market folly

Noted short seller Jim Chanos of Kynikos Associates recently sat down with Capitalize For Kids for an interview.  They touched on a myriad of topics, from how his firm has evolved over the years to areas he's focusing on now for short selling. 

Here's some key takeaways from the interview:

On how the rise of quants, machine learning, and A.I. can affect hedge funds:

"In our universe companies are actively trying to give you false inputs. They’re trying obscure the numbers. They’re trying to basically make it look better than it really is and so, if you are analysing reams of reams of stocks based on a P/E ratio, momentum, whatever factors are en vogue, you’d better be sure that you don’t have a Valeant that is puffing up their earnings in a bunch of one time ways because that algorithm will kill you. So4, I think it’s one area, where because you’re questioning the actual inputs and not how they interact with the market price, that you might still have an edge. Might. I’m always willing to consider the opposite. You have to."


On today's market environment: 

"Since ‘08, ‘09 I think we’re going to look back and say that it was the advent of central banking, ‘the central bank saves the world and makes you all rich’. So, QE and zero interest rates, I suspect we’re going to look back and say well 8 years of that policy kind of got us to where we are now, so how is that going to change if it does, and how does that change manifest itself? Are we going to see companies that just can’t possibly do well if interest rates go up by 400 bases points or 300 bases points? That’s certainly one thought. On a macro basis, I mean, I’m not positioning the portfolio because that’s what I think but on the other hand I’m keeping an eye out for companies who might get into additional trouble should that regime be ending. And whether it’s in the auto cycle or companies with really, really low returns on capital that have been using financial engineering to bolster their results, those are sort of the things that we’re interested in right now."


On the auto industry:

"Cars are usually the first thing out of the cycle and so now we’ve been at this sort of 17 million SAAR now for a while and what we’re seeing is what you would classical see. You see more incentives. You’re seeing car manufacturers beginning to cut plant production on the margin. We see more aggressive use of credit, lengthening lease terms, lowering residuals. All the sort of stuff that you typically see to keep moving the iron off the lots. I think this will be one area in particular that a run up in rates would probably hit hard, because everybody buying cars is doing so on monthly payments. These applied loan rates really affect the current industry quickly, faster than I think housing.  Well, I’m not going to disclose (the specific security). However, at the peak of the cycle the company was earning about 6% on their capital. It’s a giant company in the industry. It’s not one of the OEM’s and has a finance arm. It earned below its cost of capital when things were good.  What's going to happen when things are bad?  Today, it is trading at its highs right now."



There's much more from Chanos in the full talk and you can read the rest of the interview here.