Speaking at the Ira Sohn conference in London, Chanos reiterated that Brazil-based Vale and the country’s state-run oil producer, Petrobras, are two of his favorite shorts. He also said Brazil is “resource rich” but “not rich.”

Petrobras appears worthy of the bear call by Chanos. The company reported a second-quarter loss, its first loss since 1999, and its third-quarter results missed estimates. Although reserves at Brazil’s pre-salt oil fields have been placed as high as 55 billion barrels, Petrobras has disappointed investors with declining production in recent quarters.

Chanos told attendees at Ira Sohn that ”every dollar Petrobras brings in is flowing back out, but that production is declining.”

In an interview with Bloomberg earlier this month, Chanos called the recent Petrobras “horrible.”

“Prices are kept low for the consumers. That is a political decision that is hurting the company’s shareholders,” Chanos said in the Bloomberg interview.

As for Vale, the shares have tumbled 19.5 percent this year. The shares have been hammered by slack demand from China, another market Chanos is famously bearish on, and fears about government interference.

 

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27 Responses to Jim Chanos: “Petrobras and Vale are two of my favorite shorts”

  1. gringo nao sabe nada says:

    A question for people a lot smarter than me: Does Bovespa reflect the future of the Brazilian economy? Are Vale and Petrobras harbingers of things to come?

    I expect a certain type of answer on BB (BTW, r u guys on vacation?) But I would also like to hear optimistic contrarians.

  2. frank stein says:

    Vale, Petrobras, electric utilities, telecoms, banks…all are going the way of Argentina, Venezuela and Cuba. Inevitably Bovespa, real and Brazil will follow the slippery slope.

  3. Hi ‘gringo nao sabe nada’, my answers for your entertainment:
    Bovespa, like any stock exchange, reflects mainly social mood – which itself drives to a good part the bahavior of market participants in all parts of an economy. In this sense, yes, it reflects the future of the brazilian economy.
    We see BTW now more and more falling house prices in not-so-famous locations. 16-20%. F.e. in Jacarepagua, Rio. That reflects increasing pessimism among sellers. The super luxo market segment is almost frozen – reflecting increasing pessimism among buyers.

    Brazil still depends greatly on export. Take into account a hefty crisis in USA, EU, Japan and as it seems China and … to whom does Brazil want to sell now? To Mexico?

    I regret, I cant see a way for Brazil to prosper in this environment. But I expect that Brazil due to the dynamic of its population will leave the crisis-mode earlier than the above mentioned mature economies (except China) – does this serve for cheering you up a bit? :)

  4. Tarik says:

    Hi Gringo,

    I’ve invested in Bovespa in the past and I’m planning to do it again in the near future.

    There are a number of companies that will present very good results this year and in the future. Despite this fact, the market is going down, which for me is a good opportunity, since I have a very long timeframe.

    Brazilian economy has a funny way to behave. The country has changed so much on the last 40 years, yet, most of the time was “crisis time”. One after the other. Still, the country moves forward, despite the bureaucracy, the politicians, etc.

    There are a number of solid Brazilian companies with consistent yields and solid business to invest in. But you have to do your homework.

    If you plan to run your own business, than do yourself a favor and source a local partner. But, perspectives are good in many fields. Real Estate not being one of them in my opinion.

    Remember that Brazilian economy may be growing slower than predicted, but if you compare that with Europe and USA, where I believe you have a contraction despite official numbers…

    Even the bubble in the real-estate, if bursts, will have limited effect. Only 50% of RE purchases use financing, the other half is cash.

    All said, I am bearish about the economy as a whole for the next 3-4 years, but some sectors will still perform very well.

  5. SP Trader Fou says:

    Glad to see the website is still alive. I thought it’d died there for a couple of weeks.

  6. salvo says:

    You are right about RE to a degree the overvalued markets like Rio , Sao Paulo ,Belo Horiz. etc are correcting as well as the high end market but the shortage of housing on the low end & continued government financing & subsidies will continue to help this market to thrive as well as population migration that starts to leave the big cities for better quality of life in smaller cities especially beach towns nearby.
    Though I would think the Brazilian consumer would be tapped out by now it appears the spending is still strong in my opinion I think we can look at 2 more years of modest growth but by 2015 something going to give

  7. Samuel 2 says:

    The Bovespa mirrors the S&P futures for the most part.

