The LeBron James of short-selling talks Ponzinomics.
It’s a sweltering, 95-degree August day in Manhattan, but Jim Chanos — fresh off a two-week holiday, rocking a sharkskin suit — is pumped: Elon Musk had once again called a hero of the Thai cave rescue a pedophile.It’s 1:30 in the afternoon. Chanos bolts through the door to his office building on West 55th Street, grabs the journalist waiting for him, and, on the elevator ride to his eighth-floor office, fills her in on the latest news....MUCH MORE
“Musk is at it again. He’s doubling down on his pedophile comment,” Chanos says, amusement noticeable in his voice. Minutes earlier the CEO of Tesla Motors — who is already under investigation by the Securities and Exchange Commission for a tweet about taking the company private — had returned to an earlier tweetstorm in which he accused the British cave diver of being a “pedo guy”.
“You don't think it’s strange he hasn’t sued me?" Musk tweeted at 12:30 p.m. on August 28. Tesla shares immediately began to slide, and within hours the diver’s lawyer reportedly informed Musk that he would, indeed, be sued.
Recent months have seen one bizarre event after another in the saga of the electric-automaker and its iconic boss, and Chanos has been watching it all. The 61-year-old founder of hedge fund Kynikos Associates announced his short against Tesla in the fall of 2015 and has been nursing losses ever since — for despite a raft of bad news and the increasingly controversial, and potentially illegal, behavior of Musk, Tesla’s stock, while off significantly from its highs, has stubbornly refused to crash.
The Tesla short made for a tense working vacation for Chanos, who had left New York for his annual trek to the Greek island of Mykonos on August 9. That was just two days after Musk tweeted that he was considering taking Tesla private — with the now-infamous “funding secured” line — and Wall Street went into a frenzy trying to see if it could happen.
Chanos was skeptical.
“I thought immediately it was not true, because I know Elon Musk at this point,” he said during a two-hour interview that touched on everything from hedge funds and short-selling to politics and the history of fraud, then, eventually, got back to social media and Musk. “The way it came out during market hours, right after the Saudi passive investment announcement [the Saudi sovereign wealth fund has reportedly taken a 5 percent stake in Tesla] — it was so irresponsible, number one, and was not clearly vetted, because no one who vetted that would’ve let him put that out.”
Although Kynikos’s two senior portfolio partners, Chuck Hobbs and David Glaymon, were monitoring the stock from New York, Chanos couldn’t stay away from the news, even in Mykonos. “It was breaking so fast,” Chanos says. As the stock rallied, he sold more shares short.
Finally, at 11:00 p.m. on Friday, August 24, Musk ended the suspense with a statement on Tesla’s blog. He had decided against going private.
Tesla has been the biggest short in the market for much of this past year, with nearly $10 billion wagered that its stock will fall. Chanos is hardly the only one who takes that view. Kynikos now runs less than $2 billion, and with individual short positions capped at 5 percent each for risk management purposes, Tesla represents at most about $100 million of the firm’s total short bets, which it currently has on 65 companies.
Win or lose, the Tesla short won’t make much of a difference to Kynikos’s bottom line. But for Chanos — who claims he’s also advising much larger “pools of capital” on their Tesla shorts — there’s more than money at stake.
Kynikos is the lone short-selling hedge fund of any size — and the only one that that has been in business since 1985.
That’s no mean feat, as the stock market has risen almost 1,500 percent since Kynikos’s debut. Chanos has lived through at least three bear markets — the 1987 crash, the bursting of the dot-com bubble in 2000, and the global financial crisis of 2008 — and he’s waiting patiently for the next one.
“I’m not saying it’s the top of the market, but on the other hand, bear markets haven’t been outlawed,” he quips.
Chanos, of course, is already a legend. He will go down in Wall Street history for predicting the demise of Enron Corp., whose collapse resulted in a wave of prosecutions and the imprisonment of top executives — the kind of harsh penalties that have not been seen since.
But that was in 2001 — 17 years ago.
Since the financial crisis year of 2008, Kynikos’s shorts overall have been bleeding red ink, and investors have bailed. Kynikos has lost almost three quarters of its assets since the end of 2008. This year alone, its funds had fallen between 9 percent and 19 percent through July (net of fees), depending on the fund, according to a report to investors Institutional Investor has seen that has not been previously reported on.
“It has been one giant short-squeeze market,” he moans.
Take Tesla. To Chanos it represents a market euphoria last witnessed during the dot-com craze. Although Tesla is unprofitable and loaded with debt, its market cap rivals that of General Motors. A rush to meet production targets on its midprice Model 3 sedan this year has been accompanied by defective cars, unhappy employees-turned-whistleblowers, and a stream of exiting executives — not to mention ever-stranger outbursts by a CEO under enormous pressure to meet the projections he promised shareholders. The current stock price of about $299 per share (above Chanos’s average cost of $250) is based on ambitious plans for the future. But what most people are missing, says Chanos, is that Tesla has quit making the capital investments required to realize those ambitions. It can no longer afford to do so.
But facts don’t seem to matter. As Chanos reminds us, referring to President Trump and his supporters, we are living in “a post-truth environment.” That translates, he argues, into a mood in which investors are also willing to suspend disbelief.
“If we don’t hold our leaders to that standard,” muses Chanos, “then why should we hold managements to that standard? I think that’s part of where we are now.”
Chanos, who jokes that he is considered an anarchist on Wall Street for his liberal political views, is not prone to proselytizing. He doesn’t write letters to the Securities and Exchange Commission or publish long treatises on his short theses. Though he believes the political environment has an impact on the market, he never counts on the SEC to take down the bad guys. “They’re archaeologists, not detectives,” he scoffs.
Chanos can appear world-weary and somewhat guarded — but, as the saying goes, in every cynic beats the bleeding heart of an idealist. “There’s more than a little of the crusader in him,” says longtime friend Jim Grant, founder and editor of Grant’s Interest Rate Observer. “He would like to clean up Wall Street. He would like to improve the quality of corporate reporting. He would like to rid Wall Street of the scoundrels and clean up corporate management.”
That might explain what happened earlier this summer....
HT: Barry Ritholtz but we don't have a specific post. So here's The Big Picture.
