David Einhorn’s latest investment letter just dropped.
The hedge fund legend and founder of Greenlight Capital returned 4.5% in the fourth quarter, taking the year-to-date return to 8.4%, according to the letter.
The fund has now returned 2,090% since its inception in 1996, or 16.1% annualized.
“Since Election Day, the market appears to have changed its macroeconomic outlook and is re-evaluating the prospects for many companies accordingly,” the letter said. “This change in tone has been favourable to our style, and we generated a good result in the quarter despite our low net exposure and a decline in gold.”
The letter also runs through what a Trump presidency might mean for markets.
“We believe that the post-Great Recession easy money policies have been good for Wall Street but bad for Main Street,” the letter said. “It’s possible that the TP [Trump presidency] reverses these policies, which would be good for Main Street but rough on Wall Street.”
President-elect Trump is focused on increasing economic growth and employment, according to the letter. Given unemployment is already at 5%, this could create inflation, forcing the Fed to raise rates.
“In the near term, this stimulus combined with the benefit to savers will add fuel to an accelerating economy and a tightening job market,” the letter said. “Ultimately, wage inflation could become a drag on corporate profitability and higher inflation may force the Fed to raise rates substantially, potentially causing the next recession.”
With that in mind, Greenlight set out a bunch of thoughts on positioning for a Trump presidency. Here they are:
- “Long a variety of low-multiple, tax-paying, U.S. value stocks.” The letter names AMERCO, Chemours, Dillard’s and DSW as “generally full federal tax-payers with healthy profits.”
- “Long AAPL.” The tech giant stands to benefit from repatriation of foreign cash, with over $200 billion in cash overseas.
- “Long GM.” The letter states that Greenlight has “dramatically increased” its GM position. “More jobs, higher income for savers, and higher wages should drive demand for consumer durables, and there is no better consumer durable than an automobile.”
- Short “bubble basket.” These stocks don’t have profits, and therefore don’t benefit from tax reform. In addition, “an accelerating economy should allow investors to find growth without needing to pay nosebleed prices for a narrow group of profitless top-line growth stocks.”
- “Short oil frackers.” The economics still don’t work out for frackers, according to Greenlight. “We thought the well of investors willing to sink cash into money-losing holes would begin to run dry, but the “drill-baby-drill” attitude of a TP is likely to lead to additional mal-investment,” the note said.
- “Short CAT (and a few other similar industrial cyclicals that have moved much higher post-election).” Investors have been buying Caterpillar stock as it stands to benefit from infrastructure spending, according to the letter. Caterpillar machines are indeed used to build infrastructure, but that is only a small portion of its business, according to the letter. “CAT’s biggest segments are mining and energy,” the letter said. “We just completed a once-in-a-generation boom in iron ore mine development, and horizontal drilling means we can produce more oil with fewer rigs.”
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