Jim Chanos tanked Brazil on Monday afternoon.
The founder of short-focused hedge fund Kynikos Associates presented his thesis for Petrobras, the Brazilian quasi-state oil company at the Robin Hood Investors Conference. He called the $US91 billion company a “scheme, not a stock.”
The market’s reaction was swift and decisive. Chanos’ remarks were made after two and the stock immediately started to slide. At yesterday’s close Petrobras fell almost 10% in after hours trading.
And because the company is so large it took Brazil’s Bovespa stock index with it — down almost 4%. Petrobras is also weighted in the MSCI Brazil ETF, which fell almost 5% in after hours trading.
On Tuesday both indexes opened down almost 4%.
Petrobras fell down about 6.7% at the open.
This isn’t a new position for Chanos. He’s been public about his short thesis on the company since at least 2013 arguing that it’s a wasteful, corrupt piggy bank for the Brazilian state. What makes this worth revisiting now is the timing. Brazil will elect a new President on Sunday.
It will be either incumbent Dilma Rousseff or more conservative, market friendly reform Aecio Neves. They have their differences. Rousseff will continue to support the expansive social programs that have brought millions of Brazilians out of poverty, but bloated the state. Neves promises to tighten monetary, bring investment back to the country, and help fatten thinning corporate margins.
Both, however, have been associated with corruption, in the form of government kickbacks, at Petrobras.
“I will do all I can to reimburse the country,” admitted Rousseff during a news conference this week.
Chanos argues that — despite the fact that Brazilian markets have been a whipsaw based on who is up or down in the polls — it doesn’t actually matter for Petrobras.
“Every time Dilma’s poll numbers go up, Petrobras stock goes down. And every time Neves’s numbers go up, Petrobras stock goes up,” Chanos told Bloomberg’s Stephanie Ruhle after his presentation. “The problem is it’s tied to Dilma. She was the chairwoman of this company. There’s been a number of investigations and — and scandals swirling the company — around the company. And we’re just not sure that even if Neves wins he’s going to really be feeling all warm and fuzzy toward this creature. Having said all that, the economics are just so poor at Petrobras that we really have called it a scheme, not a stock.”
The problem is simple, Petrobras prices are so low that the company ends up subsidizing costs for consumers. As a result, the company doesn’t have enough cash to fund costs, capital expenditures and the little bit off the top that the government seems to be taking.
But that isn’t the way all of Wall Street sees this trade. Big name hedge fund managers, like Mike Novogratz, think this election will be a buying opportunity, and that Neves can turn this around.
“…if investors knee jerk run into the Bovespa and buy Petrobras because Neves wins, I think it’s a great entry point on the short side in this story because it doesn’t change the economies of the situation,” said Chanos, addressing that argument. “And we pointed out today in our presentation that even — even if you gave this company Exxon’s margins both upstream — and I see your eyebrows — and downstream, it would still be break even cash flow.”
So don’t get caught in the farce.