econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 13 August 2016

Jim Chanos Vs. Elon Musk - Here's How You Side With The Winner

by Keith Fitz-Gerald, Money Morning

Money Morning Article of the Week

What do you do when you've found a stock with fabulous long-term potential that you love... but one of the world's best short sellers hates?

That's the situation thousands of Tesla Motors Inc. (Nasdaq: TSLA) and SolarCity Corp. (Nasdaq: SCTY) investors find themselves in today.

Most have no idea what to do next, which is why I want to use the situation as a teaching moment. This isn't the first time two Wall Street titans have been at odds, and it won't be the last time you'll see it as an investor.

Don't Miss: Research shows that this number is the key to beating the markets by 10, 20, even 40 to 1. No wonder it's one of Wall Street's best-kept secrets...

My goal is to show you how to read between the headlines and identify the winner early on. That way you'll know how to place your money for maximum profits.

It comes down to this.

No One Ever "Talks Their Own Book" for Somebody Else's Benefit

Millions of investors follow legendary traders like billionaire activist Carl Icahn into and out of stocks like Apple, Xerox, and Netflix, believing that doing so is a surefire way to make millions. So why is it that they're not the ones getting rich?

Very few investors understand a nasty practice called "talking your own book."

If you're just joining us, that's a derogatory term to describe when an insider, an activist investor, or a hedge fund manager makes a statement of opinion on a stock that's a good buy or a solid sell, typically without the express caveat that he or she stands to profit from the public reaction that inevitably follows.

For example, activist Carl Icahn bought into Apple Inc. (Nasdaq: AAPL) at a time when share prices were trading around $463 ($66 split-adjusted), then promptly made a very public case for it being worth $625 a share ($89 split-adjusted). Millions of investors watching the news bought in hook, line, and sinker. Not surprisingly, Apple shares took off 5.8% in a single day and Icahn's holdings jumped a stunning $104.4 million.

Or consider Netflix Inc. (Nasdaq: NFLX). On Oct. 31, 2012, Icahn revealed he had a 10% stake in the company... and the stock surged 14% in a single day. He picked up $5.5 million in shares through either options or direct acquisitions, then did the rounds talking up the company's virtues and laughed all the way to the bank as shares soared when individual investors piled in, too.

In the old days, you couldn't do this... at least not so directly.

Instead you'd make the rounds and try to convince fellow traders or "hedgies" to join your trade based on the merits of your analysis. Or you'd hit up the sell-side analysts - meaning those facing the investing public - for a favorable report.

But now, thanks to changes in securities laws and the JOBS Act, specifically, hedge funds can advertise their services to a much broader section of the investing public and issue "research" reports that, not surprisingly, play to supposedly independent thinking, then talk about them in the mainstream media.

Illegal, you say... manipulation?

Not according to the law.

Manipulation is untruthfully talking up your book with the expectation of profit. Simply talking up your research and your opinion involves the truth... more or less.

Enter Jim Chanos.

He's chairman of Kynikos Associates and one of the best short sellers in the business - meaning he makes money when companies go down in price. He's as smart as they come when it comes to identifying companies on the brink of failure.

He thinks SolarCity is a company "headed toward financial distress" and has made no bones about it in widely syndicated media appearances on CNBC and Bloomberg.

According to Chanos, SolarCity is "burning hundreds of millions in cash every quarter", and that's a burden "Tesla shareholders will have to bear" at a total cost of more than $8 billion.

It's thoughtful of him to help spread the word, right? He certainly wouldn't want anybody to lose money on a bad company. Or would he?

Actually, Chanos doesn't care... as long as he's not the one losing.

Like any competent short seller or trader, Chanos isn't interested in whether or not you sell at a loss, nor does he care whether your long-term investing philosophy falls prey to short-term market movement.

His only real motive is to get you - a card-carrying individual investor - to back up his position using every means at his disposal, including making his case as forcefully, bluntly, and publicly as possible.

