WHEN: Today, Thursday, December 13, 2018
WHERE: CNBC's "Closing Bell" – from the Yale CEO Summit
The following are excerpts of a CNBC EXCLUSIVE interview with Kynikos Associates Founder and President Jim Chanos and CNBC's Sara Eisen on CNBC's "Closing Bell" (M-F 3PM – 5PM) today, Thursday, December 13th from the Yale CEO Summit. The following are links to video from the interview on CNBC.com: https://www.cnbc.com/video/2018/12/13/chanos-worried-about-interest-rate-sensitivity.html and https://www.cnbc.com/video/2018/12/13/famed-shortseller-jim-chanos-on-new-shorts.html.
All references must be sourced to CNBC.
MORGAN BRENNAN: Welcome back to the "Closing Bell." Short seller Jim Chanos telling Sara Eisen earlier today that he is now short casinos Wynn and Las Vegas Sands. Those stocks trading lower on the day. Sara joins us now with more. Hey Sara.
SARA EISEN: Hey Morgan. Yes. We talk a lot about the new shorts and what it all has to do with the U.S. China trade night. But I started off asking Jim about this volatility and the downturn we have seen in the markets, which should be a redemption for some of the short sellers, and whether he sees it lasting. Watch.
JIM CHANOS: One of the things that worries me is just how fragile we seem to be to small rises in interest rates. Right? So if I were to tell you that nominal GDP growth recently was 6% with record low unemployment and you know, good jobs numbers, good wage numbers and you'd say, "Gee, we were having a problem with 3% interest rates." You would say, "That's – you know, what kind of fragility in the system? I was just in the summit – the Yale CEO Summit here. And you know, people were talking, being interest rate sensitive. I can't name names but in interest rate sensitive industries, we're talking about what a slowdown they've seen in the last two months for their business. And you know, this is basically interest rates going from 2.5 to 3%, mortgage rates going from 3.5 to 5. Look at Europe. Europe's suddenly struggling with basically 0% interest rates. And so something seems to be a little bit off. That if 8 or 9 years into a recovery we can't handle a ten year, which normally trades about a full point below nominal GDP, that would be 5% right now. We certainly if rates went to 5%, I think people would probably lose their minds.
SARA EISEN: A lot of freaking out about the 3%.
JIM CHANOS: Yeah. So it's -- I don't if it's because of the build-up of debt overall in the global economy or what it is. We seem to be basically very sensitive through higher interest rates. At previous cycles we wouldn't have been.
SARA EISEN: I wanted to ask about China. I always think of you as a famous China bear. You were betting against it for a long time.
JIM CHANOS: Yeah. It's been a good short.
SARA EISEN: Are you still short? I mean – what I thought was that you actually hadn't been taking advantage that the fact that the Shanghai composite basically melted down this year.
JIM CHANOS: A quarter or two ago, we were probably the least short China that we've been in the last ten years. And that was not that we were becoming bullish on China. It is just that there were better opportunities elsewhere. Because the Chinese market has gone basically flat for the last ten years. But more recently we've added some new and old names. And one area I was scratching my head about is the Macau casino guys. And what's fascinating is whatever your views on Macau, the U.S. operators trade at a premium to the Chinese operators. And while that has normally been the case, I think in light of the trade tensions that doesn't make a lot of sense right now - particularly because the trade deal notwithstanding, the licenses are coming up for renewal with Chinese authorities and negotiations start next year and into 2020. The licenses expire typically 2020 and 2021.
SARA EISEN: So you think this is going to be a political punching bag for China?
JIM CHANOS: It could be. I mean I think if – at the very least the U.S. operated should trade at a discount. And, you know, what's really ominous is that if you examine the nature of the concessions and you read the disclosures and SEC documents the Chinese government holds all of the cards. They literally could put these guys out of business if they want with no recourse. And so --
SARA EISEN: So who are you shorting?
JIM CHANOS: Well we are basically short the U.S. guys. You would know the names --
SARA EISEN: Wynn.
JIM CHANOS: Wynn.
SARA EISEN: Las Vegas Sands.
JIM CHANOS: And Sands. And particularly their Hong Kong listed Asian operations. And then in our hedge fund we're actually long the Chinese operations. Because again, that way we don't have to make a stand on Macau itself. But just on the free put, if you will, politically. Having said that, you know, these are still not cheap stocks. They have come down a bit. But all of them --
SARA EISEN: Have you been short during – the way down?
JIM CHANOS: We have been short since the summer. I think that what's interesting is that the Chinese operation have come down as much as the U.S. operation. So it is more general concern about growth than it has been political.
SARA EISEN: So is this a bet that the trade war is not going to be soon resolved – ?
JIM CHANOS: I think it's more that that could happen. And t's not being priced in the stocks. It's not a prediction that it will happen but I could also certainly see we walk in one day and people's daily points out to the world that the U.S.
SARA EISEN: The licenses are up.
