Jim Chanos to Bloomberg TV: interested in companies that are growing by acquisitions
Chanos went on to speak about tech companies, saying that he's interested in "companies growing larger by even larger acquisitions." He also cautions on tech stocks with limited floats and he's gotten out of Microsoft since Kynikos' last filing.
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Chanos on whether we're at the inflection point in the cycle where credit starts to deteriorate again:
"I don't think so - not yet. Again, there's a place where that is definitely happening so we don't have to guess. That's happening in China. You have a credit system gone crazy there. New debt has been running anywhere from 30 to 40% of GDP a year. Think about that for a second. Their economy is going 10% nominally, 7.5% real and 2.5% inflation. If you are growing your debt at 35 and your economy is growing 10 a year, that means that new debt is growing 25 percentage points greater than your economy. And using the old rule of 72, that means you double your debt to GDP every three years. So when we started looking at China, total debt in China to GDP is about 100% of GDP. It's now about 200%."
"Our view on Caterpillar as well as a few other companies globally - not Chinese companies - has to do with what we also see as the end of the commodities super cycle - industrial commodities, which have just gone ballistic in the last 10 years on the China infrastructure and real estate buildup. If you look at things like iron ore, copper, cement, steel, it's all the same story. To give your viewers an idea, in 1991 total capex in the mining area globally was $4 billion. 10 years later, it was $14 billion as we got to 2001 and 2002. in the next 10 years from '02 to now at the peak, it went from $14 billion to $120 billion. an arithmetic function became a geometric function in the last 10 years. When people say it could drop off a little bit, they think it could drop off slightly. It could drop off a lot."
On shorting the Australian dollar:
"There are countries that will not do as well. But there are big commodity companies, companies that have gone on acquisitions sprees. We are actually long on a couple of companies in Australia that are more diversified and we are short the leverage guys who have gone off and leveraged up their balance sheet. One of the great thing about the short side is i don't always have to disclose my positions…We have been public on a few companies. One is Fortescue, which is a poster child for a one-way bet. It's an iron ore play. It's a leveraged iron ore play. Iron ore is about $130, up from 40 or 50 for years and years and years. We have talked about Vale as well in the past and I think it's safe to say we're still pretty negative on Vale."
On how recent findings in China have confirmed his positions:
"I think that the continued push for investment spending, every time the economy seems to slow down. Infrastructure, real estate. Even in the August data, we saw in the July data people got excited again. China is pulling out of this June credit blip. It was all new products being approved. They don't know how to change this model and we've been talking about it for three years. The problem is it simply the same story. Stick a shovel in the ground, put up another building, another stadium, another railroad…at this point, the returns are minimal. We saw on your newswire yesterday, about 50 new international airports being greenlighted in China. And really there's only room for five or six."
On how hard is it for his team to get real research on China:
"It's a lot easier than you might think. The thing about a real estate bubble and an investment bubble is that it's visible. You can literally go to these cities, and we have, and just travel up and down the boulevards and take photos and compare the ones you did from one year ago to current ones. China does give you decent granularity at the company level. The banks give you a lot of data, they do trade publicly in Hong Kong. There is good disclosure in the Hong Kong market. It's not as difficult to get information as you might think."
On how China is going to have an impact on the global economy:
"Anybody selling raw materials into china. Africa will have a problem. Australia will have a problem. Brazil will have a problem. The amount of Chinese capital going into these projects globally will dry up…it depends when they need to repatriate the capital back to china. all of these things will probably happen, when is a good question, but it's already happening in terms of market prices. The Chinese market has continued to underperform. Every other global market is basically up."
On whether it's difficult to have short positions when in a waiting period:
"The one place my investors are happy we have been short is china. Everything else has been more problematic on the short side than China. It has been a place that the credit cycle is continuing to unfold in slow motion and pressuring equity returns. One fun fact -- the Chinese economy has basically quadrupled in nominal terms over the past 10 years. The Chinese equity market is basically flat over that time. That's an amazing statistic."
On what he's working on right now:
"I'm not going to reveal anything I shouldn't but I will say that one of the areas we are most interested in right now, similar to what got us interested in Hewlett Packard which was the Autonomy acquisition, is companies growing larger by even larger acquisitions. Increasingly now, we are seeing the point in some of these companies where they are having to make the acquisition too far, which was Tyco's problem 10 years ago. In order to keep the game going, they're going to have to do bigger and bigger deals."
"They have that quaint notion of developing their own products internally with their own design teams as opposed to some of these companies who basically -- and you have heard me complain about this and Cory understands this concept better than most. Companies in tech that acquire lots of companies are basically capitalizing their R&D…think the free cash flow looks good and thus Hewlett-Packard or dell or IBM, as you mentioned. But if you look at acquisitions as R&D, suddenly a lot of these companies look a lot more expensive than they do on the surface."
On Amazon, Netflix, Pandora, Salesforce.com:
"The problem not with Amazon and to a lesser extent with Netflix, but some of the other ones you mentioned right now, is that retail investors are falling in love with concepts again. They've fallen in love with concepts with limited floats--not enough shares outstanding. The whole world can get very excited about Pandora or a company that makes electric cars or whatever you might want to say, but if there are only a million shares outstanding in public hands as opposed to hundreds of millions outstanding which inexorably will get onto the market through venture capital distribution, insider sales, and this is what happened in 1999 and 2000. As these stocks were higher and higher, there was suddenly a flood of issuance....I'm not commenting on whether we are short Pandora. The point is that a lot of these stocks are trading on very, very limited floats. Even though they have big market caps, the amount of tradable shares is limited and that's going to change radically in the fourth quarter of 2013 and into 2014 if prices stay where they are. It makes a lot of sense for the original investors to diversify."
On how he figures out timing:
"That's the $64 million zillion dollar question on the short side. If we could time these things perfectly, there'd be no fun in the process. In any case, it's a mixture of things. Is the business deteriorating? We have pointed out over and over again that our best shorts historically are stocks that have appeared cheap. The businesses were deteriorating faster than the value investors were lowering their numbers. Many of those companies get into financial trouble. Everybody says be careful shorting on valuation and i think that's a good bromide. On the other hand, not factoring in valuation when you buy a stock can kill you too, and nobody ever says that. I would caution a lot of investors out there--whether or not you want to short stocks or not--you ought to take valuation into account when you buy something because it will matter at some point."
On whether he's long Microsoft:
"We have actually since the filing gotten out of it…for a variety of business reasons that I think Bloomberg has covered well…I am very leery of tech companies that become value stocks. It just never seems to work Apple trades like a value stock but I don't think it's a value stock. I think Apple is still innovating and is a good consumer product. I'm not so sure Apple is a technology company as much as a consumer products company. Microsoft is a technology company."
"We were short this last year. When the stock took a nose dive on Bill Ackman's disclosure of his position, we felt the risk reward changed. I'm watching from the sidelines like everyone else...My view is, just as an analyst, that any business that is predicated on selling overpriced products to consumers and/or distributors is ultimately a flawed business model."