Wednesday, May 25, 2011

Chanos vs. China?

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!

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