Greenlight’s latest investor letter is out, via Zerohedge, and David Einhorn had much to say on the crisis in Greece, but kept his Ben Bernanke slamming relatively contained, and asked why S&P is waiting to downgrade the U.S.
So, firstly, Einhorn doesn’t see how privatization of state assets in Greece will resolve the country’s underlying insolvency issues.
He believes the efforts so far “aren’t really designed to prevent what most people would recognise as a default or losses to bondholders. They are designed to hide a much more ominous problem.”
That problem? A credit event that would “trigger the payout” on credit default swaps.
French President Nicolas Sarkozy declared that there could not be a “credit event.” Why would Mr. Sarkozy do this? Perhaps the French banks have enormous exposure to sovereign credit events, and it might not be just a Greek default that they are worried about.
Likely, the real worry is that the first default will expose the fiction that sovereign debt is risk-free. If the authorities permit one default, their credibility to prevent additional defaults will be lost. No one knows just how much aggregate exposure to sovereign debt and CDS is hidden in the banking system, and no one is itching to find out.
Einhorn also panned the ratings agencies on the situation closer to home, after S&P said that if need be, they would downgrade the U.S — “Earth to S&P: if you can foresee a near-term default scenario that is plausible enough for you to warn about it, AAA cannot be the correct current rating,” he wrote.
And though it wasn’t as piqued as in earlier letters, Einhorn couldn’t resist a jab at Bernanke:
Higher energy and food prices are crowding out consumer demand for other items, and the market consensus is that QE2 has proven to be counter-productive. Unable to concede this, Mr. Bernanke nonetheless seems determined to have it both ways, remarking in a recent speech that monetary policy cannot be a panacea. We won’t know whether the Fed is serious until it withholds monetary easing in the face of a further softening of economic conditions or a falling stock market.
The hedge fund dumped Yahoo, MDC Holdings (held since ’96 and “one of the biggest contributors to the Partnerships’ returns of all time”), CIT, MI Developments, Xerox, Vicat SA. Meanwhile, Greenlight opened a stake in Seagate Technology.
On stock-picking in this market, Einhorn opined on how much easier it was to read the original tech bubble, compared to whatever it is that is happening right now:
One difference between then and now is that during the internet bubble, the market categorized stocks into “new economy” and “old economy.” It was relatively easy to pick out the dangerous stocks. This time the distinction is less clear.
The fund also recorded a big loss on its Yen position, with Greenligh Capital LP, Greenlight Capital Qualified and Greenlight Capital Offshore returning (2.5)%, (2.1)% and (2.2)%1 net of fees and expenses, respectively in Q2, “bringing the respective year to date net returns to (5.0)%, (5.0)% and (5.3)%.”
In summary Greenlight’s “longs declined a fraction of a per cent… shorts rose by about a per cent and… lost a little bit on macro investments… The main problem with [its] performance was a lack of winners in the quarter.”
Full letter below: