David Einhorn's Q1 Investor Letter: "Under The Circumstances, It Is Curious That Gold Isn’t Doing Better."

Tyler Durden's picture

Sadly, not much in terms of macro observations this quarter or discussions of jelly donuts, but a whole lot on the fund's biggest Q1 underperformer, Apple and the hedge fund's ongoing fight for shareholder friendly capital reallocation as well as proving Modigliani-Miller wrong. And then this cryptic ellipsis: "Under the circumstances, it is curious that gold isn’t doing better." Say no more, David. We get it.

In other positional news, Greenlight closed out longs in XRX and ESV and shorts in AVB and MBI. Greenlight also initiated a long position in Germany EVK (ahead of public listing). It appears Greenlight is still long Green Mountain.

From Greenlight Capital, as of May 8

Dear Partner:

The Greenlight Capital funds (the “Partnerships”) returned 5.8%1, net of fees and expenses, in the first quarter of 2013.

It was a quarter of reversal: Marvell Technology Group (MRVL), our biggest loser in 2012, was our biggest winner this quarter. Yen puts, our biggest losing position in both 2010 and 2011, were our next biggest winner. On the other hand, Apple (AAPL), a top three winner in 2011 and 2012, was our biggest loser.

Overall, it was a decent start to the year with a good risk-adjusted return. It’s unlikely for us to keep up with the sort of one-way market that we saw in the first quarter, where the S&P 500 never suffered more than a trivial weekly decline. Our long portfolio roughly matched the S&P 500, we had a modest loss in our short portfolio, and macro was positive. We are four years into an economic recovery. Corporate earnings, which grew steadily during the initial stages of the recovery, are now growing anemically. The market advance can be better explained by investors convincing themselves that extraordinarily accommodative monetary policy is bullish for stocks. Unconventional monetary policy is now a global phenomenon.

The Japanese government replaced its conservative central banker with a more aggressive one. This regime change has led Japan into the global battle to see who can debase their currency the fastest and this drove our gains in Yen puts, as the Yen weakened from ¥86.74 to ¥94.19 against the dollar.

Now every major central bank is fully engaged in aggressive, unconventional policy. It seems that as each bank implements a new experiment without immediate consequence, the new policy is deemed safe, if not effective. Other central bankers notice and, acting in the philosophy of ‘Anything you can do, I can do better,’ take turns in one-upmanship. This serially correlated behavior smacks of bubble mentality. But investors are currently complacent about the unintended consequences of central bank money printing, and like most investment cycles and fads, this will persist until it doesn’t. Under the circumstances, it is curious that gold isn’t doing better.

AAPL shares fell from $532 to $443 during the quarter. The biggest problems with our AAPL investment are disappointing earnings and a diminished forecast. When AAPL announced its year-end result, it made clear that it would earn less in the March quarter than it did a year ago. Forward estimates have been falling for a while. Last July, consensus estimates for fiscal 2014 were $64 per share; estimates now stand at $44. When we thought the company would earn $64 per share, the shares seemed cheap even as they reached $700 in September. Of course, that required AAPL to meet that forecast.

Our thesis is that AAPL has a terrific operating platform, engendering a loyal, sticky and growing customer base that will make repeated purchases of an expanding AAPL product offering. Unfortunately, there have been a series of disappointments including slower sales growth, lower margins, and increased competition. There have also been delays in new carrier wins, next generation product introductions, and new product category launches. While all of these have had an understandably negative impact on AAPL’s share price, we take a longer view and believe our thesis is intact.

As shareholders, we watched AAPL accumulate a cash stockpile greater than the market capitalization of all but 17 companies in the S&P 500, and recognized that its high cost of capital and shareholder-unfriendly capital allocation were depressing the stock price. AAPL’s management and Board, either unconcerned or unaware of the detrimental effects of AAPL’s all common equity capital structure, seemed uninterested in finding a solution.

As shareholders who believe in AAPL’s core business, we wanted to help AAPL resolve its cash problem in a way that satisfied AAPL, the market, and its shareholders. Based on years of observation and many discussions, we believed that AAPL would not issue debt under any circumstances, and especially not to return cash to shareholders. With this in mind, coupled with our awareness that AAPL was loath to repatriate (and thereby pay taxes on) its overseas cash, last year we suggested iPrefs to Peter Oppenheimer, AAPL's CFO. We had no better luck than any of the many other investors and analysts who for years have pressed Apple to return excess capital to shareholders. Our concerns fell on deaf ears.

