trading at a near $63 billion market valuation if you use the widely used – but false – 2.17 billion share count on Yahoo Finance or $81 billion using our own calculated 2.8 billion share count. LinkedIn on the other hand trades at near $113 per share giving it a market capitalization of $12 billion.

So basically, investors are valuing a Facebook user at a minimum of $63 (we think its closer to $81) and a LinkedIn user at only $60. Do you think either is reasonable?

At the time of this post no staff member at the Wall Street Dispatch had any position in Facebook or LinkedIn.

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Facebook priced its shares in its IPO at $38 raising a little over $16 Billion after the company and selling shareholders sold 421,233,615 shares. The question is: what is the company’s market capitalization at $38 per share? Reporting on the pricing of the IPO, Bloomberg and Reuters pegged the market capitalization of FB at $104 Billion while CNBC “at over $100 Billion”.

Naturally, to know the market capitalization you need to know how many shares will be outstanding after the IPO on a fully diluted basis. The company states in its latest S1 filing that there will be 2,138,085,037 shares outstanding after the IPO but that excludes many items including shares issuable under its various employee stock options plans and other items including the shares to be issued for the purchase of Instagram. So looking at the S1 we crunched the numbers and came up with the diluted shares outstanding for Facebook and they are:

So to all journalists and analysts calculating Facebook’s market cap, we believe the shares outstanding number you should plug in is 2.822 Billion shares.

After listening to Fed chairman Ben Bernanke’s testimony today, it is clear that what the FOMC was doing in its new level of transparency was nothing more than buying time. By offering this language about the need for extended periods of low interest rates for a period that is almost 3 years into the future was an ingenious way of extending “Virtual QE3” rather than actually committing to an actual program of new easing. With economic indicators showing the economy making steady improvements over the last 4 months, particularly in the unemployment picture, one has to assume that the chances for any new form of QE will decrease with every good report. Economists love to make forecasts and its the FOMC’s job to make and rely on its own forecasts. However, if you believe anybody’s forecast 3 years into the future will be dead accurate then I have a bridge to sell you.

It is not surprising to see the market sell off when it is denied the QE3 that it was expecting. But pretty soon, the diminishing prospects of QE3 will be a market positive as the macroeconomic picture brightens up and stocks will go up on the actual and anticipated strength of economic growth. So how should one position their portfolio? Clearly the FED is offering a safety net for risky assets in general and stocks in particular. If the economy deteriorates then the FED will be there to boost asset prices with more QE. If the economy continues to improve then stocks will go up on their own on the strength of corporate earnings.

As the title implies, the subject of this column will be to discuss “noteworthy” development impacting a market, sector, or stock. It aims to shed light on a specific trend that is taking place in real-time or near real-time. This can be a precursor to a major move in the market, sector, or underlying stock.

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