Chanos vs. China?

Leo Kolivakis's picture

Via Pension Pulse.

Svea Herbst-Bayliss and Matthew Goldstein of Reuters report, Top hedge fund chiefs: short green tech, store gems:

Bet
against solar energy, says famed short seller James Chanos. Squirrel
away gems, advises bond guru Jeffrey Gundlach. Go long on discount
retailer Family Dollar, counsels activist investor Bill Ackman.


 

These
and other hot -- or unusual -- ideas emerged on Wednesday from an
annual conference where top hedge fund managers pitch their best
investment ideas.

 

Chanos
threw cold water on alternative energy companies, saying that shares
in wind turbine maker Vestas Wind Systems and solar panel maker First
Solar Inc likely will fall.

 

Arguing
that alternative energy may not create the jobs politicians predict,
Chanos said he would likely offend the green movement with his bets.

 

"The
cost of wind is 50 percent more expensive than natural gas," Chanos
said, adding that Denmark-based Vestas would be a good company to bet
against or sell short.

 

The environmental benefits of solar power are also questionable, he said.

Chanos
said he is certain that he is on the right path on First Solar because
top managers are leaving the company. "We advise you to heed their
warnings," he said, drawing both applause and laughter.

 

Ackman,
who has cemented his reputation as a polite activist, said his new
idea is on the passive side -- indeed it is not even his own, but
investor Nelson Peltz's idea. He likes retailer Family Dollar Stores
Inc for being accessible to shoppers and selling unique and inexpensive
products.

 

While lagging behind
chief rival Dollar General, its managers are trying to close the gap,
and the company may be a buyout candidate for private equity firms, he
said.

 

Retailers seem to be popular.
HSN Inc which runs a home shopping television network, rose 5.3
percent after KKR's Bob Howard recommended it. Crosstex Energy Inc
shares rose 11.3 percent after Harbinger Capital's Philip Falcone said
the company's shares, which traded the day before at about $9.13, could
rise to $18 to $20.

 

Most of the
speakers touted what they already owned. Trian Fund Management's Peter
May, who is Nelson Peltz's partner, talked about jeweler Tiffany and
Co. He did not discuss Family Dollar, the idea Ackman presented, even
though he owns it and his bid for the company was rejected in March.
Dinakar Singh, who founded TPG-Axon Capital, likes telecom company
Sprint Nextel Corp.

 

Greenlight
Capital's David Einhorn, whose fund long has owned shares of Microsoft
Corp, again touted that stock, but he did it with a twist -- he called
for the software company's board to oust CEO Steve Ballmer.

 

"Almost everyone agrees that it is time for the Microsoft board to tell Steve Ballmer lets give someone else a chance," he said.

 

The
industry's elder statesman Carl Icahn plugged his own company and said
the management is good and he would like to continue to acquire
companies.

 

"We like to do it friendly," he added.

 

Gundlach,
lacing his talk with slides of artwork by Pablo Picasso, Andy Warhol
and others, forecast the U.S. economy's problems would escalate and that
investors should protect themselves.

 

However,
instead of recommending gold, a common safe haven, Gundlach urged
investors to buy gemstones. "For real wealth preservation portability
has got to be an issue."

 

But the bulk of speakers did not surprise.

 

Steve
Eisman, who made his reputation with a bet against subprime mortgages,
said investors may be down too much on financial stocks, and said
there were some gems in property and casualty insurance.

 

He
said there are three ways to play them, beginning with buying
insurance brokers. Next, investors could buy large reinsurers, and the
very brave could buy the bigger and more diversified property and
casualty company stocks. He offered a chart of the companies, but did
not pick any in particular.

 

"When the cycle turns, the upside in earnings could be considerable," he noted.

I
agree with David Einhorn, time for Steve Ballmer to leave Microsoft.
He's done absolutely nothing for shareholders. As far as Chanos, the FT
blog beyondbrics comments, Chanos: short China, in New York:

 

Poor Jim Chanos. The man who has made headlines in recent years for his strident bearish call on China has run out of stuff to short.

 

 

 

His
latest suggestion is to short New York-listed Chinese stocks – if only
he could get his hands on them. Other people, it seems, have got there
first.

 

Chanos sees shorting US-listed China stocks as a great way to broaden his wider bet against China as a whole. Bloomberg reports:

“Almost
all of them have odd looking financial statements,” Chanos, the
president and founder of New York-based Kynikos Associates LP, said on
Bloomberg Television yesterday. “We wish we could borrow almost all of
them.”

But that’s easier said than done – with some
stocks seemingly impossible to get hold of in order to sell/short them.
More from Bloomberg:

Renren Inc., a Beijing-based
social-networking company that went public in the U.S. earlier this
month, is among the most expensive U.S. equities to short. The stock is
difficult to borrow with 72 percent of the lendable supply out on
loan, according to Data Explorers, a New York-based research firm.

 

Short
sellers have borrowed 96 percent of Beijing-based China Shen Zhou
Mining & Resources Inc. (SHZ)’s lendable supply, meaning there is
almost no equity available for short sellers to bet against. Its shares
are also among the most expensive for short-sellers to borrow
according to Data Explorers.

It’s easy to see why. Aside from the growing concerns over financial statements, as highlighted by the SEC probe launched this week into Longtop, the stocks in many cases just aren’t that attractive.

 

Of
453 US-listed Chinese stocks, only 7 of them have ever paid a
dividend. Of that same list, only 265 have a booked a dime of profit,
while many of them have seen their share price fall off a cliff this
year.

 

Some of those that haven’t are trading at eerily high multiples. Baidu (BIDU:NSQ) – China’s Google – trades at 71 times this years earnings, while Sina (SINA:NSQ) – other internet portal – trades at 132 times earnings. And then there’s elong (LONG:NMQ)
– the travel website – which, despite its impressive growth prospects,
already trades at a nose-bleed-inducing altitude of 246 times
earnings.

Which raises the question: what took Chanos so long?

Before you go shorting BIDU or SINA, you should check out the detailed institutional holdings on BIDU and SINA. There are some elite funds like Coatue Management and others that increased their positions on both companies during Q1 2011. I trust what Coatue and other elite funds are actually doing more than what Chanos is saying to mainstream media.

And
what about Chanos' call on First Solar and solars in general? Have a
look at price action on First Solar (FSLR), and Chinese solar companies
LDK Solar (LDK), Renesola (SOL), Suntech (STP) and Yingli Green (YGE)
during Wednesday's session:

The drop in Chinese solars has been beyond insane in the last couple of weeks. Again, check out LDK Solar's chart:

 

Look at the volume on LDK Solar over the last week. According to Yahoo Finance key statistics,
LDK Solar is now trading at a trailing P/E of 2.7 and a forward P/E of
2.6. Yes, it has lots of debt, but it isn't going bankrupt, it's not
"another Chinese fraud" and with all due respect to Jim Chanos, the
environmental benefits of solars are not questionable nor are the costs related to solar energy.

I'll tell
you what's questionable, the sneaky practices of big banks and big hedge
funds which routinely and systematically engage in naked short selling
of solar shares using multi-million dollar computers, bringing the
prices down to scare retail investors away so they can scoop up a ton
of shares on the cheap. I wouldn't be surprised if they bring LDK Solar
down to $5 or lower again and I'll be ready to scoop up more shares.

Jim
Chanos has become a claptrap for big hedgies. He made a great call on
Enron years ago but he's way off his realm of expertise when it comes to
China or solars. If you don't believe me, go check out the institutional holdings on First Solar
and you be the judge. When it comes to Chanos vs. China, I'm putting my
money where my mouth is, going long Chinese solars and shorting Chanos!