Jim Chanos: The Greatest Short-seller on the Street?

(source: Shirin Neshat for New York)

Chanos was excited that afternoon. He had just read a report that China’s electric consumption had dropped 4 percent, despite official government statistics that the Chinese economy was growing at 8 percent. He relished the implications. “I think they’re making up the numbers!” he said. As Wall Street picks up the pieces of the broken financial system, Chanos is already one step ahead. He sees China as the next domino to fall in the global meltdown. In recent months, Chanos has loaded up short positions on the infrastructure companies that have rushed to build China’s new highways, bridges, and tunnels. Now he is waiting for their share prices to tank.

Watching Chanos’s trades over the last six months is like reliving the economic meltdown in slow motion. Since the summer, he has been cashing in his short positions in cratered banking and real-estate stocks, as the crisis has spread from the subprime-mortgage sector to become a full-scale economic meltdown. Starting in 2006, Chanos took up sizable short positions in residential home builders like KB Home and WCI, firms that transformed places like South Florida and Phoenix into exurban nightmares. This past summer, Chanos cashed out his portfolio’s 30 percent stake in financial-sector and real-estate stocks, after bank shares plummeted in the wake of the Bear Stearns collapse. Chanos then went short on construction and engineering companies, predicting that the credit crisis would spill over into a full-fledged global recession and places like China and Dubai would see their overheated economies freeze up. And he bet against his fellow hedge-fund managers’ mania for art collecting, making a bearish gamble on Sotheby’s. Last month, Chanos closed out his short position in Sotheby’s after the auction house’s stock plummeted from a high of nearly $60 to $8. “That wasn’t a hard one,” he says, smugly.

(source: The Catastrophe Capitalist by Gabriel Sherman. New York, December 7, 2008)

New York magazine has a nice profile of Jim Chanos (thanks to Crossing Wall Street for bringing this to my attention.) Jim Chanos, for those not familiar, is a short-seller that is famous for singling out Enron. He has also had tanglements with Fairfax Financial, run by Prem Watsa, in the past. Like most short-sellers, it is never clear how "clean" these guys are. Similar to William Ackman, you can never be sure whether they are double-dealing or undertaking dubious schemes. Jim Chanos seems quite arrogant to me compared to the astute persona of William Ackman. Jim Chanos is also looking like a hero now because practically all assets have collapsed in value; but it's not clear how much of this is due to fundamentals and how much is panic selling. In any case, Chanos is quite interesting and some of my comments follow.

(If you are interested in Chanos' current views, do check out the CNBC videos at Todd Sullivan's Value Plays.)


Here are some excerpts, along with my thoughts:

He sees China as the next domino to fall in the global meltdown. In recent months, Chanos has loaded up short positions on the infrastructure companies that have rushed to build China’s new highways, bridges, and tunnels. Now he is waiting for their share prices to tank.

I don't know if the infrastructure short blew up, now that the Obama administration seems to be pumping a lot of money into that sector. But I share his sentiments about China. I have felt, similar to Jim Chanos, that the numbers in China cannot be trusted. Furthermore, China is just throwing money into clearly overbuilt infrastructure (I have quoted stories in the past about shopping malls that are largely empty.)

If Chanos is right, he will make an absolute killing in this area. There is still a strong bullish view of infrastructure plays, not just in China but in USA, Middle East, and so on. Similar to how homebuilders completely collapsed once housing was shown to be unsustainable, if the infrastructure spending is shown to be unsustainable, these companies are going to get clobbered severely.

But when the market is not dropping so precipitously, the game is much more nuanced. More than other hedge-fund managers, Chanos has long made use of a potent weapon: the media. Chanos is a media operator. According to the New York Times business columnist Joe Nocera, Chanos is “a guy who’s willing to talk to reporters, and reporters gravitate towards people who will give them information.” You can think of Chanos like the pre-2008 John McCain—the media is his base. In this information culture, Chanos has built valuable relationships with journalists who take his ideas seriously, promote his point of view, and ultimately help make him rich. Like Washington, Wall Street is a game that is fueled by the selective leak. The right tip can mean the difference between winning or losing millions.

Similar to how long investors manipulate the media to their advantage, short-sellers do that too. Nothing new to me...

And what about the ranks of average Wall Street traders who rode the boom and are now losing? Chanos feels sorry, sort of. “The marginal people on the trading desks, there’s no skill set,” he says. “If they don’t trade derivatives, I don’t know what they can do. The next stop is driving a cab.”

This is what I mean by arrogant--in a Jim Rogers sense. I can't help laugh at that comment, not because I want the Wall Street employees to suffer, but because of the frankness of it. What he is saying is quite true. There will be a massive contraction in the financial services industry and it's going to be painful. It'll be similar to the dot-com bust which resulted in many technology workers, including highly educated and talented people, taking marginal jobs. Sad but that's the nature of capitalism.

Early in his career, he discovered the value of uncovering frauds and using the media to move the market. In the summer of 1982, he started tracking the insurance firm Baldwin-United, which was then a darling of Wall Street. Its stock was soaring, and the company had blue-chip supporters like Merrill Lynch. But Chanos had his doubts. After getting a tip from a disgruntled insurance analyst, Chanos wrote a research report that recommended shorting Baldwin stock. Wall Street lashed into his thesis. Powerhouse lawyer Marty Lipton called Chanos’s boss and threatened to sue...In December, Forbes published Stern’s piece, which came down on Chanos’s side. Months later, Baldwin collapsed, filing a $9 billion bankruptcy. At the time, it was the largest corporate meltdown in history.

That seems to have been his first big breakthrough...

Enron made Chanos’s career. He followed the trail of Enron’s fraudulent accounting and did as much as anyone to bring its malfeasance into the light, by sharing his insights with a reporter.

Enron was what put Jim Chanos into the history books. I still haven't read enough books about the affair but this is a masterpiece of investing (on the short side). From what I know--I wasn't investing at that time--Enron was the star of everyone on the Street.

Fairfax Financial, a Canadian insurance company, is now suing Chanos and a group of hedge-fund all-stars including Steve Cohen and Third Point’s Daniel Loeb. The suit reads like a mash-up of a John le Carré novel and Den of Thieves. Fairfax alleges that Chanos and his fellow short-sellers paid for negative stock-research reports that helped drive down Fairfax’s stock price. Chanos’s allies, including Nocera, dismiss Fairfax’s charges, maintaining that the suit will have a chilling effect on legitimate criticism of companies.

...

Whatever the case, Chanos wasn’t right this time. Unlike Enron, Fairfax hasn’t been charged with any wrongdoing, and the stock has gone up since Boyd covered the company.

This has been Chanos' most controversial. As the author says, this has been a bizarre case and it's not clear what actually happened. It's also not clear if there was any wrongdoing at Fairfax.

He’s already moved on, looking for his next short targets. He’s now investigating the health-care industry and defense companies that will likely see cutbacks and face tighter regulation during an Obama administration.

I don't have a strong opinion, either way, on these industries. I don't follow the industries and making a short case based on what a government may or may not do seems quite risky.