  8. REPX says:

    In every market, there are bearishes and bullishes. At the same time Chanos is possibly short on Vale, one of the largest asset managers in Brazil has a huge – literally huge – long position in it. Both are right. The Brazilian asset manager bought these shares a loooooong time ago and made tons of profit. Chanos is betting on China’s deceleration and lower demand for minerals.

    Petrobrás is suffering from Dilma’s hard hand, controlling fuel prices, which reduces cash flow from operations that finally limits investment capacity. I am not aware of any large asset manager shortening Petro, but I know another firm that has a significant short position on OGX (and has made a good profit so far).

    Anyway, Chanos being short on these papers does not indicate the Brazilian economy is going under. As explained in the article, both suffer from external factors (china’s demand and political influence) rather than a weaker domestic economy. I’d be concerned if he was shortening Pao de Acucar, Drugstores, Hering and companies that sell mostly to Brazilians and not subject to government influence (such as utilities, banks, road concessions).

  9. Indio Tupi says:

    From the High Amazon River, the indians say that, thecnically speaking, in the medium term, Bovespa were traying to recover, but the graphics are showing indefinition in the near term. It is possible that the crisis in Argentina could act like the decisive factor. Beware…

  10. Persio Menendez says:

    Bullshit , Brasil has nothing to do with Argentina and others you’ve mentioned. FYI Brazil has it’s problems but is a true democracy which has 50% of South America GDP.

    On the other hand there’s a country located in the north border of our continent which let the banks do whatever they wanted with the economy and the result of this “lack of regulation” was that the world nearly fell into pieces.

    You gringos ( Europe + USA) should thank BRIC’s for it not to have happened. Now let’s put an end in the irresponsible practices !

  11. Nicholas says:

    Jim Chanos, never been to Brazil (he admitted himself) and doesn’t understand how the economy works..he hates rules that aren’t infavor of speculators..duh.
    Translation of this article is very simple, but not simple for trolls ( aka franky stein and clown alexny, both never been to Brazil and can’t even look at their own failures in the US), Brazil does not allow massive middle man speculation in oil. Mr Chanos is a typical hedge fund manipulator.

  12. Erick Skrabe says:

    As as follower of the Austrian Business Cycle Theory… I’m afraid I didn`t have good news.

    Brazilian government spent more money than had, payed with government obligations bought by… Central Bank. Who obviously payed printing money. Again and again.

    Prices on rise… solution will be – as already commented here – Argentina’s and Venezuela’s way: control on prices, specially the ones on the inflation indexes.

  13. Jack Ganoza says:

    Unfortunately, the reality is that the quantity of oil PBR anticipates to produce will not be there. There has been too much hype about the Brazil sub-salt prospects.

    Ask the oil experts. You’ll hear that the technology is not there yet. It’ll be difficult to make the massive goverment’s investments sensible. The typical case of socializing an enterprise’s risk, with utter disregard to the national welfare. This oil business should be in hands of private capital, with clear and responsible goals, governance and regulations.

    The Silva Foster lady has already been shaken by a rude awakening. PBR’s output and investment figures will -unfortunately- continue to be brought down as time goes.

    With the 65% Brazilian content on the infrastructure/technologies to de delivered, there is simply no way that that woo-hoo figures painted by Gabrielli and Lula will ever materialize on the 2015-2020 timeframe.

    On the positive side, once the bust is obvious in 2-3 years down the road, Brazilians will have a new ‘nouveau riche’ class, who will rise out of the hyped oil business and the corruption that is a staple when doing business in Brazil.

    You guys out there watch. There are already serious issues taking the oil out.

    Although I do not susbcribe Chanos, he’s in the right track. And to put the oil business in perspective, Brazil will continue to be the ‘country of the future’ after all is said and done.

