WHEN: Today, Thursday, December 17th
WHERE: CNBC's "Closing Bell"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Kynikos Associates Founder Jim Chanos and CNBC's Kelly Evans on "Closing Bell" (M-F, 3PM-5PM ET) live from the Yale CEO Summit in New York City today, Thursday, December 17th. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000467301 and http://video.cnbc.com/gallery/?video=3000467311.
All references must be sourced to CNBC.
KELLY EVANS: WELCOME BACK. SHARES OF SOLAR CITY RALLYING THIS WEEK, UP AROUND 55%. THAT OF COURSE ON NEWS THE GOVERNMENT BACKING FOR A TAX CREDIT EXTENSION FOR RENEWABLE ENERGY. JOINING ME NOW IN A CNBC EXCLUSIVE IS HEDGE FUND GIANT JIM CHANOS HE IS FOUNDER OF KYNIKOS ASSOCIATES AND HE IS SHORT SOLAR CITY. JIM GOOD TO SEE YOU AGAIN.
JIM CHANOS: GOOD TO BE BACK.
EVANS: LET'S BEGIN WITH THE POSITION WHICH YOU STILL HAVE WHICH I ASSUME IN SOLAR CITY.
CHANOS: WE ARE STILL SHORT.
EVANS: OK HUGE MOVES THIS WEEK ON THE FACT THE GOVERNMENT WILL NOW OFFER ANOTHER FIVE YEARS OF TAX CREDITS. WHY DO YOU STILL THINK THIS COMPANY IS A BAD INVESTMENT?
CHANOS: I THINK THAT THE ITC WAS CLEARLY GOOD NEWS FOR THE INDUSTRY BUT FOR SOLAR CITY UNFORTUNATELY IT'S NOT A TECHNOLOGY COMPANY. I KNOW WE HAD THIS DEBATE ON THE AIR WITH THE CEO. IT'S A FINANCE COMPANY. AND THEY OWN THE PANELS SO THE ITC, THEY KEEP AND THEY FARM IT FOR THEIR EQUITY, BUT THE DEAL TO ACTUALLY RESIDENTIAL CUSTOMERS IS NOT A GREAT DEAL. IT'S NOT A GREAT DEAL FOR SOLAR CITY CUSTOMERS – OR SHAREHOLDERS, EITHER. IF YOU LOOK AT THE COMPANY AND YOU ELIMINATE ALMOST ALL THEIR EXPENSES, YOU ASSUME THEY DIDN'T MARKET, THEY DIDN'T KNOCK DOOR TO DOOR, THEY DIDN'T HAVE AN ADMINISTRATIVE THING, THE RETURN ON CAPITAL IS ABOUT 7% AND EVEN WITH THE MOVE IN THE STOCK SO FAR THIS WEEK THE COMPANY'S BONDS YIELD MORE THAN 7%. THE COMPANY IS BURNING $500 MILLION A QUARTER. SO ALL THIS ITC EXTENSION WILL DO IS ENABLE THEM TO KEEP BURNING HUNDREDS OF MILLIONS OF DOLLARS PER QUARTER.
EVANS: THAT STILL COULD BE A DIFFICULT POSITION TO BE SHORT, COULDN'T IT? AS YOU KNOW AS MUCH AS ANYBODY YOU CAN BE RIGHT ABOUT THE FUNDAMENTALS AND YET STILL HAVE THE WIND BLOWING AGAINST YOU FOR QUITE SOME TIME.
CHANOS: I WISH I COULD BORROW MORE. THE STOCK IS HARD TO BORROW.
EVANS: WHAT ABOUT OTHER PLAYS IN SOLAR BECAUSE THE COST OF THIS TECHNOLOGY IS COMING WAY DOWN. I THINK I READ THAT IN THE FIVE YEARS SINCE THE FIRST CREDITS WERE PASSED THE COST IS DOWN 90% FOR SOLAR AND WIND AND BY THE TIME THESE PHASE OUT IT COULD BE CHEAPER THAN COAL AND NATURAL GAS.
CHANOS: THAT'S PART OF THE PROBLEM WITH SOLAR CITY. IS THAT IN FACT YOU ARE OBLIGATING THE PEOPLE WHO YOU ARE LEASING THE PANELS TO PUTTING ON THEIR HOMES 20 YEARS OF RISING PRICES AND I THINK THAT ULTIMATELY THESE BECOME LIABILITIES FOR THE SOLAR CITY CUSTOMER AND THE ADVANCE IN TECHNOLOGY AND WE'RE PRETTY BULLISH ON THE ADVANCE IN TECHNOLOGY, WE THINK SOLAR WILL BE ROLLED OUT MUCH MORE QUICKLY THAN PEOPLE THINK, WORKS AGAINST THE RESIDENTIAL SOLAR MODEL. SO WE ARE NOT BEARISH ON SOLAR, WE'RE BEARISH ON THE GUYS WHO ARE KNOCKING ON YOUR DOOR TRYING TO PUT SOLAR PANELS ON YOUR HOUSE.