JIM CHANOS: The U.S. licenses are coming up. And by the way, one them is being run by a guy who's the biggest donor – one of the biggest donors to President Trump. And how can that not – how can the Chinese not know that?
SARA EISEN: So how much further do you see Wynn and Sands falling?
JIM CHANOS: I don't know. We are just going to follow the news. And as I said, their businesses, it's not as if things were great any way. The growth had slowed down there so the stocks had gotten hit back after the second and third quarters. So there has been a general slowdown with Macau because of generally being up against good numbers a year ago.
SARA EISEN: It's interesting because you for so long were sounding alarms on the China fueled debt bubbles, and their growth. Now they are actually in that China play betting against U.S. companies who operate there instead of Chinese companies.
JIM CHANOS: Well, there is another ancillary issue there. Which is I think the Chinese are worried about their currency. And one of the corollaries to the debt issue is -- is that they begin to worry about money leaving the country. And that's a Macau issue too. And they had that fear in 2014, 2015. And the Macau took it on the chin. So Capital can shut that spigot off whenever it wants to.
SARA EISEN: Capital play.
JIM CHANOS: Capital play. Yep.
SARA EISEN: Money leaving Macau which is --
JIM CHANOS: Exactly. And in light of what we are seeing with the Huawei situation, money coming into foreign real estate markets like Canada, I mean all of this stuff is inner linked. And it has to be political when you talk about China because it's a state-run economy. And they are not separate.
SARA EISEN: The problem is you have President in this country that is worried about a market fall and that intervenes on a daily basis to change the mood of the markets and the narrative around the China trade talks. And so far, it looks like he wants to make it better.
JIM CHANOS: I'm sure he does. And --
SARA EISEN: Kind of works against you on this -- on this trade?
JIM CHANOS: We'll see. China has an interesting way. They know that, right? They know the President is obsessed with the stock market so it's also in there just to wait him out if that's your logic. And so -- and I don't know that I would want to predict what he will do any given day anyway.
SARA EISEN: Is this your highest conviction in trade right now?
JIM CHANOS: It is up there. It is -- we have a lot of trades on. But --
SARA EISEN: Anything else you want to share?
JIM CHANOS: I think that's enough.
SARA EISEN: Guys we did talk about some of his other high conviction trades including Tesla and how about the recent improvement in fundamentals for the company with high expectations for profitability for Tesla in the fourth quarter. We're going to play that in the next hour of the "Closing Bell," why he is still short this company and pretty negative about the so called fundamental improvements. And we also talked about another one of his shorts - Dunkin Brands, which has been up since Chanos first announced that he was short on CNBC. We're going to talk about it with him and we're also going to talk about it with Nigel Travis, the chairman of Dunkin Brands, all coming up here from the Yale CEO Summit. For now back to you.
MIKE SANTOLI: Yeah. Those are two that obviously have caused a lot of pain to a lot of short sellers, Sara. But you know, it's interesting to hear him talk about Las Vegas Sands and Wynn when, you know, Jim Chanos for years would look at accounting irregularities and valuations and all of these other factors. These are like geopolitical shorts right now.
SARA EISEN: Kind of. Though he did say the evaluations on Wynn and Las Vegas Sands are still elevated despite the slowdown. He talked about some of the weakness in Las Vegas and sort of wondered whether there were structural issues facing Vegas like millennials not wanting to go there and it just not being that popular of a destination, increased sports betting for instance hurting Las Vegas. So other fundamental reasons but you're right, it is certainly -- it sounded like from Chanos that the central part of this thesis is that China has all of the power when it comes to renewing licenses and nobody is paying attention to the fact that they are up for the first time in several years. And so that could really do a lot of damage to the subsidiaries that a Wynn or Las Vegas Sands has over there, which he also mentioned are saddled with debt. So tere is definitely a financial sort of thesis here Mike to your point.
MIKE SANTOLI: Sure.
SARA EISEN: But you're right. It's not like he was questioning that. He does see though a lot of downside ahead.
MIKE SANTOLI: Yeah, fascinating. Those stocks are down 30 plus percent. Sara, thanks. We'll talk to you again soon.
MIKE SANTOLI: Kynikos Associates' Jim Chanos sat down with Sara Eisen earlier today to talk about one of his key shorts: Dunkin' Brands. The stock is short about 14% since Chanos announced he was short. Listen to his response on why he's maintaining that position for now.
JIM CHANOS: We are short a number of franchise businesses, particularly in the restaurant industry. We think the franchisees are suffering. McDonald's had a – I believe a meeting starting today where a majority of their franchises are actually showing up to protest McDonald's.
SARA EISEN: You're not short McDonald's are you?
JIM CHANOS: No, we're not short McDonald's. But I'm just saying, If McDonald franchisees who are the gold standard in the restaurant industry are upset with economics, upset with the relationship between the parent and franchisees, we know that's true at Dunkin' and other brands as well.
