Last quarter David Einhorn admitted that “it has been a while since we’ve had a profitable quarter to report“, when he happily reported that in Q1 Greenlight returned 3%. Alas, fortune has turned again, and in his latest report we read that after a serious of unfortunate events, his hedge fund declined 2.6% in the second quarter, bringing the YTD profit to just 0.4%. Here is the reason for the underperformance in his own words:
Most of the quarterly losses came from the short book. An undisclosed oil fracking short (not the Mother-Fracker) was our biggest loser, followed by Amazon, which reported a stronger quarter than we expected.
In the long book, Apple (AAPL) and Macy’s were material losers. The earnings estimates for AAPL continue to fall. We mitigated our loss by trading AAPL well – though the stock is down about 9% for the year, we have been nearly break-even on the position in 2016. We sold Macy’s for a loss after the company announced a significant reduction in full-year 2016 guidance. This announcement invalidated our thesis that 2016 earnings would benefit from easy comparisons later in the year. We exited the position at $32.08
Einhorn also provides a lenghty explanation for his disagreement with Citron’s short thesis on Chemours (which Greenlight is long), and then provides an interest peek into the Market Abuse Regulation for the European Union (“EU MAR”) which went into effect earlier this month.
Among its dozens of provisions, it sets forth uniform regulations throughout the EU regarding insider dealing and market manipulation, but it remains to be seen how local regulators will ultimately interpret and enforce many of its conflicting and ambiguous provisions. Having studied EU MAR and obtained expert advice, we have decided on a cautious approach. In short, we’ll be saying little or nothing about new positions in issuers that are subject to EU MAR for the time being. Accordingly, while we would ordinarily now discuss a new large stake in a European life sciences company, we will not do so at this time. Going forward we will of course monitor how regulators and courts interpret and enforce EU MAR, and will further revise our policies as appropriate.
Aside from that, Einhorn details some other positions that he closed out of, selling the following:
- American Capital Agency for a small gain after the company announced the acquisition of its external manager. Strangely, the market treated this bad news as good news, so we chose to exit.
Baxter International at a gain when the shares reached our view of fair value. - Ingram Micro, a small position that earned a good return, which is being acquired by Tianjin Tianhai.
- Oil States International (OIS) without much recovery for what became a bad investment in Civeo, which was spun out from OIS. The stock fell sharply during the oil commodity rout and then subsequently bounced on an anticipated recovery. We sold rather than waiting to see if the recovery pans out.
He also covered the following shorts:
- Intuitive Surgical at a loss where we overestimated how quickly competition would materialize.
- Under Amour where we took a second shot at shorting last fall. This time it worked better and we earned a nice profit.
- United Rentals, which was a sizable winner over the last couple years, as the rental rates and demand for heavy equipment rentals fell and the company missed estimates.
… however not Amazon which continues to levitate to record highs.
Einhorn also had some macro commentary on Brexit, which he doesn’t see as leading to meaningful long-term impacts:
For the last couple centuries populations have celebrated the phrase “The British Are Leaving!” In our view, Brexit by itself will not be a significant economic event. Sure, there will be a handful of companies that suffer idiosyncratic issues, but the U.K. economy is simply not big enough for even a devalued British pound to have a large direct impact on global trade.
However, the mere pretense of an event is likely sufficient to entice the global monetary authorities into serving up a fresh course of Jelly Donuts. The Federal Reserve put itself on hold ahead of the vote, so it shouldn’t be a surprise if the “leave” vote takes tightening off the table for some time. Other central banks have made various promises to double down on their failing policies as they deem appropriate. Government bond prices have soared, as the market senses that a global monetization of large amounts or even all government debt may be in our future.
The scent of more Jelly Donuts also sent gold prices up from $1,231 to $1,324 an ounce, making gold and gold stocks our largest winners during the quarter. CONSOL Energy was our other significant winner, fueled by a partial recovery in natural gas prices and continued strong well performance. The shares rose 43% and ended the quarter at $16.09
And as customary, reveals his latest top holdings:
At quarter-end, the largest disclosed long positions in the Partnerships were AerCap, Apple, CONSOL Energy, General Motors and gold. The Partnerships had an average exposure of 96% long and 69% short.
Full letter below
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