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A putrid set of earnings for Caterpillar Inc. represents another big win for short-selling hedge fund manager Jim Chanos, a man enjoying a mythical run of successful market calls. It's been more or less proven in the last 18 months that it's a very, very bad strategy to bet against Mr. Chanos' short ideas, so it seems like a good idea to find out what other investments he's made for his funds.
Mr. Chanos founded hedge fund management company Kynikos & Associates in 1985 and for a while toiled away in obscurity. He rose to prominence with timely short positions in Enron Corp., Tyco International Ltd.and WorldCom Inc.
At a recent conference in New York, Mr. Chanos disclosed a large short position in heavy equipment maker Caterpillar, noting that the end of the commodity cycle meant the company was "in the wrong business at the wrong time." Wednesday morning, Caterpillar reported earnings well below expectations and slashed growth forecasts for the remainder of the year.
Mr. Chanos was also the first prominent manager to bet big against China, particularly property developers, beginning in 2010. He explained his rationale in an interview with Barrons, saying "I view [China] as a stock that's growing, but whose earnings are below the cost of capital."
Reporting regulations for hedge funds makes it difficult to uncover the exact stocks Mr. Chanos' hedge fund sold short. But, with the Shanghai Composite currently down 33 per cent from the 2011 highs, there is little doubt that his pessimism on China has been lucrative.
The Kynikos funds have also consistently held short positions in the personal computing space. The manager has revealed significant shorts in Hewlett-Packard Co. In this case however, he has hedged the short sale with a long position in Sandisk Corp, a company he expects to benefit from the proliferation of mobile computing at the expense of PC sales.
Mr. Chanos has also made skeptical comments about Dell Inc.'s future growth, a view that pits him against famed corporate raider Carl Icahn, a man who's also not wrong very often.
Canadian investors will be most interested in Kynikos' investment strategy in the U.S. natural gas space. The funds are invested in the natural gas price itself through UNG, an ETF that tracks the price of the commodity. This long position is the counterbalance to a bet against Chesapeake Energy Corp. which he believes has overspent on fracking properties that will have to be written down in value.
Investors should never blindly follow a portfolio manager no matter how impressive their ongoing hot streak. Today's genius often proves tomorrow's laughingstock. Nevertheless, it would seem a terrible idea to bet against Jim Chanos at the moment. Investors should avoid the personal computing sector, China-related stocks (like Caterpillar) and leveraged energy players in the natural gas sector until Mr. Chanos is proven wrong.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .