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Zero Hedge

Einhorn Crushed By $1.7BN In Redemptions: "Nothing Went Right For The Entire Year"

After suffering a record 34% loss on its investments in 2018, it is perhaps surprising that David Einhorn's Greenlight Capital was not hit with more than $1.7 billion in redemptions, which while a massive number, will allow the fund to continue operating, if with far more subdued ambitions (and less a CFO, because as David Einhorn wrote in his annual letter to Greenlight investors today, the fund's CFO Harry Brandler will be retiring this month). Still, as Bloomberg notes, it was "a remarkable plummet" for Einhorn, who started this year with $2.5 billion, some 60% below the $6 billion AUM a year ago, and a fraction of the $12 billion Greenlight managed at its peak.

It is also perhaps some latent hubris that prompted Einhorn not to accept any new investor funds since 2014. That has changed, and as Einhorn writes - tongue-in-cheek - "we no longer believe there is risk of our assets growing too quickly (other than through improved performance)," and is why he is once again re-open Greenlight to new capital. "To be clear, we do not plan to initiate a marketing effort, as we plan to continue to focus on the portfolio," he added, without adding the obvious "... because we can't afford it."

Still, for those long-suffering Greenlight LPs who stayed on board even after last year's debacle, there was some good news: Greenlight started 2019 on the right foot, up 11.4%, thanks to the fund's two top positions, GM and Brighthouse Financial, finally rebounding, and rising 13% and 17% YTD, respectively.

Whether those gains continue is of course, the $2.5 billion question, because whereas Einhorn laid out various positions closures (and openings) in his latest letter, one notable development stood out - the fund's short basket of tech names is still there. And as most know, it is these shorts which includes some of the best performing stocks in 2017 and 2018, that has been the biggest drag on performance.

As for Einhorn's post-mortem on a year he, and those around him, would rather forget, it's predictably downbeat, to wit:

Coming into the 2012 season, the Boston Red Sox beat reporter wrote, “…the Red Sox still have a very talented roster and they have the capability of doing big things… the Sox pitching staff will be a strength… Jon Lester will win the AL Cy Young Award… the Red Sox will make it to the World Series in 2012.”2 As it turned out, the Red Sox won 69 games and lost 93 and finished in last place. The starting pitchers went 48-72 and gave up 5.2 runs per game. Jon Lester went 9-14. The year just didn’t turn out for them.

When we entered 2018, we liked our portfolio. We believed our three biggest longs (General Motors, Brighthouse Financial and Bayer) were poised for strong years, and our short portfolio was laden with overvaluation and future disappointments. As it turned out, we would have been lucky to end the season 69-93. We finished last, but it felt more like 30-132. Nothing went right for the entire year.

And while there is more in the full letter, notably hopes pinned on the Red Sox 2013 season (as symbolic of the renaissance that awaits those who wish to put their money with Einhorn) here is a recap of the key position changes.

Over the year we made a few portfolio changes, like selling Apple, Bayer, Mylan and Perrigo, covering the oil frackers and Core Laboratories during the year-end oil rout, and adding a few small and medium positions. We have re-underwritten the entire portfolio and we are excited about its current construction.

So with morale understandably hammered, there is some hope, and as Einhorn notes, "2019 is in the early days, but we feel a little like a team that just won its opening day game after a last place finish."

Below we excerpt the key highlights from Einhorn's letter:

Dear Partner:

We had another difficult quarter and lost an additional (11.4)%,1 net of fees and expenses, bringing the Greenlight Capital funds’ (the “Partnerships”) year-to-date loss to (34.2)%. During the fourth quarter, the S&P 500 index returned (13.5)%, bringing its year-to-date return to (4.4)%. Since its inception in May 1996, Greenlight Capital, L.P. has returned 1,367% cumulatively or 12.6% annualized, both net of fees and expenses.

Coming into the 2012 season, the Boston Red Sox beat reporter wrote, “…the Red Sox still have a very talented roster and they have the capability of doing big things… the Sox pitching staff will be a strength… Jon Lester will win the AL Cy Young Award… the Red Sox will make it to the World Series in 2012.”2 As it turned out, the Red Sox won 69 games and lost 93 and finished in last place. The starting pitchers went 48-72 and gave up 5.2 runs per game. Jon Lester went 9-14. The year just didn’t turn out for them.

When we entered 2018, we liked our portfolio. We believed our three biggest longs (General Motors, Brighthouse Financial and Bayer) were poised for strong years, and our short portfolio was laden with overvaluation and future disappointments. As it turned out, we would have been lucky to end the season 69-93. We finished last, but it felt more like 30-132. Nothing went right for the entire year.

The baseball analogy comes down to process vs. outcome. As we review 2018, we don’t believe we had a bad process in assembling the portfolio. 2018 was very different from our last bad year in 2015. In 2015, three big mistakes drove the result. In 2018, the losses were a mile wide and an inch a yard deep. It’s much easier to explain results when they are driven by large moves in a few names. It’s much harder when the answer is a lot of everything. It’s possible that in time, we will better understand why 2018 turned out the way it did. But today, it feels more like a combination of a few where we were wrong, a difficult environment for value investing, and a lot of adverse variance.

The Red Sox believed in their process, and after the 2012 season they kept the nucleus of the team intact. After the losing season, the Boston Red Sox News predicted little improvement in 2013: “The Sox won’t make the playoffs; there’s too much ground to make up and the rotation remains suspect.”3 It turned out the Red Sox were right to stand by their core players. The team won the 2013 World Series. The rotation went 67-42, gave up 3.8 runs per game and Jon Lester went 15-8.

Over the year we made a few portfolio changes, like selling Apple, Bayer, Mylan and Perrigo, covering the oil frackers and Core Laboratories during the year-end oil rout, and adding a few small and medium positions. We have re-underwritten the entire portfolio and we are excited about its current construction. 2019 is in the early days, but we feel a little like a team that just won its opening day game after a last place finish.

And select position updates, first Gold:

Gold – Long

U.S. debt to GDP is over 100%. The U.S. Treasury recently announced that the U.S. debt has increased by over $2 trillion under the current administration. A decade into an economic recovery, with employment approaching maximum levels, the U.S. is running an almost $1 trillion deficit, even with low interest rates limiting the burden of existing debts. This is not prudent. When the economy eventually slows, the deficit is sure to expand rapidly, possibly catastrophically. The politicians say deficits don’t matter (President Trump has answered concerns about the massive national debt with “yeah, but I won’t be here”). History says otherwise. Gold continues to be a hedge in our portfolio to imprudent global fiscal and monetary policies.

... and the Tesla short:

This is such a bizarre situation that we could write pages about the latest developments every quarter. A lot of attention was paid to Elon Musk’s recent statement that he doesn’t respect the SEC. Why should he? After all, he committed blatant market manipulation and was rewarded with a fine, which he said was “worth it.” The Chairman of the SEC wrote of the settlement that “the skills and support of certain individuals may be important to the success of a company.” In other words, if you are as important as Elon Musk, removal is not a serious option. He is above the law. Last week, TSLA confirmed what we have written in the last several letters, namely that it had non-repeatable results in the third quarter of 2018 by selling high-end versions of the Model 3 ahead of 2019’s decrease in the Federal tax credit for buyers of TSLA’s cars. With that pull-forward of demand, we believe the third quarter was as good as it gets and TSLA faces challenges in 2019. Admitting that it is not just a question of manufacturing scale and putting in a smaller battery, TSLA now says it needs to make many manufacturing engineering  improvements and manufacturing design improvements in order to make a $35,000 version of the Model 3.

Because TSLA has done a poor job of ramping production, the market has been focused on the shortage of supply. With manufacturing getting to higher throughput, we believe the next leg of the story will be a shortage of demand, which should undermine the bull case.

TSLA bulls believe the company is the next Apple, and essentially deserves a huge premium because it has the best product and will continue to do so for years to come (we disagree). The ardent fan base makes that seem plausible. Apple always delighted the customers and did whatever it could to please them. TSLA, on the other hand, seems willing to offer inflated promises and poor service. Apple created loyalty by supporting its customers, while TSLA wants the customers to support it because TSLA is saving the planet.

TSLA’s recent announcement that it will be cutting its workforce by an additional 7% suggests that its poor customer service is likely to get even worse. A few years ago, TSLA had a remarkable world-leading Net Promoter Score of 97 (which basically means it was building a world class brand that everyone recommends). Currently, the score is only 37, which places it just below Hyundai. Manufacturing quality control is low. Consumers are having bad experiences charging, servicing and repairing their cars, obtaining refunds from TSLA for cancelled orders and receiving vehicle registrations after taking delivery.

And his parting words:

Our longs are businesses that are performing well and are priced at really low valuations. The shorts have flawed business models, questionable accounting and leadership, and obvious paths to serious problems. We also have a bit of a macro hedge in case the politicians and central bankers continue to act irresponsibly – which seems like a safe bet. We can’t forecast the result, but we are looking forward to the new season.

Lastly, some statistics: "the largest disclosed long positions in the Partnerships were AerCap, Brighthouse Financial, General Motors, gold and Green Brick Partners. The Partnerships had an average exposure of 126% long and 67% short."