MARKETS SPECTATOR: Chanos reloads the elephant gun

Short seller Jim Chanos believes there are a number of opportunities to short the PC market, with Hewlett Packard and Dell among the value traps.

Locally famed for his aggressive short position in Fortescue Metals Group, Jim Chanos, founder and president at Kynikos Associates spoke overnight about what his company is betting against and his views on the economy and where technology is headed.

Looking at the bigger picture, Chanos views the US as being in better economic shape than either Europe or Asia as the end of the deleveraging cycle works its way through the system.

Concerning the recent views over the languishing labour market, Chanos indicates that much of the domestic investment is actually in more efficient technologies that are replacing jobs rather than creating them. As an example, he talked about the internet and what it is doing to the retail space, which has typically been a huge employer across the US.

This premise has driven some of his recent activity, most specifically in short positions across a number of Asian and European banks. However, unusually Chanos has chosen to hedge this bet by being long Citigroup and Bank of America, which are both domestically focussed US banks.

In the US, Chanos indicated that there is no shortage of short opportunities, especially given the rally most sectors of the market have seen in 2012. Specifically, his firm has been finding opportunities within the natural gas and coal space. Chanos likes what is happening in terms of the overall move towards natural gas and the shale gas industry, but sees select opportunities in those firms that are highly leveraged. He notes that those firms looking to sell shale gas assets are quickly finding it a buyers’ market.

Moving on to the technology space and this is an area Chanos has been active in for many years. The underlying theme the firm has focussed on for the best part of a decade has been the relentless digitisation of analogue businesses. These businesses once sold a tangible product and now that that product has become digitised are seeing profit margins
aggressively and continuously sliced.

In terms of short opportunities, Chanos likes what is happening in certain pockets of the PC market. His firm is short both Hewlett Packard and Dell, seeing them as value traps that have underestimated and missed the move to tablets and smartphones. Chanos believes we are witnessing a fundamental shift in the way personal and business users interact with data, and these firms have largely missed it.

To offset the declines in their core businesses, these traditional PC makers have made an increasing number of risky acquisitions, which Chanos views as purchased R&D. The crux of his bear case is that when these acquisition costs are viewed as capex or R&D, the actual free cashflow of the business is negative.

Against these PC shorts Chanos is holding a long hedge in Microsoft, a business he feels is beginning to understand the shift and is transforming itself, not only as a software company but also in hardware and solutions. He cites Microsoft’s upcoming launch of its tablet, the Surface, as evidence that they’re changing for the better.

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