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For years, the Federal reserves policy of lower rates for longer helped fuel a bullmarket in stocks, and even now after the Fed's rate high campaign to fight inflation, the bullmarket keeps on running. It's all raising questions about the future of short selling. So here now to share his perspective, I'm pleased to say, is legendary short seller Jim Chainos, President, managing partner and founder of Chinos and Company. Jim, great to see you here in.
New York with us, Thanks for having me. You look at the number.
Of short buys hedge funds as tracked by HFR, and it's fallen dramatically from fifty something to fourteen now fifty something in twenty eight and fourteen in about twenty twenty three, twenty twenty four. How much does the rate environment overall contribute to the shrinking universe of short selling funds?
Do you think?
I think the rate environment is probly the first or second derivative. I mean, it's really the ongoing persistence of the bull market, which has now been fifteen years, and we saw something similar Scarlet in the late nineties, or the number of short short biased funds by nineteen ninety nine and two thousand really had dwindled to a handful and people just got exasperated.
And that was right before.
There was really ten years from ninety nine to nine of just fantastic returns on the short side and two bear markets, of course, but I think that really it's the length of time beyond just FED policy, although FED policy certainly had a lot to do with it in the last ten years.
Now, I introduced Chinos in company.
It's now a family office and advisory instead of a hedgepoint firm. Right you are investing in the market, though, I'm curious how you're investing in the market right now.
Well, and we're advising clients. Look, this is the I just advised a client on a putbas its strategy this afternoon, and right now, what we're seeing in the universe of companies we follow is probably as attractive at time as it was in first half of twenty twenty one. And I've said publicly that twenty twenty one was the most stucket of market I've ever seen in my forty years of forty five years of investing, and we're getting back
to that. Not quite there, but it's close. And you've seen it with things like the meme stocks again and my god, we're still we're starting to price backs again. And noticed that three billion of SPACs price.
Does that give you ajata? Particularly the run up we saw on Gamesop? And yeah, I means facts are somehow trying to call their way up.
People have always said, well, what about the FED?
Per your first question? And I always said, we'll give Wall Street enough time. The FED is not the only one with the printing press. Wall Street does a pretty good job at issuing pieces of paper when people really want them.
I mean, how do you sort of navigate and you talk about advising folks, you're advising people on a public market, public equity market at least right now that is a high at least on the SMP, on the NASAC. A lot of people would look at historical valuations and say, we're stretched here.
What is the advice you give in that situation?
Well, since really the mid nineties, we ran our business where we were long equity markets, we were long indices and then short our names. And I still think that makes a lot of sense. And where the stock market is going, I have no idea. I started my firm back in nineteen eighty five, that dial was thirteen hundred, So that.
Should tell you something about timing.
But the fact of the matter is is that with the exception of the far right group of companies on the bell curve, most companies underperformed the stock market over time or failed. It's the nvidios or the teslas or whatever on that far right end that go up quite a lot that give you your returns. So the strategy of being long equity markets broadly and short idiosyncratic names I still think makes a lot of sense. And then finally,
insurance is really cheap right now. I mean, you know, people insure their homes, they ensure their cars, they ensure their loved ones. It's pretty cheap right now to insure a portfolio.
Is AI in a bubble?
I have no idea.
You know, you lived through bubbles.
I go af through bubbles.
I'll make one observation as it relates to AI. So if you go back and look at the US economy in the immediate post Internet age, and I think we can all agree the Internet changed our lives in a major way. From nineteen ninety eight to seven, the US economy grew at three percent real annually. From nineteen eighty eight to nineteen ninety seven, the ten years prior to really the advent of the Internet to the public, the economy grew by three percent annually. The internet had no
impact on growth. Now it had a lot of impact on individual companies. Getting back to my point, right, there were big, big winners and big big losers. And I suspect if AI is going to be as transformational as people think it is, and I have no idea whether it will be or not.
They'll be big winners and they'll be big Okay.
I just want to follow up on that though, too.
And this kind of leads back to the question with Scarlett's started off with about the connection between macroeconomic conditions and our markets today, and there does seem to be a disconnect.
Yeah, I wouldn't disagree with that, and I think there is a much more specuative nature of this market.
And we started to.
See it in late twenty nineteen when commission rates cut to zero and retail began to come back in the market in a big way in ways they hadn't been in prior to that. They've been investing in ETFs or mutual funds or what have you, and we began to see pre pandemic speculation and individual names really pick up. And then of course post pandemic it took off and we're still you can see it in option volumes and a lot of other sort of quantitative measures that the public is in this stock market in.
A big way.
That really then means that you have to change your risk parameters, change the size of your short bets if you will, and be mindful of the game stops and those kinds of things. On the other hand, generally they chase momentum and sometimes quite frankly, silly stories, and if you want to be investing, you don't want to be doing that.
If you were looking at the AI story, and I guess you can't say it's a bubble, but it's spread out in lots of different parts. Right, Utilities have been up, power has been up, your hardware coming up, You've got software like it's like the tentacles are moving out. How do you think about something like that, like, how do you well, we look for.
I mean, when we look for companies in our world that have gotten the benefit of an AI kiss but are actually going to lose because of AI. So we've been publicly short the data centers, the legacy data centers, because they literally are not designed for AI chips. They have to basically be retooled completely, and all of the infrastructure and hardware in a data center an old one is not compatible with the new chips. So people if did the stocks up thinking their AI place, they're actually
losers from AI. And it gets back to the winners and losers.
Thing we mentioned spack companies a little bit earlier.
I'm wondering if you were trading around the elections at all, what my aid Donald Trump victory in November, for instance, mean for regulation and would that, as a result, perhaps create more opportunities to be short companies because you know, with the regulatory heat taken off, companies can do all kinds of things and speculative fever goes up.
Yeah, I mean it's hard to bet, basically if unless you know who's going to win. Yeah, it seems like I still think it's gonna be a pretty close election. And obviously there's certain areas that each party would would emphasize and de emphasize. Again, some areas that were already negative on, like solar would probably lose under Donald Trump. But but it's hard to know exactly, particularly if the polls are right that it's still a pretty tight election.
Yeah, and of course he's a booster for all kinds of companies, including his own spack.
You've been very.
Vocal about how irrational retail day traders are, how much kind of charismatic influencer like Roaring Kitty aka deep fing Value and you know what's his actual name, Keith Gill, and an army of day traders keep this GameStop dream alive. I mean from where you sit and look at it, at some point it comes crashing down, does it not?
Well, it already has. I mean, so if you look at the.
Meme, there's little blips here and there.
Yeah, But if you look at the memestock class of twenty twenty one, which was GameStop AMC, B, BEF and beyond, you know a number of others. I mean, with the exception of game Stop, they are all down ninety ninety five ninety nine percent. It was a disaster for retail investors, quite frankly, and so I think that that it gets to my point that you don't want to be chasing this stuff if there's no fundamentals behind it, and I have no position in game Stop, but people are still
valuing that company. If we're going to value business at three times, it's cash, and even though it's raised all this cash, it's got about nine dollars of sharing cash right now per share. I think the stock's at twenty five or twenty six or twenty seven, And so you have to believe the business has something or there's option value to the cash, which is what people believe that Ryan Colm to be able to do something that's really hard to do when you're paying three dollars for a
dollar of cash. And again, so you're chasing the future, you're chasing the story. In bull markets, the future gets a premium. In bear markets, reality gets a discount.
Well, when we talk about that premium, particularly when it comes a game Stop in some of those meeting socks, let's talk about the other potentially on the other side of that trade, which is sort of the short positions. We saw that in twenty twenty one, where at the short interest went through the room. If we're not seeing that necessarily as aggressively this time the opposite. But yeah, but part of that reason is because there aren't a lot of folks like you doing this anymore.
A lot of those folks got scared off.
Obviously we know happened to gay block in and a little bit earlier we were just talking about Andrew Left who had a short position in Game Stop, but even he closed that out.
Yeah.
Well again, when you just look at the numbers, overall, short interest is down, as you allude to. But take a look at Game Stoff again, just to use this example. So a week or so ago, ten days ago, short interest was twenty two percent of the outstanding or of the float. Today it's eleven percent. A. The short interest went down. B. They issued a lot of shares, getting back to my point about issuance, so the supply increased and not a share.
So now it's not a short story anymore. The shorts aren't trapped.
In January of twenty twenty one, I think the short interest was one hundred and forty percent of out standing.
Yeah, and now it's eleven. It's a big difference.
Okay, so maybe that's not a target.
Is there sort of a market or more important, appetite for that sort of short seller's playbook a playbook that you made famous and it just doesn't seem like there are sort of new channels is coming around the corner in this space anymore.
How do you feel about that?
I don't know, you know, af for forty five years. I don't wish that on anyone.
Maybe people want to aspire to that, right, Like, are there players in the market.
There's some really good there's some really good people on the short side out there that are doing great work. And the folks at Hindenburg I'm a big fan of and others, and you know, we never did the short activist model, but the work they're doing is is I think, you know, the fundamental work, which is what I look at when I look at people's work, is really first rate. And so it's out there. And I've called this the
golden age of frauds. So there's just so many companies, so many companies now that are playing games that are that are trying and take advantage of investors.
So we need short sellers.
More than ever.
We need short sellers more than ever. But the government's cracking down on all of them. Right This ongoing investigation into activist truth sellers has resulted in its first charge. I believe ants and funds and ants and advisors. We're accused of hiding payments to bearish researchers. This disclosure issue really disclosure is but it's something right.
Yeah, I think.
That that was the issue and we were never involved with that and we were never that was never part of our business model. But I think that the issue that the government was worried about in the SEC and possibly justice was disclosure. Were there people funding these things that was not disclosed that should have been I could argue that legally, but I think that was really what the issue is was where the third party is involved in funding this that should have been disclosed or not.
Yeah.
It goes back to that idea that there's a lot of ways to make money. Short Selling is complicated, it's expensive, and it's certainly in a risky way because your downside is unlimited.
You shut down your hedge funds last year.
Yet, given where we are in this market cycle, you say, in the golden age of fraud, this might be a good time for short strategies in terms of performance. Do you see it getting a little bit easier to raise capital from institutional investors.
It's harder, Yeah, and that's part of why the opportunity set is there, nobody wants to do it, and so I think that that's what's so interesting. And of course you have the growth in the platform companies, the so called pod shops, so a lot of short selling is
done through those vehicles in terms of dollar value. They've certainly supplanted the long short world in a major way, but with tighter risk models, so we see more volatility and sometimes because those platform companies keep short positions small and if they move against you a certain.
Amount, you're out. But bybab the way that works on the alongside too.
But do you think though that long short strategy might actually have some value at some point in time? Absolutely, because I mean we talk about this idea. I mean, you can't have a market that's all long. I mean, that doesn't work forever.
Does it.
I don't think so.
Okay, I said, we have forty years of forty years of almost that of numbers that kind of proved that wrong.
Yeah, pretty much, straight up market.
So I think that that again, as long as you're doing your work and don't focus on the short term and understand that a dollar is not worth three dollars and you shouldn't pay three dollars for it and if you can sell it for four dollars, it's maybe not a bad trade. I think they'll always be real.
I was having a conversation with a long short manager and she kind of pointed out this idea of, at least in her mind, that price transparency or price discovery was not as easy as it used to be, so that made the.
Strategy a little bit harder.
And she pens some of that on the distortions coming out of the private markets, the idea that private markets have stolen a lot of thunder from public markets. You don't necessarily have the same balance or equilibrium in private markets in public markets that you had in the past.
That's an interesting theory.
I have not considered that private markets would impact the short side that way. I mean, I think the private markets, the growth in private markets has had a lot more to do with capital raising, particularly in the public market arena, including long short. You know, I sit on a couple of investment committees and we've been doing nothing but redeeming hedge funds and giving it to private private equity, private credit, And in my own view, I think that's not the
right thing to be doing right now. I think that wherever you see a flood of money. For years and years and years, it's been pretty much you're not going to get the outsized returns that you had ten or twenty years ago.
And let's circle back to individual stocks.
Why don't you like solar stocks?
I don't like solar stocks.
I don't like the residential solar stocks because the business model doesn't work no matter what rates do. The concept of putting up panels on someone's roof and then leasing it from that company. If you just look at the numbers of the companies that are in that business, like sun Roun or Sonova or whatever, they're just they bleed cash and they use accounting constructs to tell you why it's really and meanwhile they're just burning hundreds of millions of dollars per quarter and have.
Been for years and years and years.
And I think that that that is uh is just simply an accounting story.
What else don't you like? I mean like it's it's interesting to get your take because all our thoughts have been on a.
Tear the last last couple of weeks.
Yeah, yeah, they were actually beating new loads just last month, and so they bounced because of the view on rates.
Well, we're not going to talk about the Tesla shareholders.
Yeah, yeah, yeah.
You're taken away my father.
I asked you that behind that.
We don't like the data centers, and haven't We've been public on that for for a long long time. I'm puzzled by the number of restaurants that are trading at absolutely insane valuations in industry that you know ultimately is
uh is not a secular growth business. You can find stocks of fifty times cash flow and one hundred times earnings, and there's lots of companies that are kind of mundane that have been bought by growth managers, where the returns on capital low, that are treading at fifty sixty, seventy eighty times earnings, and you can find them. There are a lot of them, and so it's a it's a pretty target rich environment right now if you're doing fundamental work.
And I'm sorry, did he answer the question on that flow?
No?
Yeah, Well, Tesla is holding into annual general meeting tomorrow, and you were famously short Tesla at a time when it basically defied gravity.
We know that shareholders are going to be.
Voting on Elon Musk's fifty six billion dollar pay package, not from this year, not from last year, but from a couple of years ago.
What is that emblematic of? What does that tell you?
Well, first of all, it might shock some of your viewers, but I tweeted out a week ago, I actually think that people should vote for the package. Really yeah, I think, even though I'm a bear on Tesla, I think a deal is a deal, even if it's a bad deal and they agreed to it. Now the judge has made even if they voted in again, that doesn't mean it may happen.
It may not obviate the ruling.
But I do think a deal is a deal and that if you voted for it, that he should get it.
Having said that, you know, the value of the package.
Is in excess of all the retained earnings of the company's ever made, even post package. And the one thing I mentioned I pointed out today, the one thing I've been scratching my head on and going back and looking at this package from twenty eighteen.
Was that the.
Deal was continued on hitting certain numbers and the stock price hitting certain values.
But what they didn't.
Do was make each trunch the equity the new Equity Award that he got for doing that right price of that option at the stock price at that moment. All of the equity for all of the tronchas was set at the original price, which was twenty three dollars adjusted.
For the split.
So that is means there's really no clawback provision. And basically it means if the stock goes up a lot and then goes down a lot, he still wins. The shareholders don't necessarily win. In fact, I think the stock price is below where he earned the last trancho already.
So it's a little bit like a hedge fund manager saying, Okay, well, I was up forty percent at midyear and then gave it all back in the second half of the year, but you should compensate me on the fact that, you know, I was up a lot at one point, and so that's the one aspect of the package I think shareholders should really, you know, be kind of kicking themselves on. I think that the tranchas should have been set at each point at which the stock price had to go to.
But having said that, I mean, I think he should get it. I'm not a big fan of Eline. There's no surprise of that, but a deal is a deal. It is, however, a very expensive deal for the shareholders. And what does it mean about going forward? What's going to be the next demand?
Do you think it would be better though if they structure. I mean, I know they can't really restructure. They can, but if they try to restructure it would it be better to sort of make some of those metrics tied to the performance of the company itself, not necessarily a stock, but I'm talking about.
Yeah, it was both, So the award was tied to both, and it was various formulas. Look, anytime you tie it highly to stock, it's problematic because you run the risk of someone being overly promotional to get paid and then worrying about it later. And I've often said that lavish stock option programs are undervalued in the marketplace in terms of their expense, because if you don't, if you have a board that's very acquiescent and that's Tesla, and you
don't get fired for aggressive risky behavior. If you engage in risky behavior to get lots of stock option payouts and it doesn't work, it actually becomes in your self interest to have the stock price go down so you can reload at lower prices. So in effect, when you've issued call options to an executive in that case, you've
also issued them put options. And a lot of people don't realize that, and so I think that it makes share based compensation problematic for that reason and also for the reason that everybody simply adds it back for adjusted earnings, which is another accounting game being played.
Yeah, rumber gap, those are the good old days, Jim, You're going to have to leave it.
There.
A great conversation here with Jim Chanos, the President, managing partner and founder of the Family Office and Advisory Channels and company