In February, CalPERS came out in loud support of a proposal aimed at improving AAPL’s corporate governance that inexplicably bundled several measures into a single voting measure. The proposal, which included an unwarranted provision prohibiting AAPL from issuing preferred stock, was in direct violation of SEC rules, and we filed a lawsuit insisting that AAPL allow the shareholders to vote on each measure separately. We believed this would generate a public dialogue around AAPL’s capital allocation strategy.

When Tim Cook later called the lawsuit a sideshow, it was understandable. Whereas we chose to focus on the very real issue of Apple’s capital structure, others seemed more intent on turning things into a circus. A lawyer known mostly for preserving the autonomy of Boards to act in any manner they wish wrote a piece titled Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the Economy. Given the hysteria implied in the title, one would think we had suggested that AAPL hire Steve Ballmer to run new product development. A retired Fortune 500 CEO said “I’d give Einhorn the back of my hand,” prompting us to wonder why he wouldn’t give us the front of his hand. Perhaps most startling was the reaction from CalPERS, who vigorously defended the proposal.

The essence of corporate governance is form over substance. The belief is that properly-made decisions will lead to better decisions, so it was odd to watch self-identified corporate governance advocates support a proxy proposal that violated SEC rules. Incongruously, CalPERS believes good corporate governance is unnecessary when approving policies that purport to improve corporate governance.

Others ignored the circus and focused on the balance sheet. We received feedback from many AAPL shareholders, including some of AAPL’s largest institutional investors, thanking us for initiating the public discussion. Even some who disagreed with our idea helped further the public debate. Respected NYU finance professor Aswath Damodaran wrote a critical piece that pushed us to refine our presentation of the iPrefs idea. These thoughtful responses reinforce the value of speaking publicly, despite the more obvious drawbacks.

In the end, the judge sided with us, and AAPL withdrew the proposal from consideration. Once the shareholder meeting passed, there was nothing left for a court to do, so the case became moot and was dropped. Not long after, we met with AAPL management and its investment bankers to further discuss AAPL’s options. We believe that our thoughts were given a fair hearing.

Ultimately, the Board and AAPL decided to abandon their “no debt” philosophy and gave birth to iBonds. As rejections go, AAPL’s bond issuance ($17 billion in bonds were issued at about a 2% average interest cost) was as good as anything shareholders could have hoped for and the market seems to agree. AAPL announced that it will return $100 billion to shareholders by the end of 2015 and will evaluate returning additional capital annually. This vastly more shareholder-friendly capital allocation policy is a dramatic shift from where AAPL stood just a few months ago. We have added to our AAPL position. We now await the release of Apple’s next blockbuster product.

The other significant loser in the quarter was Green Mountain Coffee Roasters (GMCR). We would love to be the “Credentialed Bear” that gets invited to ask tough questions at its annual shareholder meeting, but we aren’t waiting by our iPhones. Shares of GMCR increased from $41.34 to $56.76 in the quarter.

In addition to MRVL and the Yen, Vodafone (UK: VOD) was another material winner during the quarter. It is now clear that Verizon does in fact want to buy VOD’s 45% interest in Verizon Wireless. We can hear them now. We believe that a premium sale followed by a successful return and/or redeployment of the proceeds could unlock substantial value latent in VOD stock. VOD without Verizon Wireless might also become a good acquisition target for AT&T. During the quarter VOD shares advanced from £1.54 to £1.87.

MRVL reversed its 2012 decline as investors began to pay attention to MRVL’s prospects for share gains in controllers for hard disk drives and flash memory drives, as well as its new processor for cell phones and tablets. The company should see significant fixed operating leverage in 2013, as it has been carrying the cost of the investments in these products without any corresponding revenue until now. The company has also continued to buy back stock aggressively, adding to the potential earnings leverage.

We initiated a long position in Evonik (Germany: EVK), a global chemical business, through a private placement at an effective price of €29.13 per share, ahead of a public listing in April. EVK has a high quality portfolio of chemical assets in the U.S., Europe and Asia, including market leadership in methionine, a high margin, high structural growth business that tracks the demand for animal feed. EVK’s business is less cyclical than that of its European peers as demonstrated by its positive EBITDA growth each year even during the recession. EVK is currently in the middle of a capital investment cycle that we believe will enable it to grow its earnings power from €2.50 in 2012 to €4.00 per share in 2015/2016. We think that its combination of secular growth, superior asset quality, and low cyclicality makes EVK the premier European chemical company, which deserves a rerating to a premium multiple.

