Monday, December 9, 2013
Jim Chanos, bad news bear, urges market prudence
On the U.S. stock market
Chanos: “A few years back, I felt the U.S. was the best house in a bad neighborhood for a cliché hackneyed term and certainly there were better places that I think on a macro basis to be short like China. Our thinking is changed on that now. I think that the U.S. market is pretty fully discounting an awful lot of good news. While one can never be precise on markets and that’s not why my clients pay me, we’re finding many more opportunities (on the short side) in the U.S markets than we found a few years ago. The U.S. market at roughly 1,800 on the S&P is trading at 19 times earnings. I am always sort of befuddled because people use a much lower figure on that…we went back and triple-checked trailing 12-month S&P 500 earnings and they are only $95. A lot of companies report earnings before the bad stuff and we’re talking about GAAP earnings – actually talking about real accounting earnings – they are only $95. So for you to believe that the market is only at 14 times, 15 times next year’s number, you have to make some pretty robust assumptions on earnings growth to get to $95 to that $120 or $125 figure.”
Déjà vu all over again
Chanos: “I recall pretty vividly in 2007 at the top people were saying that ‘Well, the markets weren’t that expensive.’ And yet, we had a little bit of a dislocation following that. Of course, everybody will say, ‘Yeah but the markets could go to whatever…because it did in 2000.’ If you want to use as your benchmark, a once-in-a-lifetime, mainly the Nasdaq as your guidepost what is cheap or not, Good luck. We’re at the same kinds of levels we’ve been at in ’07 and in other periods where the markets had some difficulty. Having said that, the Fed is going to stay easy for a long time, so they tell you, so people are taking that as a given. But there are other some other signposts that are a lot different from four years ago.
Back then, you saw very little (stock) issuance, now issuance is picking up very, very quickly. We see three-four-five spot secondaries every night beyond the IPO market. You’re seeing hedge funds scrap the short side – and in some cases, bring out long-only funds. That was a hallmark of 2007 as well. In 2009, everybody wanted tail risk protection. I haven’t heard about tail risk protection in probably 18 months. We’re back to a glass half-full environment as opposed to a glass half-empty environment. If you’re the typical investor, it’s probably time to be a little bit more cautious. It doesn’t mean the market can’t go a lot higher. And as I say, we’re pretty much in our short-only business always defacto hedged but the risks are getting out there. And even in some stocks we’re you’re beginning to see research reports now stretched out and tell you the stock is reasonably priced based on 2020 estimates, most people can’t really forecast much beyond a few months — and we’re seeing more and more of those kinds of reports where stocks are justified based on some enormous growth way, way out into the future. And to some extent Fed policy fosters that because of the low interest rates people feel that they can be confident in predicting out reasonably high multiples with no hiccups going out in the future.”