“The Greenlight Capital funds (the “Partnerships”) returned -0.1%1 in the first quarter of 2021 compared to 6.2% for the S&P 500 index” he wrote.
David Einhorn’s Greenlight Capital almost broke even in Q1, making only a handful of changes to the portfolio, nevertheless, David Einhorn remains bullish because in his words, “a lot has happened”.
“In general, the investment environment, especially from mid-February through the end of the quarter, was favorable as value outperformed growth, and interest rates and inflation expectations rose” he wrote.
“David Einhorn remains bullish, according to his first-quarter letter to investors”
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The crux to David Einhorn’s bullish view is based on capital rotation from Growth to Value in light of rising inflation expectations
“Has the tide turned from Growth to Value? After a very tough decade, we have only just begun a recovery as shown in this 45-year chart from Goldman Sachs research” he wrote.
“Part of the shift from growth to value may be coming from higher inflation and inflation expectations” added David Einhorn.
David Einhorn noted that as measured by the inflation swap market, 10-year inflation expectations fell from 2.9% in September 2012 to 0.8% in March 2020. “The only significant intervening bounce came in 2016 when expectations jumped from 1.5% to 2.3%; notably, that was the only year in the last decade in which value outperformed growth” he wrote. After bottoming in March 2020, inflation expectations have recovered to 2.5%.
“The trend became clearer in the middle of May, and value started outperforming growth then, and especially since the middle of February. Since May 15, we have returned 80% of the S&P 500 index with half the net exposure” wrote David Einhorn.
“Part of the shift from growth to value may be coming from higher inflation and inflation expectations”
David Einhorn remains bullish on the inflation trade and puts his fund’s underperformance down to deflationary periods
“When the time comes, we will have to figure out how to perform better in deflationary periods. But for now, we believe inflation is only going one way – higher, and we are optimistic about our prospects. The wind is now at our backs” he wrote.
“The economy is in full recovery mode” he wrote which is also why David Einhorn remains bullish. “Household balance sheets are stronger than they have been in a long time and household income growth was up 13% in February compared to last year. And this is before the latest $1.9 trillion, with a “T” – pandemic relief stimulus. Corporate capital spending is booming. There are shortages and bottlenecks everywhere. Last month nearly one million jobs returned. There are signs of an emerging labor shortage” he wrote.
“Do price increases come with a label that says “transitory” – David Einhorn
So why are US labor participation rates near record lows at 60%?
David Einhorn then laid out his view on the Fed, believing that it has fundamentally changed its framework last August. “It no longer seems to care that monetary policy works with a lag. It has embraced an asymmetrical inflation policy: The Fed wants to be ahead of the curve on the downside to protect the stock market and corporate bondholders the economy. Behind the curve is fine on the way up no matter how frothy the stock market recovery is. Now, it says it is only going to react to actual inflation that exceeds its 2% target for some time” wrote David Einhorn.
“We wonder, how will the Fed know? Do price increases come with a label that says “transitory”?”, he wrote.
Here comes the zinger;
“We sense that no matter how hot inflation gets in the coming months, the Fed will continue with zero interest rates and large-scale asset purchases. After all, the U.S. Treasury has a lot of debt to sell and it isn’t clear who, other than the Fed, can absorb the supply” he wrote.
Whilst David Einhorn remains bullish, he is also concerned about the deficit
“The bipartisan idea that deficits don’t matter has even reached popular culture. John Oliver dedicated an entire episode of Last Week Tonight to browbeating anyone concerned about the growing national debt.3 His argument boiled down to (1) nobody knows how much debt is too much; (2) we have a good need to spend money now; and (3) it won’t be a problem until inflation shows up, and we can deal with it then” wrote David Einhorn.
David Einhorn’s Greenlight Capital then locked swords with government number crunchers “Official government statistics are contrived to avoid capturing inflation, shortages, and bottlenecks accompanied by rising demand can only be solved through increased capacity and higher prices” wrote David Einhorn.
“change is certainly needed” – David Einhorn
“Fed says it has the tools to fight inflation, it remains to be seen if it will have the stomach to use them when the time comes. Right now, we remain positioned for rising inflation and inflation expectations” he wrote.
David Einhorn added that most of the fund’s long portfolio and one mid-sized short performed well during the quarter: •Brighthouse Financial (BHF, +22%) benefitted from rising interest rates; •Danimer Scientific (DNMR, +61%) began its life as a public company; •Concentrix (CNXC, +52%) benefitted from strong demand and rising estimates; •Resideo Technologies (REZI, +33%) was helped by the strong housing market; •Change Healthcare (CHNG, +18%) agreed to be acquired by UnitedHealthcare; •AerCap Holdings (AER, +29%) agreed to acquire GE Capital’s aircraft leasing business (GECAS) at a discount; and an undisclosed healthcare short (-41%) fell due to reduced government reimbursement for its product.
David Einhorn noted two factors offset these gains. First, Green Brick Partners (GRBK), with their largest position, doubling in 2020. “This led to an excessive weighting within our portfolio. In January, we sold approximately one-quarter of our shares in an underwritten offering. As is customary, we sold at a discount, which hurt our January result” he wrote.
David Einhorn remains bullish but he also noted that the performance of their short portfolio in 2020 and early 2021 was unacceptable
“So, change is certainly needed” he wrote.