We initiated a long position in Oil States International (OIS), a solutions provider for the oil and gas industry, at an average price of $77.16 per share. OIS has four business segments: Well Site Services, Tubular Services, Offshore Products, and Accommodations.

We believe that the company trades at a significant discount to the sum of its parts. Though the shares trade at slightly less than 7x 2013 EBITDA (a multiple typically associated with its lower multiple businesses), the majority of its profits come from Accommodations, which is a high growth, high return-on-capital segment that deserves a much higher valuation. At 8.6x 2013 EBITDA, an appropriate multiple given a sum of the parts analysis of OIS’s business mix and where comparable companies trade, OIS would be worth close to $120 per share. We believe that OIS could unlock significant shareholder value by converting the Accommodations unit into a REIT and separating it from the rest of the company; if completed, it would suggest a valuation of $155 per share.

We closed several positions during the quarter including longs in Ensco (ESV) and Xerox (XRX), and shorts in Avalon Bay (AVB) and MBIA (MBI).

We bought ESV, an offshore contract oil driller, after the Macondo oil spill. At the time, we believed that the shares were depressed over fears of curtailed offshore drilling. Subsequently, the fears were resolved and the drilling business recovered. We earned a 34% compounded return over our 4+ year holding period. The return was helped by favorable trading around the position. We sold in order to redeploy the capital into OIS.

XRX did not perform as well as we had hoped. We bought the shares based on expectations that synergies from its acquisition of Affiliated Computer Services would lead to revenue growth and margin improvement. Unfortunately, the company did not deliver.

Despite this, we sold the shares for a modest gain.

We finally gave up on our short of AVB. Our initial short in early 2007 worked nicely during the credit crisis, but we overstayed our welcome. It is a mediocre business with cyclical risk and an extreme valuation due to its REIT nature. Nonetheless, the company recently acquired Archstone  properties and issued a lot of stock. The shares declined from their recent highs and we took the opportunity to admit defeat and exit with a loss.

During the quarter, we finally declared victory on our MBI short, which we have held in some capacity since 2002. It was rough sledding for the first five years until the stock collapsed from $76 to $2 between 2007 and 2009. This was another case of a misunderstood business and a management team engaged in assorted accounting and business chicanery. While it is possible that sleepy regulators will ultimately put this company and its management out of their misery, the opposite seems equally possible. We’ve decided to enjoy the healthy profit we made and step aside for the time being. Cumulatively, this was the third most profitable short position in our history.

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Element's picture

Have a look what gold did from Pre Bear Sterns collapse to end of 2008, big swoon.


flacon's picture

> "Curious That Gold Isn’t Doing Better" Yeah, no shit!

Element's picture

In 2008 it did what it is doing now.

Recession, FIRE sector sickness, Bear Sterns, BIS warning, Lehman's, then rapid sustaind price rise trend.

And in late 2011 Europe again stated to go into recession and the banks all got sick again.

So similar conditions now, to 2008, and BIS warning occurred last December.

So gold is behaving similarly too to what it did during 2008.

Liquidation stopped after Lehmans ... then price exploded ... untill late 2011 when it began the swoon into the European recession and global slowdown.

Get big banks failing now, the gold liqidation cycle will cease, and price will pop.

So it will take more recession and bigger banks getting into serious trouble, credit freeze - POP!

Until then it will probably continue this price swoon.

fonzannoon's picture

I am an unabashed gold bull, despite what my conversation seems like below. Did 2008 last for two years? because this stretch seems to be a bit longer? Can I ask these questions without being thrown into the troll pool?

Element's picture

QE happened. Banks are being recapped, so it takes longer for them to bust in the recession, plus recession is shallower and weaker, but longer.

I'll make a testable prediction: 

Find a vulnerable TBTF (any will do), naked-short it to oblivion and collapse, the gold price will pop and surge to record highs for several years ... or longer.

James_Cole's picture

Find a vulnerable TBTF (any will do), naked-short it to oblivion and collapse, the gold price will pop and surge to record highs for several years ... or longer.

Good way to lose all your money. 

Gold market is moving very predictably right now, it's not complicated.

Hint that Fed is maybe pulling qe and what is the immediate knee-jerk in gold??

Element's picture



Hint that Fed is maybe pulling qe

Not in this universe.

James_Cole's picture


Hint that Fed is maybe pulling qe

Not in this universe.

I'm saying - consider the implications of how the market reacted to the mere hint (a consistent reaction every time this is suggested as a possibility) relative to theories about phys shortages, JPM blah blah blah etc. 



In a lot of ways people are currently buying gold for the same reason people are buying DIA with the same fundamental support.


Junk away. 

Element's picture



Has any one junked you yet? ... no.

Given what you say, on a rumor, imagine a large bank actually going down ... now how do I lose my money again?

James_Cole's picture

Has any one junked you yet? ... no.

You spoke too soon.

Given what you say, on a rumor, imagine a large bank actually going down ... now how do I lose my money again?

If you have really good inside info, OK, go for it. Failing that, naked shorting is generally a bad idea. Combining naked shorts with TBTF? Terrible idea. 

Element's picture

 lol ... wasn't me.

That experimental test was run in August-Sept 2008 on a vulnerable TBTF ... and it wasn't too big to snuff.  As for inside info, it has been suggested at least on other TBTF did it.

It illustrates that if the economy is bad enough, the real one that is, big banks, not actual TBTFs, but big enough, are going to fall apart in numbers.

QE stopped the collapse avalanche last time, but gold was out the gate and still shot-up.

So it is the growing instability of banks that leads to actual major bank failures, and credit freezes, that is the key to another major gold POP and run in my view.

We are in a preparatory phase, and that can last for a longish time.

DoChenRollingBearing's picture

@ fonz

+ 1

Gold has had a huge run since 2001, even a two year stagnation means little.  Long term thinking (IMO) is the way to go re gold.  Think intergenerational...  Our friends the Rothschilds have been doing this, for what, almost 200 years?  (Even for the Legion here who hate the Rothschilds does not mean you cannot learn from them...)  

Your children and grandchildren will be very happy to have had you save in gold.

BLOTTO's picture

Just posting as it mentions one of our favourite websites...from todays Chuck Butler article...the currency guy and friend of Gold.


'Then There Was This. I was looking through one of the websites I always tell you is one of my faves to visit, Zerohedge.com, and came across an interview with James Grant. I've always been a fan of James / Jim Grant, reading his newsletter over the years has given me some great insight into the markets.  Here's Jim Grant on Gold:

"Gold has been in a bull market for 12 years. Gold is this rare thing in which you can be bullish and yet contrary and also with the trend. There is I think a general fatigue animus towards gold. The gold prices are reciprocal of the world's view of the competence of central banks. The greater the world's confidence in the Ben Bernanke's of the world, the weaker the gold market. The less the world holds confidence in the institution of managed currencies, the stronger the gold market. And to me the confidence is utterly misplaced.'


fuu's picture

Element = DCRB?

Who knew?

LoneStarHog's picture

"Curious"? .. Pull your head outta your ass!

Joe Davola's picture

The biggest problems with our AAPL investment are disappointing earnings and a diminished forecast.

Cue Reggie...

Pladizow's picture

To: LoneStarHog

With the use of the word "curious", David was being extremely diplomatic!

LoneStarHog's picture

Understand...but...Diplomacy = Bullshit!...Tell David to either have the BALLS to speak directly/honestly or to just STFU!

Pladizow's picture

That would not help gather AUM!

NotApplicable's picture

Given the longs either get Corzined or Paulsoned, what mechanism exists for true price discovery? Only the shorts seemingly have a safe haven to operate from.

The only thing curious is how the author could fail to observe this.

LoneStarHog's picture

"The only thing curious is how the author could fail to observe this."

Being merely "curious" still gets one invited to all the Whore Street parties.

James_Cole's picture

Only the shorts seemingly have a safe haven to operate from.

fonzannoon's picture

Hmmm (scratching beard) yesss.....hmmmm Kyle Bass goes on Bloomberg and says the same thing after he recently sold 400 bil of bullion.....hmmmm I wonder If he and Einhorn talk....


Quinvarius's picture

He didn't sell any gold.  400 billion worth is more gold than the US government has anyway.  Adjust your rumor.  Infact, the US national debt of 17 trillion and the US M3 money supply + all credit of another 80,000 billion is backed by under 400 billion in gold.  Hence, it is going a lot higher.



fonzannoon's picture

Well excuse me. The UT of which he is one of the fiduciary's of their funds....SOLD 400 million dollars worth of their 1.4 billion in holdings.

Sorry if I was off by several hundred billion and some change but I figured you got my point.

He also has said in the past that if they sold the gold, he would resign. But I am still waiting for that.