  14. frank stein says:

    LAST TIME I LOOKED PBR IMPORTS DISTILLATES AND SELLS AT A LOSS BECAUSE THE GOVERNMENT SAYS SO. IS IT GOOD? IN BRAZIL ONE CANNOT EVEN FILL THE TANK IN ORDER TO KEEP JOBS FOR THOSE ILLITERATES WHO VOTE FOR THE GOVERNMENT. IS IT GOOD? THERE ARE CORRUPTION SCANDALS POPPING OUT EVERY WEEK AND NOBODY EVER GOES TO JAIL. IS IT GOOD? BRAZIL WILL ALWAYS BE A THIRD WORLD COUNTRY AS LONG AS THE SAME ATTITUDES PERSIST.

  15. alexny says:

    I agree , and that has aways been the plan , dilma/lula are doing it gradually , the only thing they want is to stay in power forever , like chaves and fidel.
    Chanos is going to make lots of money shorting anything “brazil” , i have been betting against brazil for 3 years now and made lots of money thank you very much.
    I know the country , if you walk arond any major city all you will see is favelas and crime , roads are terrible , airports are terrible , ports are terrible. But on TV they keeps saying to people , “borrow money” , “borrow money”, “we are the best”…

    The latest is a ad on TV saying , “Are you fucked with lots of debt!!??? , borrow more and we the government will give you a “PAUSE” .

    There is a huge serious credit bubble in brasil and the government knows that when it pops it will be the end for them and for the country for about 20 years

  16. alexny says:

    Like in avery 15 year or so , brazil has had yet again another “chicken flight” only this time they gave crack cocaine to the poor bird , the crack and china took it in 2010 to a 7.5% grouth , but since 2011 it is going down really fast , looking closely at the chicken you can see it has ODed and is dead in the air

    Dilma , there is no shortcut to make a country great , you need to educate your people. That takes 20 year….. look at south korea….

  17. armand says:

    People have different views on different asset classes. brazil is an asset class on its own. It’s currently out of favor. Mexico is the flavor of the month. Is Brazil finally getting to a good entry point? I mean, Vale is coming to its senses again. Vale is Carajas. They’ve stopped their spending binge with not world class assets. they are going to dispose of most the trash amassed in the last years. In fact, Carajas could be undervalued right now. PBR? Pre-salt oil is a curse. it’s there but it’s not there yet. Nonetheless the incoming cash crunch could be a blessing in disguise LT. PBR should freeze new greenfield downstream capex. it may have done that already but it will anounce it later. it’s just ditched the expensive ethanol pipeline. it just farmed out an offshore brazil block for the first time in years. it signals mgmt change to me. quality asset development is crawling back. next is getting rid of power plants and ethanol producers. otoh domestic demand names are mostly too rich. you can’t grow consumption and real wages forever. plus the industry consolidation story thru m&a is mostly behind us. the low hanging fruit of efficiency gains on consolidation and margin increase is gone too.

  18. REPX says:

    Brazil ain’t taking a shortcut. These improvements started in 1994 when hyperinflation was controlled.

    Dilma is currently trying to improve Brazil’s hilarious infrastructure, but with little progress on productivity (aka education) and Brazil’s institutions.

    Brazil has been and will be a commodities country over the following decade. We can hardly see significant technological improvements (apart from Embraer, can you name another technological product that Brazil exports? Foxconn’s iPhones? haha) over the following decade, but being a commodities producer is not bad.

    Food consumption will always exist. World will keep demanding oil and minerals. If you can live along the implied vol of these commodities, you are not going under.

    Alexny, stick with your burguers (but don’t buy BK, it’s now a brazilian company, along with your watered beer) and your heart attacks. Have a nice day.

