Greenlight’s David Einhorn slams Fed, again

By Jennifer Ablan
October 15, 2013
David Einhorn

David Einhorn is pointing at you Fed

Greenlight Capital’s David Einhorn, one of the most closely followed managers in the $2.2 trillion hedge fund industry, is out with his latest investment letter and provides another lambasting of the U.S. Federal Reserve for what he describes as short-sighted policy decisions with regards to its continued quantitative easing.

“We maintain that excessively easy monetary policy is actually thwarting the recovery,” Einhorn said of the Fed and its decision to continue buying $85 billion a month in Treasuries and mortgage-backed securities. “But even if there is some trivial short-term benefit to QE, policy makers should be focusing on the longer-term perils of QE that are likely far more important.”

Einhorn says the Fed’s bond buying prompts some questions about income inequality and the ability of central bankers to deal with the next recession. Specifically, he asks in his letter:

* How much does QE contribute to the growing inequality of wealth in this country and what are the risks this creates?

* How much systemic risk does the Fed create by becoming what Warren Buffett termed “the greatest hedge fund in history”?

* How might the Fed’s expanded balance sheet and its failure to even begin to “normalize” monetary policy four years into the recovery limit its flexibility to deal with the next recession or crisis?

Einhorn doesn’t necessarily have answers to these questions. But it’s clear that as a wealthy money manager,who clearly has benefited from the lift QE has given to stocks and other assets, Einhorn is somewhat conflicted by what the Fed is doing given his own tongue-in-cheek approach to helping out the economy.

No one is sure what the Fed is focused on. After spending several months bracing the market for fewer QE donuts, the Fed decided that it was premature to taper. Even a token reduction (from a baker’s dozen to a dozen?) was ruled out despite the fact that the economic trajectory has not materially changed. We responded the next morning with our own stimulus by ordering jelly donuts for the entire office.

Einhorn, of course, also discussed his winners and losers for the third quarter and it was a mixed bag with his longs tending do well but his short positions only performing so-so. (See our story for more on the letter).

He said: “In addition to sizable gains by Apple (AAPL) and Vodafone (United Kingdom: VOD), virtually every long position in the portfolio was profitable.”

With regards to Apple, one of Greenlight’s biggest positions, the past few months have been good to the hedge fund as the tech company’s shares advanced from $397 to $477. The rise in Apple stock came as earnings estimates stopped falling and the market turned its attention to AAPL’s new products. Einhorn says this focus on new products should be good for shareholders.

The newly introduced iPhone 5s gives customers a compelling reason to upgrade. It looks like it will be a hit, and we believe that AAPL will find novel ways to use Touch ID and iBeacon to monetize its user base and ecosystem via new service offerings and apps. AAPL’s current non-hardware e-commerce business (sales from iTunes, App Store and iBook Store, plus software and services) is $16 billion a year and growing. Not only is it growing faster than Amazon, AAPL makes more money in non-hardware e-commerce alone than Amazon makes in its entire business. That gap will likely widen in AAPL’s favor as AAPL rolls out new offerings and services. We believe that near-term share performance will track the success of the new phones, while the longer-term share price will reflect the market’s eventual understanding of AAPL’s strong ability to earn high-margin and recurring revenue streams.

Conversely, Einhorn said “it has been hard to make money on shorts. In many cases we’ve lost money.” He points out his short bet against Chipotle Mexican Grill (CMG), which has risen over 46% this year.

That said, Einhorn added to the firm’s short position in Green Mountain Coffee Roasters (GMCR).

Although the company again missed the consensus estimate for sales, bullish analysts scrambled to lower forward revenue forecasts while insisting that all is well in mudville. Attention quickly shifted away from the results when new CEO Brian Kelley announced on the Q3 earnings call that GMCR would hold its first ever investor day in September. When asked what prompted the decision, Mr. Kelley said, “I think a number of people on our team have found that an investor day that is crisp, but thorough on the key issues can be very valuable to help people understand our company. And I think it’s – that’s the core purpose is to help you understand our company better.

It’s not clear what kind of coffee Einhorn and his crew served with those economic stiumulative donuts.

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