Between the upper cuts and jabs Jim Chanos and Jim O’Neill threw out at the 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.
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