  19. alexny says:

    A Brazilian owns one American company , big deal…. most corporations in brazil are owned by Americans/Europeans/Asians

    Yoki was sold to americans just before the brazilian whore killed the poor guy

    Regarding embraer , You say is the only Brazilian corp with top technology , wrong there as well, embraer buys ,”ALL” parts of the air plane’s it makes from US,EU , then it puts it together and sells it with a yellow/green flag. is just like a ford fiesta made in brazil , all parts are from abroad

    To put things in prospective for you, GE created its first turbine in the 40′s!!!! , Brazil is still trying to make one , we are in 2012
    There has been no progress in Brazil , only lies+marketing+corruption , sad but truth

  20. Jack Ganoza says:

    Just to add some detail to this posting’s remarks.

    For example, the SuperTucano aircraft trying to get sold to the US Air Force to be later transfered to the Afghani Forces is reckoned to be 86% American content, including American labor.

    Not only that, the production line is entirely set in the US, Brevard county, Florida.

    http://www.builtforthemission.com/american-made.php

    http://www.youtube.com/watch?v=n85HwdtGpB8

    We all want to cheer that perhaps this Embraer case is one of a technological edge and of the realization of dynamic economies of scale by Brazil’s manufacturing and its technology establishment, but the reality undoubtedly is different and crude.

    All these Brazilian social experiments with State-led capitalism are a fiasco in terms of national welfare. Let’s not even bring up the dismal levels of basic education nationwide. Let’s all be honest.

    Brazilian holy-cow economists would never dare to even discuss this unfortunate reality.

    The country needs a change of mind. The colonial culture will take a while to get uprooted. Education and open markets (structural reforms) are key to long-term success.

    Copa and 2016 are just ego-boostera for the masses and a direct transfer of aggregate wealth from the country to a few favored pockets.

  21. frank stein says:

    IT WILL BE DECADES IMPORTING DESTILLATES AND SELLING AT A LOSS. VALE, PBR , BANKS, EVERYTHING… ALL GOVERNMENT COMPANIES AND MANY PRIVATE ONES ARE BLOATED WITH PARASITES APPOINTED BY GOVERNMENT. EVERY WEEK THERE IS A NEW CORRUPTION SCANDAL POPPING UP. NOBODY GOES TO JAIL. BRAZIL IS SURREAL. EVERYTHING BENEFITS THE THIEVES. THEY TEND TO FORGET MAJOR FAILURES LIKE THE INFAMOUS “TRANSPOSITION OF SAN FRANCISCO RIVER” AND ALL THE ROBBERY FROM “DELTA CONSTRUCTION”. ONLY THE POOR GO TO JAIL. THE COUNTRY IS A SAD JOKE.

  22. REPX says:

    Alexny, you didn’t get the point that I am NOT proud that Embraer is the only tech company in Brazil or the fact that it produces everything abroad with gringo’s tech. My point is that being a commodities based economy is not bad as people think, as long as these commodities are strictly necessary.

    Focus on the topic, which is whether Chanos is right on shortening Vale and Petro.

    I must agree with Jack Ganoza. Education and reform in its institutions are the key elements to make the change. But it takes 12 years to start making a difference. If 100% of the new oil royalties are invested in education, it can be the starting point.

    But again, this is not a shortcut for a short term fix. If these changes become effective, they will change the country for better. And if these changes are coming, for how long would Chanos dare to short Vale and Petro?

  23. armand says:

    Dude, whats your point exactly on Brazilian assets valuation again? I mean can you trade corruption on a relative basis e.g. Peru, Phillipines, Indonesia, Russia??? This is the EM world. If you cant stomach red tape and general inefficiency, please buy JGB hahahaha…

  24. Jack Ganoza says:

    @ REPX

    I believe we all should salute Rousseff’s statement that the proceeds of the sub-salt oil discoveries and yields will go to support education. The goal is worthy and certainly merited for the Brazilian young population. It’s a necessity for the country’s future development. Public education as a national goal is the dream of even much developed societies.

    Now, we’d better dissect and examine where the proceeds to finance these aspirations are coming from, at which costs, at which risks, attempting to fathom the opportunity costs involved.

    In reality, the sub-salt oil fields development is in fact just ‘a project’ at this juncture. Technologically, it is still a big ‘if’. The technology to extract the oil under 7,000 musl is not there yet. The technology is being developed as the operation goes. The oil extraction gets complicated because of water, natural gas and CO2 being sucked to the surface.

