David Einhorn Is "Adding More Shorts", Has A Question For Mario Draghi

Tyler Durden's picture

In his latest letter David Einhorn first of all proceeds to unload on the epic accounting gimmick that was GE's $16 billion charge, which to the Greenlight manager is confirmation of how the industrial conglomerate was cooking its books for years:

GE’s staggering $16 billion after-tax charge will drain another 5-7% from the S&P 500 quarterly earnings. Given that GE is exiting these portfolios after several years of economic and valuation recoveries and still has to take an enormous loss, the gigacharge adds clarity to the multi-decade debate about the integrity of GE’s reported results. That GE chose to exit and finally own up to its cumulative chicanery rather than face its first Fed-supervised stress test is one of the first real successes of Dodd-Frank.

... but more importantly notes that the time to lower exposure has arrived, and is precisely what he has done: "During the quarter, we reduced our net exposure from 30% to 14%. This move was driven both from the bottom-up and the top-down."

Why? Two reasons:

Bottom-up: Short candidates are easy to find, but as noted above, the opportunity set on the long side is quite constrained. Most of the investment theses we have reviewed over the past several months can at best be described as late-cycle opportunities, with valuations that often ignore historical economic sensitivity. The operating (and in some cases activist) execution needed to achieve target results has to be rated at Triple Lindy difficulty level.


Top-down: Valuations are on the high side and earnings are in a precarious spot. Last year’s snow slowed the entire economy, setting up the first quarter to be the easiest comparison quarter of the year. It nonetheless hasn’t turned out to be a good quarter (despite this year’s snow confining itself mostly to New England). At year-end, first quarter earnings were supposed to grow about 5%, but now, they are expected to decline by a similar amount, and this doesn’t even include GE’s large, anticipated first-quarter charge as it exits most of GE Capital.


The full year S&P earnings outlook is even worse, as the comparisons become more challenging.

As a result not only is Einhorn lowering his net exposure, he is also adding shorts:

At the bottom of the cycle, firms cut labor faster than output. The higher productivity led to improving margins, earnings and stock prices. Now labor is being added faster than output, and with large companies like McDonalds, Walmart and Target announcing pay increases, unit labor costs are likely to increase further. All told, there is a good chance earnings will actually shrink this year. We think the market is too high if earnings have, in fact, peaked for the cycle, and we have reduced our net exposure by adding more shorts.

The only good news for bulls is that according to Einhorn at least stocks are not all in a bubble, just a few.

The bull case is that equities haven’t yet reached bubble levels at a time when fixed income is behaving bubbly, and that the Fed will support the market. As to the former, it may prove true. We don’t like the proposition of betting on a bubble, though one may yet emerge (or, more clearly, a bubble might expand beyond the current small group of high flying stocks). As to the latter, despite all the attention paid to every utterance of any member of the FOMC, it is clear that the Fed isn’t going to add further accommodation unless conditions deteriorate substantially. How fast it tightens should be less important than the fact that it will tighten.

Finally, we echo Einhorn's question to Draghi and we hope that someone in the next ECB press conference will ask it, assuming of course Draghi doesn't have any more close encounter of the confetti kind:

Mario Draghi says he sees no sign of a bubble in the sovereign debt market, which raises the question: what does Mr. Draghi think a bubble in sovereign debt might look like that isn’t already evident?

Perhaps for the right answer Draghi needs to consult with the Fed's bubblebusters first, and specifically Stan Fischer committee on "avoiding asset bubbles" because clearly German 10Years at 0.07% and 53% of all global government debt trading below 1% is not it.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Haus-Targaryen's picture

Dear Mario Draghi -

Today I took a sizeable short position on the EUR vs AG. It's already covered. Please fuck yourself with a cattle prod.

All the best,

The Ancient House Targaryen

golden torch's picture
golden torch (not verified) Haus-Targaryen Apr 20, 2015 10:22 PM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

BullyBearish's picture

"Slowly at first, then all at once"

q99x2's picture

Guys an idiot. Hasn't he heard of BTFD.

Snoopy the Economist's picture

BTFD works until it doesn't anymore. He's betting we are close to the end. Many signals are showing but I still think it's a bit early. But GE could top here - many equities have experienced bear markets already.

dcohen's picture

If you have a reasonable stop, then BTFD may last for many decades, or even several hundreds of years. Never underestimate the length at which psychopaths go at pleasing their sadistic urges.

