In David Einhorn’s fourth quarter letter to investors (which reveals a respectable net return of 4.5% for Q4 and 8.4% for 2016), the avid poker player reveals himself as yet another closet supporter of Trump policies, stating that he expects the economy to “accelerate” once Trump’s still undetermined policies are implemented.
Looking back, Einhorn writes that “since Election Day, the market appears to have changed its macroeconomic outlook and is reevaluating the prospects for many companies accordingly.” This, of course, is the so-called Trumpflation rally, which however may have fizzled overnight with Trump’s stated opinion that the USD is now overvalued. Nonetheless, Einhorn points out that “this change in tone has been favorable to our style, and we generated a good result in the quarter despite our low net exposure and a decline in gold.”
But, as he then breaks, “rather than look backward, we’d like to share our views of what a Trump Presidency (TP) might look like and why we believe we are well-positioned for 2017. In short, we believe that the post-Great Recession easy money policies have been good for Wall Street but bad for Main Street. It’s possible that the TP reverses these policies, which would be good for Main Street but rough on Wall Street.”
So looking forward, Einhorn is, for now at least, that the fiscal stimulus emerging from the Trump presidency will be favorable both for the economy…
While it’s hard to know exactly where President-elect Donald Trump stands from day to day, his main economic policy objective appears to be employment. To that end, he has proposed corporate tax cuts, infrastructure investment, and military build-up, combined with antiimmigration policies and trade protectionism. To the extent that he can implement these policies, the economy should accelerate, and given that we are starting with less than 5% unemployment, a labor shortage could develop.
… and consumer spending:
In response, monetary policy is poised to tighten. Conventional wisdom says this will slow growth, but we continue to disagree. Our Jelly Donut thesis on monetary policy contends that ultra-low interest rates deprive households (savers) of income to the point that the harm overwhelms any of the limited benefits. We believe that raising rates from, say, 0.5% to 2% would give needed income to savers without significantly impacting corporate investment decisions.
While we don’t disagree, we have yet to see a single bank hiking the rate on its deposit accounts, which with the exclusion of a handful of dedicated “high yield” banks, remains largely at zero. One wonder, at what interest rate will banks finally “trickle down” this more expensive dollar to the depositor. So far it has not happened. According to Einhorn, one places where the public will benefit, is in higher yields on Treasuries. Our response, however, is that for the average American, will an increase in yields from 2% to 3% on the 10 Year really make much of a difference, especially in a nation where two thirds of Americans barely have any savings? This is how Einhorn see this particular transition:
Further, rates rising from ultra-low to merely low would add a fiscal stimulus because the higher interest payments to holders of newly issued Treasuries and on overnight liabilities at the Fed will add to the deficit. In the near term, this stimulus combined with the benefit to savers will add fuel to an accelerating economy and a tightening job market.
Ironically, the one place where rising rates would truly boost consumer spending, higher wages, is also what may bring the entire house of cards down.
Ultimately, wage inflation could become a drag on corporate profitability and higher inflation may force the Fed to raise rates substantially, potentially causing the next recession.
In any case, with this optimistic macro framework in mind, here are Greenlight’s thoughts on its current positioning for a Trump Presidency:
- Long a variety of low-multiple, tax-paying, U.S. value stocks. Corporate tax cuts provide the most benefit to companies that have profits on which to pay taxes. AMERCO, CC, Dillard’s, and DSW are all generally full federal tax-payers with healthy profits.
- Long AAPL. AAPL stands to benefit from repatriation of foreign cash and tax reform. The company has over $200 billion in offshore cash it could bring back to the U.S. AAPL also derives a majority of its earnings from foreign sources but still accrues GAAP taxes at a 25% rate, which is higher than many other large tech companies. The lower corporate tax rates proposed as part of repatriation and tax reform could therefore lead AAPL toward a structurally lower GAAP tax rate going forward.
- Long GM. More jobs, higher income for savers, and higher wages should drive demand for consumer durables, and there is no better consumer durable than an automobile. GM also falls under the low-multiple, tax-paying U.S. value stock category. For these and other reasons (upon which we elaborate later), we have dramatically increased our GM position.
- Short “bubble basket.” Bubble basket stocks mostly don’t have profits, which makes them unlikely to benefit from corporate tax cuts. Further, an accelerating economy should allow investors to find growth without needing to pay nosebleed prices for a narrow group of profitless top-line growth stocks. We think the basket is poised to further underperform with one caveat: There is a risk that Disney decides to star in the Internet Bubble 2.0 remake of the TWX/AOL deal by acquiring a profitless Netflix (NFLX) at the top. We suspect Disney won’t. Accordingly, NFLX merits a spot in the basket because its domestic market has matured; it risks an unfavorable change in net neutrality rules; and it has not demonstrated that its huge investment in original content has a positive return. We believe it doesn’t. NFLX is able to report that its U.S. streaming segment is highly profitable only by allocating a disproportionate amount of content amortization to its smaller and unprofitable international streaming segment.
- Short oil frackers. Despite repeated claims in their slick presentations, the economics still don’t work when all investment and corporate costs are taken into account. We thought the well of investors willing to sink cash into money-losing holes would begin to run dry, but the “drill-baby-drill” attitude of a TP is likely to lead to additional malinvestment. This will lead to lower commodity prices and still deeper losses. Further, due to various existing subsidies, oil frackers are generally not cash tax payers. The proposed corporate tax cuts don’t help much when you don’t pay taxes in the first place.
- Short CAT (and a few other similar industrial cyclicals that have moved much higher post-election). Every time someone says “infrastructure investment,” investors reflexively buy certain stocks including CAT. Yes, CAT sells machines that are used in infrastructure, but this represents only a small part of its business. CAT’s biggest segments are mining and energy. We just completed a once-in-a-generation boom in iron ore mine development, and horizontal drilling means we can produce more oil with fewer rigs. Even in a U.S. infrastructure boom, CAT is overpriced. CAT closed the year at $92.74 or 33x forward earnings.
Overall, Einhorn’s portfolio rejiggering does not seem like much of a change from his existing holdings; if anything, it may simply be a way to justify to LPs that his holdings are appropriate under a shift from Obama to Trump.
Einhorn also explains why, unlike Druckenmiller, he remains long gold despite his newly-found economic optimism:
Lastly, we continue to own gold. Our sense is that Mr. Trump doesn’t hold any core policy beliefs and is apt to change his mind as he sees fit. This will lead to more political and economic uncertainty and less stability. There has been a knee-jerk decline in gold since the election, as investors presume that higher short-term rates are good for the dollar and bad for gold. Ultimately, we believe the case for gold is broader: greater economic, geopolitical and policy uncertainties, much wider budget deficits, and the possibility of an inflation problem all support gold (to say nothing of what might be required to redecorate the White House to Mr. Trump’s tastes).
Finally, in terms of actual new positions, Einhorn says he established one new position and increased two others during the quarter.
We made a mid-sized investment in a European financial company. As per our policy regarding EU MAR, we won’t identify the company or discuss the thesis at this time.
He also elaborates on why he is long Bayer, why he is adding to GM shares, and why he exited positions in ACM, KORS, TTWO, FLS, MJN and RAI.
Much more in the full letter below.
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