EVANS: ARE YOU BULLISH OTHER PARTS OF THE SOLAR MARKET?
CHANOS: I THINK WHAT'S GOING TO HAPPEN WHAT IS REALLY FASCINATING IS THAT YOU'RE GOING TO SEE THIS CONNECTION BETWEEN SOLAR AND ELECTRIC VEHICLES AND I THINK THAT'S ONE OF THE MORE INTERESTING THINGS THAT NOT A LOT OF PEOPLE ARE TALK BEING --
EVANS: SOLAR AND ELECTRIC VEHICLES.
CHANOS: THAT IN FACT WE ARE GOING TO GET AUTO MAKERS, WE ARE GOING TO TRANSITION THEIR FLEETS MUCH MORE TO ELECTRIC.
EVANS: LIKE FORD, BMW, EVEN INCLUDING TESLA'S POPULARITY.
CHANOS: EXACTLY I MEAN THERE'S PUBLISHED REPORTS BMW IS SAYING THE WHOLE FLEET MIGHT BE ELECTRIC BY 2025. MAJOR MANUFACTURERS, TESLA WAS THE VANGUARD BUT NOW MAJOR MANUFACTURERS ARE PUTTING THEIR FLEETS TO ELECTRIC. IMAGINE A WORLD IN WHICH MOST OF THE VEHICLES ARE ELECTRIC AND YET THEY ARE POWERED OFF THE GRID BY NATURAL GAS AND SOLAR. SO YOU REDUCE COAL EMISSIONS AND YOU REDUCE BURNING OIL. 80% OF ALL PETROLEUM DEMAND IS TRANSPORTATION.
EVANS: SO YOU RAISE THE CENTRAL QUESTION OF THE MARKET AGAIN TODAY WHAT IS GOING TO BE ULTIMATELY THE PRICE FOR OIL? IF WHAT YOU'RE TALK ABOUT IS REPLACING GASOLINE IN OUR CARS WITH SOLAR, WITH ELECTRIC FOR GOOD DOES THAT MEAN THAT THE OIL PRICE STAYS MUCH LOWER FOR A MUCH LONGER PERIOD OF TIME?
CHANOS: WHO KNOWS OVER THE NEXT WEEKS OR MONTHS, I'M NOT A COMMODITIES SPECULATOR, I HAVE NO CLUE. IT'S DOWN AN AWFUL LOT. HAVING SAID THAT I THINK IF YOU WERE TO LOOK OUT FIVE OR TEN YEARS IF I WAS A MEMBER OF OPEC I WOULD BE PUMPING AS MUCH AS I COULD TODAY WHILE IT'S WORTH SOMETHING BECAUSE IT MIGHT NOT BE WORTH A WHOLE LOT BY 2030.
EVANS: ARE THERE COMPANIES – I THINK A CHEVRON YOU WERE SHORT AT ONE POINT. ARE YOU STILL?
CHANOS: YOU CAN BE PRETTY MUCH SURE WE ARE SHORT ALL OF THE MAJOR LEVERAGED OIL COMPANIES.
EVANS: ARE ANY OF THEM NOT LEVERAGED?
CHANOS: THERE ARE SOME THAT AREN'T.
EVANS: SO THAT MEANS THAT WHEN WE LOOK AT THOSE WHO ARE UNDER DURESS AND WE MENTIONED EARLIER WHAT HAPPENS, WHAT IF THEY START TO JUST COMBINE AND SWAP STOCK IN ORDER TO DO SO, IS THERE A WAY THEY CAN BAIL THEMSELVES OUT OF THIS SITUATION.
CHANOS: KEEP IN MIND THAT THE COMMODITY ITSELF, BRENT IS DOWN 60 SOME PERCENT, SOME OF THE LARGE MAJORS THEIR STOCKS ARE ONLY DOWN 20% AND THEIR CASH FLOWS ARE GETTING REALLY, REALLY UNDER, UNDER, UNDER DURESS, BUT THEY'RE COMMITTING TO PAY THE CASH DIVIDENDS SO THE STOCKS HAVE HELD UP. IN EFFECT THEY'RE BORROWING TO PAY THEIR DIVIDEND. IN THE EXPLORATION AND PRODUCTION SPACE A LITTLE BIT DIFFERENT. THERE WE DON'T BELIEVE THAT THE MODEL WORKS, WE DON'T THINK THE MODEL WORKED AT HIGHER PRICES BECAUSE THE WELLS JUST DEPLETE TOO FAST, YOU CONSTANTLY HAVE TO REINVEST TO KEEP YOUR PRODUCTION CONSTANT. IT'S A WHOLE DIFFERENT STORY THAN THE INTEGRATORS.
