Michael Evans April 27, 2012
PROMINENT hedge fund manager and short seller Jim Chanos has singled out Fortescue Metals as a ”value trap” stock, telling a New York conference that shares in billionaire Andrew Forrest’s company will fall ”materially”.
In a presentation to Grant’s Spring Conference, a private investment forum, this month, Mr Chanos, the boss of Kynikos Associates, told investors he feared iron ore miner Fortescue had ”a somewhat promotional management team”.
He singled out the company headed by billionaire Andrew ”Twiggy” Forrest as the global example of a ”value trap” in the ”iron ore rush”, adding that he was betting against the company.
”In our hedge fund, we are long BHP v Fortescue and others,” said Mr Chanos, according to an account of his presentation in Grant’s Interest Rate Observer, the publication of the conference organisers.
”BHP is a much more stable company. They see the cycle more than others do, they’ve been through it more than others have and it’s been an interesting hedge for those that play it that way.”
Mr Chanos was the first big US investor to expose Enron as a fraud. He also famously bet against Macquarie in 2007, saying the investment bank’s famed model could not last.
A client of mine sent the above article to me and thought it would interest me.
He was right.
It spurred me to look at FMG’s options actions.
FMG closed at $5.63 on 27 Apr 2012.
1) CALLS. High volume has been building Thurs and Fri last week. Weekly calls traded increased by 213% whilst puts were higher by 83%. On Friday, Jun 625 calls attracted 1 large trade. The volume executed in this series alone and by just 1 broker represented about 34% of the overall calls traded on that day. This trade looked like initiated on the buy side by the broker.
However, despite the buying, this trade did not look like the opening of a bullish trade though. On observing some transactions in this series executed back in mid March, it looks this trade on Friday was more of a closing trade, taking profit by buying back calls sold in mid March, and not a opening of a long bullish trade.
2) PUTS increased as well. On the puts side, 42% of the volume for Friday was over a combo trade commonly called bear put spread. The volume was attributed to the buying of Jun 550 put combined with selling of Jun 500 put. The trader is trading a bearish view on the stock.
3) Another indicator of interest is its volume. This huge increase of volume was similar to what we saw 5 weeks ago, week ended 23 Mar. FMG hit a high of $6.18 then and we saw similarly huge volumes. The stock fell back following that volume pattern. Last week, it looked quite similar. The stock hit a lower high of $6.03 this time and has fallen off since then as well. The difference at the moment is that in the mid mMay peak to trough, it stopped at $5.66, this time the peak is lower and the trough seems to lower as well. On Friday the stock already closed at $5.63.
From options actions, there seems to be some pressure on the downside on the stock. The increased volume on the calls may just be masking the storm brewing in the stock.