TruthInSunshine's picture

Stawk markets in U.S. have been trading in narrow band for 4 months and are about to shit the bed.

China's economy is about to go into serious, deep contraction.

Japan is a corpse on a ventilator.

The riots have only just begun In PIIGS land.

Anyone who doesn't see this as the best opportunity to bet big & bet correctly on the IMpotence of central banks to preserve the status quo, let alone blow the bubble bigger, is missing the consumer/aggregate demand/illiquidity for the trees.

See you all on the other side. Hold tight.

kaiserhoff's picture

Amen Brother,

  and check you seat belt;)

dcohen's picture

The range will be likely broken to the upside though.

A massive repricing will not happen so long people are shorting, but at a near consensus that we are in a "new" kind of economic era, an electronic and modern era where central counter measures have made the old days of busts and booms obsolete.

It is very likely, that such a deeply disseminated paradigm change, across the board, will be a serious sign that things may crack seriously.

Before that it is hardly likely the powers to be will let any undermining forces get hold - and they are still very much in control, no matter how much we whine.

The_Dude's picture

More appropriately....doesn't he understand how a printing press works?

CPL's picture

Why would he care, it's not his money.  It's everyone else's savings they loan to him to manage, in turn they issue bonds which are in turn sold to other financial companies and brokerages and then again placed into other pension funds.  Which in turn are then issued as stock and bonds to other companies, insurance issuers and yet again more pension funds under fancy titles.  Like dominoes in a line.  Only one needs to get knocked down and Lehman happens again and yes, with all the heavy deregulation that happened to make TARP happen.  It's now no longer just one company run by cludgefisted morons.  It's all of them.

And yes, of course they'll print.  But by the time it's all said and done, we'll all see the Buffet's and Gate's of the world eating cat food out of the can with a stick.  Hobo Bill and Wild-eye Willy sitting there huffing paint thinking about the days when they enjoyed things like real food and a roof not made of cardboard.  More than likely...like at the end of all empires, it'll be one too many bounced cheques of their own security staff that end them.  Or someone does something stupid to validate themselves.  Because that's how it always happens.

Not some times either.  Everytime.  This time is no exception. 

People are still just as mentally retarded as they have been.  The exception is this time there are 20000 nuclear weapons wired via legacy Darpanet systems to the internet.  Most of which are wired to dead man switches with exceptionaly well designed failsafe systems tied to millions of external probes world wide.  What's sad is some how the idea of automating home building isn't nearly as important as automating advanced weapon systems.  Kind fo underlines the priorities of the savages that live here.  The worrying thing, most of the original engineers dead and gone that actually know how to dismantle it,  In the meanwhile their great works remain in silos tucked away that hum with 'the light' for at least an 8000 year half life.

Should be interesting to see how empires are built with ashes when some pissant warlord doesn't get their cut of cake.  But at least they'll be rich when it happens.  Since that seems to be a concern for people...staying rich and in control.  At the cost of everything.  Don't even have to launch 20000 missles to do severe damage.  Just detonate 10% of the total payloads in the silos themselves.  The wind, rain and water will take care of the rest.  Might as well, fukishima doesn't seem to be a concern, might as well finish the job of killing a planet.  Over money...that will never mean anything after some one does something retarded.  Because they always do historically.

Rainman's picture

Me personal favorite GE accounting gimmick story was the hidden locomotives.


kaiserhoff's picture

As a black colonel I worked with liked to say:

Never steal less than a billion dollars.

Callz d Ballz's picture

Sadly, Draghi and the CB circle jerks will eat Eihorn's shorts for lunch.

MATA HAIRY's picture

dude is an imposter--his real name is Finkle.

SheepDog-One's picture

Finkle is Einhorn! Einhorn IS Finkle!!

Equality 7-25-1's picture

Finkle is Draghi. Einhorn is Michael. The dolphin is Hillary.

buzzsaw99's picture

didn't i see einhorn at the bubbles bernanke luncheon the other day? guess he wasn't paying attention bitchez?

disabledvet's picture

Yes, well...we all await the mighty heroic rate increases from, well...anybody.

Until then keep expecting liquidity to arrive in the form of blood for oil.