NEW YORK Famed short-seller James Chanos said his decision to short health care companies last year proved to be the wrong move, as federal spending on health care seems about to rise rather than fall.
Chanos, who borrows and then sells stocks he expects can be repurchased later at a lower price, early last year told the markets on multiple occasions he expected a wide range of health care companies would suffer when federal funding was cut back.
Instead, he told Reuters on Wednesday, political dealings late in 2009 and early this year meant that federal outlays to health card providers could actually rise.
"We've been wrong on health care and we've cut back on those positions," Chanos said at the Reuters Private Equity and Hedge Funds Summit in New York.
"When we look at the bills, and to our horror we realized that not only was the cost curve not going to be bent downward, but, if it was going to be bent anywhere, it would be upward," Chanos said.
"To win, this administration was now giving up all its principles and was actually going to hurt everything we thought would happen to the private sector," he said. Chanos said his firm backed away from its health care trades and will stick to the sidelines.
Chanos is part of a shrinking community of hedge fund managers who manages short-only funds. His Kynikos Associates won fame over the years for spotting accounting and other issues at once-celebrated companies like Enron, shorting their stocks and profiting when their misdeeds became widely known.
Among other areas, Chanos sees opportunity in the plummeting financial health of major states like California.
Although it is generally not possible to short municipal bonds directly, Chanos is looking at municipal bond insurers that may have survived the crash of mortgage-backed securities but now could be hurt by a coming wave of state and municipal defaults. He did not identify the companies he alluded to.
"The states are a mess," Chanos said, pointing to generous retirement packages that were awarded to workers over the past few decades. "You had gold-plated, then platinum-plated and ultimately diamond-plated pension plans," Chanos said.
With retirement ages that are 10 or more years younger than those required in the private sector, the demographic bubble of Baby Boomer retirements are starting to hit states now.
"There are some muni bond insurers that actually dodged the structured finance bullet" that hit the two largest players, MBIA (MBI.N) and Ambac Financial Group ABK.N, he noted. "Those are the guys you might want to look at."
Likewise, rating agencies like Standard & Poor's, owned by McGraw-Hill Cos Inc MHP.N, and Moody's (MCO.N) have a real problem if AA-rated and AAA-rated muni bonds start defaulting. That, he said, would likely prompt the U.S. government to reconsider the special regulatory position of credit rating agencies.
"Their stocks may have come back, but I don't know if their business model is making a comeback."
Chanos also reiterated his view that for-profit education companies are overvalued and are solely in the business of selling degrees. Another target, he added, are companies like Netflix that distribute movies by mail when the movie studios are moving toward direct distribution.
"I'm skeptical that little old ladies in hairnets on an assembly line stuffing DVDs in mailers is the way to get this, as movie studios increasingly look for ways to cut out the middleman everywhere else," Chanos said. "With the stock at a ridiculous multiple, that seems to be a pretty good bet."
(Reporting by Joseph A. Giannone; Editing by Phil Berlowitz)