EVANS: SO, IF IT LOOKS LIKE THE FUTURE, AS YOU MENTIONED, MIGHT INCLUDE A GRID POWERED BY NATURAL GAS AND POWERED BY SOLAR, WE'VE TALKED ABOUT THE IMPACT – THAT WE'VE SEEN THE IMPACT ON COAL ALREADY. WE ARE TALKING NOW ABOUT THE IMPACT ON GASOLINE. BUT I WANT TO GO TO NATURAL GAS AND SPECIFICALLY LIQUIFIED NATURAL GAS. YOU KNOW, IF THIS IS SUPPOSED TO BE A BENEFACTOR OF THIS TREND OVER TIME, WHY IS THE PRICE OF NATURAL GAS ITSELF SO LOW? AND WHY DO YOU THINK THAT A COMPANY LIKE CHENIERE MAKING A PLAY ON LIQUIFIED NATURAL GAS IS SO POORLY POSITIONED FOR THE FUTURE?
CHANOS: WELL BECAUSE LNG IS A YET, A DIFFERENT STORY. AN LNG REMINDS US MORE OF SORT OF THE HARD COMMODITY STORY OF FIVE YEARS AGO, IRON ORE, COPPER. THERE IS BASICALLY A DECENT DEMAND FOR LNG, BUT THE GROWTH OF THE PAST FEW YEARS HAS STOPPED. LNG DEMAND HAS BEEN NOW FLAT FOR A FEW YEARS. THE PROBLEM IS EVERYBODY WANTED TO GET A PART OF THAT. THEY WANTED TO BE A PART OF THE CHINA STORY, THE ASIA STORY. SO CAPACITY IN THE LNG BUSINESS IS ABOUT TO SKYROCKET, IT'S GOING TO BE UP 30% IN THE NEXT FEW YEARS AND UP AS MUCH AS ALMOST 80% IF EVERYTHING GETS BUILT IN THE NEXT SIX YEARS. THAT IS A PROBLEM. BECAUSE DEMAND ISN'T GOING TO GET UP THERE. SO ALL OF THIS CAPITAL THAT'S GONE INTO LNG PLANTS IS GOING TO HAVE A VERY, VERY LOW RETURN. CHENIERE IS ACTUALLY PARADOXICALLY IN A BETTER POSITION BECAUSE THEY HAVE THESE SO-CALLED TAKER PAYS, WHERE THEY CAN GUARANTEE A CERTAIN AMOUNT OF CASH FLOW. THE PROBLEM IS IF YOU LOOK AT THE CASH FLOW THAT'S GUARANTEED, MINUS EXPENSES, MINUS INTEREST AND MINUS THE REAL MAINTENANCE CAPITAL EXPENDITURES TO MAINTAIN $30 BILLION WORTH OF STEEL IN THE SWAMP, THE RETURNS TO THE SHAREHOLDERS FIVE AND SIX YEARS OUT ARE GOING TO BE DE MINIMIS AND THE STOCK IS STILL PRETTY PRICEY.
EVANS: LET'S PIVOT FROM ENERGY FOR A SECOND TO TALK ABOUT PHARMACEUTICALS BECAUSE TURING PHARMACEUTICALS – IT'S CEO, OBVIOUSLY, MARTIN SHKRELI HAS BEEN IN THE NEWS TODAY FOR OTHER REASONS GOING BACK TO SOME POTENTIAL FRAUD AT A PRIOR COMPANY. VALEANT IS A NAME THAT YOU WERE EARLY SHORT ON. HOW IS THAT POSITION WORKING OUT FOR YOU? AND IS THERE ANY RELATIONSHIP BETWEEN THE TWO COMPANIES THAT YOU CAN USE TO EXPLAIN WHY YOU THINK SOME OF THESE PHARMACEUTICAL PLAYS MIGHT TURN OUT POORLY FOR PEOPLE WHO ARE QUITE EXCITED ABOUT THEM?
CHANOS: I THINK EACH OF THESE STORIES IS DIFFERENT. WE JUST GOT OUT OF THE JEFF SONNENFELD SUMMIT AND THE LAST SESSION HAD TO DO WITH PHARMACEUTICAL PRICING AMONG OTHER THINGS. ONE OF THE PARTICIPANTS MADE A GREAT POINT WHO WAS TALKING ABOUT GILEAD'S DRUG.
EVANS: THE HEPATITIS C DRUG?
CHANOS: AND SAYING THAT – THE HEPATITIS C AND HOW EXPENSIVE IT IS. BUT AT THE END OF THE DAY BECAUSE IT'S A CURE, IT ENDS UP SAVING THE SYSTEM MONEY BECAUSE OF LACK OF CHRONIC COSTS.
EVANS: YOU ARE NOT HOSPITALIZED, REPLACING THE LIVER.