Quinvarius's picture

Now all you need to do is adjust your rumor that Kyle Bass and his fund Hayman Capital sold gold down by another 400 million in gold, to zero.   UT made their own decision to move from bullion to futures against Kyle Bass' advice.  Thanks.

fonzannoon's picture

Please show your proof that it was against his advice.


fonzannoon's picture

I believe that he has made it clear that he did not want them selling. I find it really odd that they decided to do so right before the price got smashed. I realize they bought gold futures. I just find it funny seeing him on Bloomberg scratching is head about the whole thing after the timing of that move.

I'm getting tired of these smug guys and their smirky curious smiles being put up everyday as advice.

kito's picture

you see fonz...ive been warning you about bass for a while....................stop listening to the book talkers..................and the pundits........and the traders..............just listen the birds outside your window.................and all will be well.............ohhhhmmmmmmmmmmmmmmmmm...


Urban Redneck's picture

They didn't sell the gold right before the price got smashed, the news hit the wire right before the price got smashed, but the news was relating to the portfolio changes in previous reporting period.

TheEdelman's picture

Maybe the UFO encounter did something to Fonz.  It was $375M and they supposedly reinvested in gold futures and emerging equities.  Just the stuff Kyle likes.  

Not betting on a resignation.  Same ole Hayman Capital investors pep rally presentation at SIC last week.

Lets recap Gold shall we?

Einhorn – Yes

Klarman – Yes

Bass – Yes

Singer – Yes

Gross – Yes

Druckenmiller – No

Grantham - No

Rosenberg – Undecided

fonzannoon's picture

"It was $375M and they supposedly reinvested in gold futures and emerging equities. Just the stuff Kyle likes."

I was off by 3 hundred billion plus originally and could not edit my response. What is another 25 bil between friends.

Yes, They did buy gold futures. According to the last month on here, that was one hell of a risk. I hope it was worth it for them.

TheEdelman's picture

hehe all good.  its all funy money at this point anyway

kito's picture

that funny money still pays the mortgage, the rent, the car lease, the groceries, and everything else you need to subsist............everybody is so smug about how its all funny money........no problem.....send me whatever dollars you dont want.....................

TheEdelman's picture

well well well.....fonzs muscle arrives.  

With context... in a blog post about billionaires:

Funny money to the privileged... this exludes ZH and its entourage.  But we knew that. 

But youre right.  Now that I retype that phrase.  It does sort of bug doesnt it?

fonzannoon's picture

LOL I don't need muscle, at this point you all can just ignore me and I will end up arguing with myself.

Randall Cabot's picture

Man, this Einhorn dude is sharp as a tack

Bay of Pigs's picture

Some of the gold "experts" really seem to have no clue either (in this case below, Doug Caseys guy). It is surprising and somewhat embarrassing they haven't followed the facts that Chris Powell of GATA has compiled over the last 15 years. These are indisputable facts, straight from the mouth of Central Bankers themselves.


fonzannoon's picture

Throw Schiff in there as well, and I love the guy. I still agree with his overall prediction but boy have these guys all gotten it wrong constantly saying it will go higher every single time they speak.

kito's picture

your kids go on club penguin???? 

THE DORK OF CORK's picture

Its simple ...........most of Europe bar Germany , France and the UK have run out of cash flow.


Maybe somebody somewhere  took advantage of the weakness but the weakness is easily seen.


If you consider CBs as private banks who loaned out gold during (causing) the boom then they seem prepared to cause a depression in rich gold areas such as Italy so as to get the stuff back.


Italy was a big economy at one time.............

It was bigger then the UK.

Now not so much.

Add in Iberia , Greece , Ireland.....etc etc and you can flush out a serious amount of gold from private hands.

All you need to do is destroy their business and therefore cash flow........


Then just sit back and wait.


PS - just imagine

Every man woman & child in Ireland has 10,000 ~ euros less in his pocket then in 2007

Thats 10,000 euros every fucking year.

Add that up with all the other euro economies in a similar deflation and you are talking about serious anti money.


The banking system has complete control of the money supply.

It can play with people like rag dolls.


The physical economy has no meaning to them other then a short & long term mechanism  of extraction.


One must only keep changing the rules.

DoChenRollingBearing's picture

Those are terrible losses.  Ireland has suffered mightily, and yet you never read about it (in the USA anyway).

THE DORK OF CORK's picture

Its locked within the Irish national accounts  , I will try to get it.

But Gross national income was 37,000+ euro in 2007.

In 2011 it was 28,000+  


It depends on what population they use etc etc.

But  it was probably 27,000 ~ in 2012.

q99x2's picture

Be patient unless you are going to die tomorrow buy more. Be happy.