Santangel's Review

Commentary

David Einhorn’s Comments at the Greenlight Re (GLRE) Investor Day on May 20th 2014

Presentation:

  • GLRE is the only managed account run parallel to Greenlight’s main hedge fund.
  • It has been 5 yrs into the recovery. Corporate profits have increased a lot and continue to grow. Current earnings expectations are high at a double-digit growth rate. Q1 numbers are showing the economy growing at  ~1%.
  • Bernanke was predictable, but the new chairwoman is less predictable.
  • The fund is fully invested at 114% long and 66% short. It has increased its net long book from 35 to 50%.
  • Largest longs are Alpha Bank, Apple, gold, Marvel, Micron, and Oil States International.
  • Longs are cash-rich tech companies and businesses benefiting from structural changes. Shorts include secular decliners, momentum stocks, and iron ore related companies. Macro overlay due to monetary policy and unresolved imbalances.

 

Q&A Session:

  • Divergence between stock and bond markets?  Bond market is saying that economy is slowing down and yields have come down. Yields are not down because of deflation – we are not in deflation as commodity prices have been up. Equity markets are ignoring any slowdown because of the excuse that slowdown was related to bad weather. GLRE is pretty agnostic to how the market turns out.
  • Credit spreads very tight? Europe has not resolved its issues. Countries can’t roll their debt in a crisis. This is a structural weakness. France’s spreads have not widened. French bonds are mispriced relative to Italian and Greek bonds. They have hedges in France.
  • Thoughts on momentum stocks? Momentum stocks can go down a lot. They didn’t short these on their way up. If the price drops by 50% it doesn’t make the stock price half silly. It is still silly. Tech sector was 30% of the market in the bubble of 2000. Money can rotate out of these momentum stocks and go into other parts of the market. In that case the entire market may not go down.
  • Why not buy a cheap reinsurance company to grow GLRE? Have discussed acquisitions internally. They liquidated a position in Aspen and it was bought out 3 days after they sold. They sold because premiums grew quite a bit.
  • What does he think of the Hedge Fund and Reinsurance model after 10 years of GLRE? Big picture reasons still remain for the model to exist. Asset strategy and underwriting strategy support each other and one doesn’t have to stretch on either side to get decent returns. Now the new model can get a rating from AM Best.
  • How does he look at gold as a fundamental value investor? He thinks of gold as an alternative currency.
  • Why Gold miners ETF GDX or individual companies? They chose an index of companies. Individual companies have big question on reserves, nationalization risk – evaluating these is not their strength. Analyzing coal companies has similar issues and a mine can collapse. They change their position between Gold commodity and GDX. They have double-digit exposure to gold.
  • Short iron ore position? They have been short since summer 2012. Iron ore companies invested aggressively thru downturn, enormous capex and they thought this will create excess supply.  They thought that demand from China was unsustainable and even if China grew iron ore, there will be surplus capacity.
  • AAPL capital management and operations? When they started investing in Apple, capital management was poor but not important because cash was not large. Cash grew and stock went down so cash became bigger % of market cap so capital management was more relevant. AAPL operations: big question is if margins will go down dramatically especially if the next new great phone is not from Apple? Probably not.  When Motorola had the best phone it got big multiples. Then Nokia had the best phones – it got big multiples. Then Blackberry had high multiples. AAPL has iOS, people have music on iTunes, people have pictures and lot of info in the cloud. You want to keep your stuff the same way. Next new phone cant be just 10% better for you to switch to the new phone and that creates a moat for Apple. They also have sales, which are recurring like apps, which is a very high margin business.