market folly

Continuing our series of notes from the Sohn London Investment Conference, next up is Jim Chanos of Kynikos Associates who gave a presentation entitled 'Brazil: Resource Rich, Not Riches."


Negative on Brazil

For those unaware, Chanos runs short-biased hedge fund Kynikos Associates.  As such, it should come as no surprise that at the event he presented 2 short ideas both with ties to Brazil: a metals and mining company, as well as an integrated oil and gas company.

The general theme of Chanos’s argument went beyond these two short ideas, though, as he suggested that Brazil was generally an unfriendly place for investors in a similar way to his recent portrayal of China as a roach motel.

He said that like China, Brazil has a system of state capitalism  which leads investors to subsidize state aims at the expense of investment returns. In Chanos’ view, both China and Brazil operate the wrong form of capitalism which leads capitalists to ‘get the bad end of the stick’.


Short Vale (VALE)

He said that the company appears cheap to value investors but in his view it is a value trap.  His main thesis on this name was that iron ore itself is over-valued.  Readers will recall that Greenlight Capital's David Einhorn said to short iron ore recently at the Great Investors' Best Ideas event.

Chanos argued that Vale is too dependent on China’s demand for iron ore.  Demand might be about to fall and besides China is building more of its own iron ore plants.  There are very few barriers to entry.


Short Petrobras (PBR)

This isn't the first time that Chanos has been negative on the Brazil state owned oil company as we've posted up his past negative commentary on PBR.

The Kynikos founder also feels Petrobras is a value trap and he also highlighted that:

- It looks like a value story trading on EV/EBITDA 2013 5.3x but it's not
- It has massive reserves of oil
- The government owns 64% of Petrobras so they cannot charge the full market price for oil and gas because of government interference
- They have a poor record of exploiting reserves

We've also posted up some of Kynikos' other short positions that have been revealed.


For the rest of the hedge fund presentations from this event, head to notes from Sohn London Investment Conference.