Smart Short: Jim Chanos Was Right About Caterpillar And China

jim chanosJim Chanos, founder and Managing Partner of Kynikos Associates, speaks at the 16th annual Sohn Investment Conference in New York on May 25, 2011.

Exactly a week ago, legendary short seller Jim Chanos told CNBC’s Delivering Alpha conference that shorting Caterpillar was his best investment idea of 2013.

The company is in the “wrong business in the wrong time,” he said.

Caterpillar supplies construction and mining machinery to China, an economy which Chanos is extremely bearish on.

Earlier today, Caterpillar reported disappointing financial results and slashed its outlook for the global economy.

“World economic growth slowed in the first half of the year, and we are revising our growth estimates downwards,” said Caterpillar. “Although we expect some improvement in the second half, the improvement will be less than previously expected. Currently, we expect that world economic growth for 2013 will be a little over 2 per cent, slightly slower than in 2012.”

And this comes hours after Chinese PMI data showed the economy’s manufacturing sector continues to slow.

Here’s some of what Caterpillar said about China and the emerging markets:

  • Developing economies slowed in the first quarter and short-term interest rates declined further. Recently, a few countries raised interest rates, which could indicate average rates are near a low. We expect developing economies to grow about 4.5 per cent this year, about the same as in 2012.
  • More stringent credit conditions have become a widespread concern in China. Total credit increased 30 per cent in the first half of the year, a rate of growth which is not sustainable. However, inflation remains below the government’s target, which should allow the government to continue pro-growth policies.
  • In China, economic factors driving construction and commodity demand were mostly favourable. Infrastructure investment increased 24 per cent, building starts rose 4 per cent and steel production was up 9 per cent.
  • We expect the Chinese economy will grow about 7.5 per cent this year and industrial production will increase about 9 per cent. Those growth rates, while slower than early in the recovery, should lead to more construction and commodity usage.

Shares are down by around 1% in premarket trading.

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