Which, in turn, keeps the buyers away and drives prices still lower and his profits higher.

Now to the fun part... making money.

Chanos Has Plenty of Frenemies Who'd Like to See Him "Burn"

Short sellers like Chanos don't get where they are by playing nice. Chances are he's got more than a few hedge fund enemies who'd want to see him "burn."

That's another Wall Street expression you need to know.

When short sellers go against a stock like SolarCity, they sell it first to collect their money, then buy it back later at a lower price and keep the remainder of their money as profits. It's the opposite of buying stocks first and selling later, which is how most investors do it.

Every share they sell increases the "short interest," which is the total number of shares shorted divided by the number of shares outstanding that have not yet been covered or bought back.

A small short interest suggests that there are a small number of people who think the stock will decrease in price while a large short interest suggests that more people think it will drop.

SolarCity has a short interest ratio of 4.32, meaning that the total number of short positions is 4.32 times greater than the average daily volume. Amazon, by contrast, has a short interest ratio of 1.4. Even Exxon, which is one of the most "hated" stocks on the planet at the moment, stands at only 4.51 - just a smidgeon higher than SolarCity's.

That tells me a huge number of traders are vulnerable to a SolarCity rally, including Jim Chanos.

Why?

Psychology.

Remember, short sellers make their money as prices drop, but they can only drop so far. Zero is as low as prices can go. But buyers make their money when stocks go up and the profit potential is unlimited.

Not surprisingly, sellers are far more prone to panic as a result.

And that means, in one of the great ironies of modern finance, the very people who are betting a stock will go down actually are those most likely to drive a rally if prices start to rise, because they will pay whatever it takes to get out to avoid mounting margin payments.

Hence the term "burn," because that's what their wallet feels like if they cannot get out quickly enough.

So now to the bottom line... Chanos or Musk.

I'm with Musk.

  • He's got a proven long-term track record and a vested interest in seeing both companies succeed. Chanos is simply interested in a short-term profit and could care less about you, me, or even Elon Musk.

  • Revenue is up 81.6% year over year, according to the company's latest filings.

  • The price/earnings growth (PEG) ratio stands at just 0.02; anything under 1 suggests good value.

  • Eight analysts have issued upward revisions for SolarCity over the last 30 days.

The way I see it, Chanos has his work cut out for him.

The markets love an underdog with vision, and I can't think of an executive today with more vision than Elon Musk.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Minsky’s Theory of Asset Prices: Why Minsky Was NOT a Neo-Monetarist
Finance and Growth: The Direction of Causality
News Blog
The Rise Of The Gluten-Free Diet
Who's Smoking In The U.S.
Six Cosmic Catastrophes That Could Wipe Out Life On Earth
What We Read Today 20 January 2017
THE FABULOUS FIFTIES
13 January 2017: ECRI's WLI Growth Index Insignificantly Improves
Rail Week Ending 14 January 2017: Some Improvement
Majority Of Job Seekers Uncertain About Trump Impact
How To "Buy Low And Sell High" Like A Pro
Infographic Of The Day: Unusual Pets
Early Headlines: Asia Stocks Mixed, Oil Up, Dollar Down, China GDP On Target, GOP Govs Defend Medicaid Expans., Trump Wants To Cut Fed. Spending By $ 1 Trn, Trump's Troubling Foreign Deals And More
The Fake News That Sealed The Fate Of Antony And Cleopatra
The Jobs With The Biggest Cash Bonuses
Investing Blog
Technical Thoughts: Three From The Trading Room
Why Are Investors Moving To ETFs?
Opinion Blog
Economics, Society, And The Environment: What's Wrong With This Picture?
How To Read Theresa May's Brexit Speech
Precious Metals Blog
Four Catalysts Drive Gold And Silver For 2017
Live Markets
20Jan2017 Market Close: U.S. Stocks Were Up But Off Their Highs Of The Session, Crude Prices Continue To Climb, Next Week May Be Volatile
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved