Jim Chanos on Shorting PC's, Herbalife, China & More: Interview ~ market folly

Wednesday, January 23, 2013

Jim Chanos on Shorting PC's, Herbalife, China & More: Interview

Kynikos Associates' founder Jim Chanos recently sat down with Reuters to talk about why he's shorting the personal computer industry, China's debt load, and other topics.  He started by talking about what he's looking for as a short seller:

Chanos points to reading SEC filings as a must, saying that "it's amazing how many investors don't do that... it's a must.  Those documents exist for a reason." He looks for an exodus from a company, a large amount of stock sales, companies impacted by technological change (citing the internet as a perfect example).

Why Chanos Is Short PC's

Hewlett Packard (HPQ) is one of his largest shorts and Chanos says that the company has a lot of 'baggage' due to mistakes made by previous management (acquisitions etc).  He also points to the company's lack of investing in research & development as they've missed mobile and just cutting costs to create value isn't enough.

"while we look at financials in the rear view mirror, you can't forget to look out the windshield."

On Herbalife (HLF)

Chanos hasn't publicly commented on Herbalife (HLF) but notes he's studied multi-level marketing and that the important thing to focus on is, "How much of a product is sold through?  Is the customer actually using the product?"

Bill Ackman is short Herbalife and then Dan Loeb is long HLF so this has been a highly active situation.  As to who will ultimately be right, Chanos believes that it will be whomever can prove whether the business proposition is good.

On China

Kynikos has been short since 2009 and they haven't changed their thinking.  Chanos says the thing to worry about is how China keeps adding more debt to keep the growth going. 

He's short Chinese banking companies, property developers, cement companies and the like.  He notes that the other way to play it is via shorting materials like iron ore companies.  We've posted David Einhorn's short thesis on iron ore as well.

Chanos' Equities Outlook

He says that he's "a little less sanguine than I was two years ago... now we've had a pretty good run and things aren't so cheap anymore.  We're getting a little bit more cautious on prospects for US equities."

On His Biggest Mistake

Chanos remembers his biggest mistake as shorting AOL, saying that "it underscores the need to monitor risk on the short side.  You have to be much more aware because of the unlimited and un-ending nature of the liability on the short side.  We were short AOL at $8 and covered our last share at $80.  We were short it for accounting reasons."

Chanos went on to note that "you have to be very careful of not shorting concepts and being short companies."

Embedded below is the video of Chanos' interview:

For more on this noted short seller, see also Chanos' 2 short ideas from the Sohn London conference.

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