    If one tells me that PBR will invest the amount it has advertised as planned to extract mostly salty water and natural gas or other ‘oil equivalents’, then there is something wrong. Salty water and natural gas can be extracted with much less effort and resources.

    These are facts by the way.

    http://oglobo.globo.com/economia/producao-da-petrobras-no-brasil-tem-menor-nivel-desde-2008-6573239

    http://oglobo.globo.com/economia/lucro-da-petrobras-cai-12-no-3-trimestre-para-556-bilhoes-6545196

    http://oglobo.globo.com/economia/anp-notifica-petrobras-por-queda-na-producao-em-campos-6090265

    http://oglobo.globo.com/economia/producao-media-da-ogx-por-poco-cai-em-novembro-51-mil-boed-6921726

    http://www.offshore-mag.com/articles/2012/10/canario-wildcat-offshore-brazil.html

    In addition to the uncertainty that the oil business inherently has, the Brazilian government approach to the exploration/development of the fields is not with technical/economic efficiency in mind. Legally, 65% of the infrastructure to supply and deliver must be ‘Brazilian’. This is the infamous ‘local content’ content cost factor that foreign oil operators complain about. 65%of technology that does not completely exist off the shelf will be developed in Brazil in time for PBR’s projections?

    http://www.rigzone.com/news/oil_gas/a/119419/Brazil_Local_Content_Policy_Inhibits_Oil_Development

    http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/6337061

    http://www.curtis.com/siteFiles/Publications/IBA_Oil_and_Gas_Law_Practice_…n_(Oct_2010)_(Vol_1_No_1).pdf

    The way the state oil company does its business is simply too expensive.

    http://www.4-traders.com/PETROLEO-BRASILEIRO-PETRO-6496795/news/Petroleo-Brasileiro-Petrobras-SA-Petrobras-to-cut-costs-by-up-to-$7-5-billion-in-2013-15397950/

    The exploration and production should thus clearly be in the hands of private capital. Let them assume the risk.

    What Rousseff and her economic team have to do is ‘relax’ the industry requirements and auction the ocean lots.

    If the oil is there to be extracted economically, sensibly, the foreign oil companies will take it out. The government then can tax the operation and profits and even institute a ‘royalty’ policy on extraordinary gains as a result of higher output or higher prices.

    The way Brazil is doing this diminishes tremendously the national welfare. The State should be in the business of creating the opportunities for efficient, productive economic activities to take place. Not trying to ‘do’ business at ridiculously expensive costs.

    Let the creation of wealth occur, and then come later to tax the activity.

    It is unfortunate how the economy has evolved lately (last quarter), but it was prone to have gone this way with the endless distortions (all over, all markets) that exist.

    We hope that the road ahead will pan out for Brazil. But frankly, the conditions are not there.

    There surely are good conditions to benefit cronies such as Batista and others. We really hope that despite of all the country’s political class lack of vision and insight, the oil business will benefit the country. Brazilians do not deserve another small set of tycoons benefiting from unwise government spending and generous financing for nothing, if the business is not there.

    Let ‘real’ private capital assume the risk.

    Check Nomura’s realistic assessments on the country.

  25. frank stein says:

    ARMAND DUDE, BRAZIL IS A JOKE. MISS BUMBUM, CARNIVAL, BEER, WOMEN, SOCCER ARE THE ONLY SERIOUS SUBJECTS. IT IS A GREAT COUNTRY FOR FUN BUT NOT FOR TAKING SERIOUSLY AND LOSING MONEY IN THE PROCESS.

  26. Fabricio Azevedo says:

    When Lula left, he had an aproval index of 80%. If he wanted a third term, he would had got it. He left and Dilma was elected and not even the Serra said the election was a fraud. Don´t you like it ? So sorry, but it is calle democracy.

  27. Second, some other high-profile investors are not as bearish on Brazil as Chanos is. Earlier this year, Ray Dalio’s Bridgewater Associates, the world’s largest hedge fund, announced a stake of just over 2 million shares in EWZ.

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