Chanos warned investors of a 'speculative leg-up' back in November

Short selling

Jim Chanos, the president and founder of Kynikos Associates and one of the industry’s higher profile short-sellers, said that the evidence was almost irrefutable late last year that something was wrong with Wirecard. 

Speaking to Bloomberg anchor Scarlet Fu during the Bloomberg Invest Global digital summit, running this week, Chanos said the evidence had been piling up and that it was the largest position in the hedge fund manager’s global short accounts. 

“People kept giving them the benefit of the doubt over and over again until they could hide it no longer with the delay of the EY audit,” commented Chanos.

Wirecard has been hitting the headlines in recent days amid the fallout of USD2.1 billion of missing capital; roughly a quarter of the firm’s total balance sheet. 

Wirecard’s woes have come to the fore at a time when the markets have become highly speculative, even before the Covid-19 sell-off. Chanos referred to the fact that the corporate fraud cycle tends to lag the economic cycle. In what has been a continued period of speculation, companies with questionable business models have found it easy to get funded. Unsurprisingly, investors question things a lot less when the markets are ripping. 

It’s only when the markets fall and investors start losing money that the mask starts to slip and questions are asked as to the true financial health and wellbeing of companies. Sometimes this can lead to an uncomfortable reckoning.  

Chanos believes that Wirecard aside, that wave of realisation “is still ahead of us, not behind us”. He pointed out that after the Nasdaq fell in March 2000, Enron collapsed (among others). 

Chanos spoke candidly about market speculation. He said that back in November 2019, Kynikos Associates was telling its clients that the market had taken a speculative leg up, “the likes of which we haven’t seen since 1999”. 

“It was unquestionable in our mind that the speculative fever moved up a few notches in Q4 2019 and the early months of 2020. The Covid-19 sell-off in March punctured that for all but a few weeks and in many cases stocks are trading meaningfully above where they were in Jan/Feb,” Chanos said.

In his view, the extent of liquidity injections by central banks has emboldened investors (especially retail investors). 

For a short-seller, this makes for an interesting dynamic and requires a healthy degree of patience and gumption. 

Look at Tesla, for example, whose share price has exceeded USD1,000; a four-fold increase from 12 months ago. Despite this, Chanos is steadfastly maintaining a short position, which has been in place since the Fall of 2015. 

Fu referenced Tesla’s growth as resembling that of a technology start-up rather than an automotive company. In reply, Chanos highlighted that every quarter they produce a spreadsheet comparing Tesla to all other automobile OEMs and that it has almost the exact same margins and return on capital. Chanos said the company’s rate of growth had slowed, China aside.

“This is a company that trades at 8x revenues, compared to other automotive companies, which trade at 0.25 or 0.5x revenues. People see Tesla how they want to see it,” commented Chanos.
 

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