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Chanos adds to Tesla bet, predicts CEO Musk will leave

The logo of the Tesla Model S on display at the Paris Auto Show in Paris on Sept. 30, 2016.

Christophe Ena/THE CANADIAN PRESS

Noted short-seller Jim Chanos of Kynikos Associates continued to add to his short position in electric car maker Tesla Inc throughout the year even as the company's shares rallied, he said at the Reuters Global Investment 2018 Outlook Summit on Tuesday.

Mr. Chanos, who first disclosed his short position in the company in May last year, said that he expected company co-founder and Chief Executive Elon Musk to step down from his position by 2020 to focus on his private rocketship company SpaceX as competitors such as BMW and Porsche expand their lines of luxury electric vehicles.

"Obviously this is not being valued as a car company, it's being valued on Musk ... he's the reason people own the stock," Mr. Chanos said.

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Shares of Tesla are up 44 per cent for the year to date, at one point pushing its market value higher than competitor General Motors despite Musk's company not turning a profit.

On Nov. 1, Tesla reported its largest-ever quarterly loss and pushed back its target of volume production of its new Model 3 sedan by three months. The company said it now expects to build 5,000 Model 3s per week by late in the first quarter of 2018 from its original target date of December.

Despite the production delays, the company has been among the most painful for short-sellers this year, with losses among funds that bet on its decline totaling more than $4 billion this year, according to S3 Partners, a financial analytics firm.

"Put it this way," Mr. Chanos said. "If you wouldn't be short a multi-billion-dollar loss-making enterprise in a cyclical business, with a leveraged balance sheet, questionable accounting, every executive leaving, run by a CEO with a questionable relationship with the truth, what would you be short? It sort of ticks all the boxes."

He said the company is burning more than $1-billion in cash each quarter and will have a harder time tapping the capital markets if and when Mr. Musk leaves.

Mr. Chanos also said he has bet on a decline in the share prices of supermarket chains, calling the sector "probably the next major industry group of pain."

Mr. Chanos said traditional supermarket chains are burdened by excess square footage, low margins and competition from rivals such as Amazon.com Inc, Wal-Mart Stores Inc and low-price German retailers Aldi and Lidl.

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"Pretty much I wouldn't want to be long any of them," said Mr. Chanos. He predicted "forced consolidation and layoffs, and it's not going to be pretty."

Known for correctly betting against Enron Corp long before the energy company's 2001 bankruptcy, Mr. Chanos declined to identify which supermarket chains he is shorting, but said one is a non-U.S. company with operations in the United States.

Publicly traded grocery chains include Kroger Co and Supervalu Inc, whose share prices are down more than one-third this year, and United Natural Foods Inc, which is down by nearly one-fifth.

Among others are also Sprouts Farmers Market Inc and Koninklijke Ahold Delhaize NV, parent company of Food Lion and Stop & Shop.

Mr. Chanos is not alone in projecting rough sledding for the sector.

Short interest in Kroger, Sprouts, Supervalu and United Natural rose after Amazon agreed in June to pay $13.7-billion for Whole Foods Markets Inc. The short interest in Kroger represents 8.3 per cent of shares, while for United Natural it stands at 17.3 pe rcent.

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Mr. Chanos said that while Amazon's move would pressure supermarket chains, Aldi and Lidl could be bigger disrupters.

"You have the advent of these two German competitors who are ruthless, putting up boxes with enormous amounts of decent private-label selections at low prices, in a format people seem to like," he said. "They're coming into pretty much every decent market and obliterating the business.

Aldi said in June it planned to invest $3.4-billion to expand its U.S. base to 2,500 stores by 2022. Lidl opened its first U.S. stores this year.

Mr. Chanos said overcapacity will further pressure an industry that operates on margins of only 1 or 2 per cent.

"We were not short the department stores," Mr. Chanos said of another traditional retailing sector that is retrenching quickly. "We missed it. Supermarkets are probably the next major industry group of pain, not just because Amazon has gotten into it."

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