CHANOS: EXACTLY. GOING FORWARD. BUT THEN YOU LOOK AT THINGS LIKE VALEANT'S DERMATOLOGICAL DRUGS OR TOE FUNGUS DRUGS, WHICH PRICES WERE RAISED 800%, 1,000%, WHATEVER THEY WERE. AND YOU BEGIN TO WONDER WILL SOCIETY – IS THAT REALLY GOING TO MOVE THE NEEDLE IN HEALTHCARE COSTS? OR IS IT JUST SIMPLY PEOPLE PAYING THAT DON'T REALIZE THEY'RE BEING CHARGED THIS MUCH. AND I THINK IN VALEANT'S CASE, IT'S MORE THE LATTER THAN THE FORMER.
EVANS: AND SO, IN VALEANT'S CASE, YOU REMAIN SHORT EVEN THOUGH THEIR SHARES ARE DOWN SIGNIFICANTLY?
CHANOS: WE REMAIN SHORT. THEY ARE UP QUITE A BIT FROM THEIR LOWS. WE JUST DON'T THINK THE MODEL WORKS. THE COMPANY HAS FREE CASH FLOW, A LITTLE OVER $5 A SHARE. IT'S GOING TO BE DOWN IN THE FOURTH QUARTER VERSUS FOURTH QUARTER A YEAR AGO IT LOOKS LIKE. AND THAT $5 A SHARE ASSUMES NO AMORTIZATION OF THE PURCHASED DRUGS. AND THEY HAVE 43 BILLION END INVESTED IN THEIR COMPANY. HALF OF THAT IS PURCHASED R&D. AND IF YOU WRITE THAT R&D OVER OFF ECONOMICALLY OVER TEN YEARS, THAT'S ABOUT $5 OR $6 A SHARE PER YEAR.
EVANS: AND DRAWING A BEAD FROM THAT THROUGH TO OTHER COMPANIES WHO ARE RELYING ON THOSE PRICE INCREASES.
CHANOS: YOU HAVE TO DO A COMPANY BY COMPANY AND DRUG BY DRUG. THEY ARE ALL DIFFERENT. AND ALL THE COMPOUNDS ARE DIFFERENT AND THE PRICING MECHANICS AND THE PAYERS. THE ONE THING THAT I FIND SHOCKING IN THIS WHOLE VALEANT STORY IS JUST WHO WERE THE PAYERS WHO WERE DUMB ENOUGH TO PAY THESE PRICES? BECAUSE IT'S NOT GENERALLY MEDICARE REIMBURSEMENT. IT'S NOT GOVERNMENT. IT'S PRIVATE PAYERS. WHO IS PAYING $8,000 FOR A TOE FUNGUS TREATMENT?
EVANS: THAT SOUNDS LIKE THE NEXT POSSIBLE CHAPTER OF THE STORY. BEFORE WE RUN OUT OF TIME ANOTHER CHAPTER OF THE CHINA STORY TODAY IS IT APPEARS REGULATORS ARE GOING AFTER MARKET PARTICIPANTS, TRYING TO FIGURE OUT WHAT ROLE THEY PLAYED IN THAT SELL OFF THIS SUMMER. WHERE SPECIFICALLY ARE YOU STILL SHORT CHINA AND HOW DO YOU THINK 2016 PLAYS OUT?
CHANOS: WELL, AS YOU PROBABLY KNOW, WE ARE NOT SHORT STOCKS IN CHINA. WE ARE SHORT SOME OF THE EIGHT SHARES IN HONG KONG. FINANCIALS, REAL ESTATE, SOME OF THE SAME NAMES. MACAU, STILL. WE'VE CUT BACK OUR HARD COMMODITY SHORT. THEY ARE DOWN A LOT. BUT WE THINK THAT THIS STORY IS JUST ONGOING. I MEAN, IT'S A CREDIT STORY AND THE LATEST MOVE IN THE ANTI-CORRUPTION DRIVE INTO THE PRIVATE SECTOR IS A WHOLE NEW CHAPTER NOW. I MEAN, PRIOR TO THIS IT WAS PARTY MEMBERS. NOW IT APPEARS TO BE GOING INTO EXECUTIVES.
EVANS: PRIVATE SECTORS.
CHANOS: NOT JUST IN BANKING AND FINANCE, BUT IN THE CORPORATE WORLD. AND I WOULD THINK THAT, YOU KNOW, THAT'S GOING TO HAVE ALL KINDS OF UNINTENDED CONSEQUENCES FOR PEOPLE IN CHINA.
EVANS: AND THE GROWTH RATE THERE NEXT YEAR, DE MINIMIS?
CHANOS: WHATEVER THEY SAY IT IS.
EVANS: JIM, THANK YOU SO MUCH FOR YOUR TIME THIS AFTERNOON AND JOINING US.
CHANOS: MY PLEASURE.
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