MORGAN BRENNAN: Kynikos Associates' Jim Chanos reiterating his Tesla short today at the Yale CEO Summit. Here's what he had to say about the stock.
JIM CHANOS: It's a champ. Year over year it is up 6%. It was about 350 one year ago. It is 370 something now.
SARA EISEN: You're still hanging in there?
JIM CHANOS: I'm still short, of course. You know he's --
SARA EISEN: You have as much conviction though with the company now profitable?
JIM CHANOS: Well, it was profitable for one quarter. Keep in mind in the second quarter, they have had an enormous loss. And then it became – in one quarter --
SARA EISEN: The expectation is that the fourth quarter will be profitable again.
JIM CHANOS: I understand that but understand that it turned from a massive loss to the most profitable car company in the world in one quarter. To say that I'm skeptical about that I think would be understating it. I think the company had a lot of leverage it could push, not least of which it's selling its 35,000 car Model 3 for basically an average price in third quarter of $60,000. I just don't think that's sustainable.
SARA EISEN: Well they are trying to fix that. I mean it really is remarkable in a year where he got in trouble with the FCC, there were all sorts of questions about his behavior, his demeanor, his Tweeting, going after analysts -- all that and the stock has remained so resilient. And the fundamentals appear to be improving.
JIM CHANOS: Well again, I take issue with that. The company reported a third quarter profit but if you took out the one-time items it was about 40 or 50 cents a share. This is a stock at $370. So you're talking about a company that was pulling out all of the stops and selling a car that it told people it would sell for 35,000 for 60,000 off its backlog and still leaving at 50 or 60 cents a share on a fully taxed no-one time item basis and the stock is trading at 180 times that number. I'd say that it's –
SARA EISEN: So your issue is still with the financials, the accounting, and the cash burden?
JIM CHANOS: Yes. It looks like they cut the warranty reserves on the new cars. I mean we don't have time to go into all of the myriad issues the company has but suffice it to say they went all out in the third quarter and if the best they could do is less than $1. I'm fine with being short.
SARA EISEN: Do you think Elon Musk violated his agreement with the sec during the "60 Minutes" interview?
JIM CHANOS: You know, I'll let the lawyers decide that and the SEC decide that. He seems to -- I think it's fair to say be thumbing his nose at the agency. And I don't know if that's that smart thing to do. But for whatever reason he thinks it is an okay course of action. I'll leave his internal/external counsel to advise him on that.
SARA EISEN: Well my other question on that is does it matter?
JIM CHANOS: Well, he clearly thinks it doesn't. And so – and so far maybe it hasn't but this is a throw down to Chairman Clayton as to whether or not he is going to represent the interest of the agency and the settlement or if he is going to take it.
SARA EISEN: Why is there such a large disconnect between the way you view this company and the way the market views the company and how does this get resolved?
JIM CHANOS: Well again, I mean this is a stock, let's be fair, that has under-performed for the last five years. So I mean this is a -- this company had its big move in 2013 and 2014, and it has been pretty much sideways since. So I think the market is giving him the credit and benefit of the doubt for the future but I think that's where it gets problematic. Because of course, what he was so successful in innovating and bringing to the market 00 high priced electric vehicles that were sexy everybody else is now coming and they are coming down the pike. And Porsche and Audi – Audi and Jaguar are here, Porsche's coming next year.
SARA EISEN: But even the analysts – I mean, a lot of bullish notes this week alone, raising price targets above the 420 level and many of them noting that the competition has been slow and less impressive.
JIM CHANOS: Yes. The analysts have been uniformly generally bullish from the beginning. Number two, this company, by his own admission was near death when the stock was at this price in June.
SARA EISEN: It's true. How did that go from weeks away from death to – $103 billion?
JIM CHANOS: You tell me. We know that they asked suppliers for money back in the third quarter.
SARA EISEN: The tent.
JIM CHANOS: Thetent. You know, and the other problem of course is if you actually , the practicality, if the you go into the Tesla motor forms and you actually see what the owners are reporting, the model 3 has a lot of issues. And we are not going to know what those ultimate costs are for maybe a year or two down the road when warranties come in. And so if you're setting up only a $2,500 per car warranty reserve when you sell it and it turns out that this car is in the shop every six months then it may not be as profitable as it we thought it was in the third quarter.
SARA EISEN: Do you think 2019 will be a turning point? When does it play out?
JIM CHANOS: Well, again this is a stock trading at $370 that is marginally profitable, if that. At what point do we say, "Okay, VW trades here. Toyota trades here. Mercedes trades here." They all are going to have their lines and Tesla is not even increasing its capital spending for its next product lines. So I was kind of wondering when is the next generation of vehicles coming? Because the valuation can't support what it is doing with the Model 3 and the Model S And X. you have got to believe that the Model Y, the Semi, the Roadster, the pickup truck, are all coming soon. You know the estimates for a couple years from now are all $10 a share. And that's a big number.
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