Jim Chanos Threw Down A Big Investment Theme Going Into 2014: Short companies that are dependent on China’s appetite for iron ore.

September 26, 2013 Leave a comment

If You Listened Closely Yesterday, Jim Chanos Threw Down A Big Investment Theme Going Into 2014

LINETTE LOPEZ SEP. 25, 2013, 6:30 PM 6,289 3

Between the upper cuts and jabs Jim Chanos and Jim O’Neill threw out at yesterday’s Bloomberg Markets 50 conference, Chanos blew you all a kiss. Actually, it was better than a kiss. It was an investment theme for 2014. Bloomberg put together O’Neill — a known China bull, and the man who coined the term BRIC at Goldman Sachs —  and Chanos — CEO of hedge fund Kynikos Associates, and the loudest China bear on the planet — to see what kind of sparks would fly. It was fun, you should read about it. Anyway, if you listened closely to their discussion (watch it here), Tom Keene asked Chanos to give him a “concrete example of a concrete company” he couldn’t stand. Chanos answered: “I would say anybody that’s in the business of mining iron ore right now where supply is about to come on in late 2013 and 2014 whether demand holds up or not it’s going to be a difficult market for those people.” That statement immediately brings to mind two of Chanos’ short positions, both of which are companies that are dependent on China’s appetite for iron ore.First and foremost there’s Fortescue Metals, an Australian mining company. At this time last year, it was going through a liquidity crisis.

In an article about the company published four days ago in the Sydney Morning Herald Chanos said:

“If you believe as we do strongly that the Chinese credit driven investment boom has to ultimately come to no good, then there is probably no better place to be short than iron ore…”

Then there’s Vale, a Brazilian steel company. It’s down almost 25% year to date and last year Chanos said that it too would suffer as slowing Chinese demand, coupled with the fact that China is building its own iron ore plants spelled disaster for its business.

Chanos’ gripe with Brazil goes deeper than its association with China though. At the Bloomberg 50 conference he and O’Neill agreed that Brazil’s quasi-state planned economy was more Chinese than China’s economy right now.

Back in December Chanos said at a conference in London that “People worried that (former Brazilian President) Lula was a socialist, well, Dilma is a socialist.”

So shorting Vale is like killing two birds with one stone for Chanos. It’s logical in the context of his China thesis, and if you’re an ETF kind of person, Vale (along with Petrobras, another Chanos short) is weighted quite heavily on the iShares MSCI Brazil Index Fund (EWZ), which is down 14% YTD.

So you can buy Brazil, and then short Brazil.

Have fun.

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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