David Einhorn Releases Q4 Investor Letter: Bearish on Bernanke

by: The Keating Letter

David Einhorn released Greenlight Capital’s Q4 letter on January 18, and it’s as entertaining and informative as usual. Einhorn’s musings are a must-read each quarter for his honest appraisal of the market and insightful comments on the individual positions that he holds. For a brief overview and link to the letter, click here.

For those not familiar with Einhorn, let me give you a brief background. He started Greenlight Capital in 1996 at age 28 with just a $1 million from friends and family. Since then, he has returned 21.5% annually after fees and expenses and now manages $6.8 billion. In addition to the hedge fund, he is the chairman of Greenlight Re (NASDAQ:GLRE), a reinsurance company that invests its float with Greenlight Capital. Greenlight Re has returned 28% to investors over the past year and is still reasonably priced at 1.1 times book.

He famously shorted Lehman Brothers before the crisis, and most recently went public with his short of St. Joe (NYSE:JOE), a real estate development company where another noted hedge fund manager, Bruce Berkowitz, holds a large stake.

On to the letter: Einhorn begins by railing against Ben Bernanke:

On August 27, 2010, Federal Reserve Bank Chairman Ben Bernanke gave a speech in Jackson Hole, Wyoming where he hinted that the Fed would provide additional monetary easing. At the time, the S&P 500 was down more than 3% for the year. From that point through the end of the year, the S&P rallied 19%. At the same time, oil prices rose 16%, copper prices rose 32%, coffee prices rose 34%, corn prices rose 43% and cotton prices rose 57%.

This inflation, which apparently isn't being picked up or respected by the Fed or Bernanke is the reason why Einhorn is holding a large gold position. I think there are better ways to play inflation than gold, because it's difficult to measure demand, but I agree with the inflation view. It's no coincidence that all of these commodities would jump during the same period. The price appreciation reflects the sopping up of liquidity, but it's not creating real growth.

Einhorn's largest disclosed longs are Arkema (OTCPK:ARKAY), Ensco (NYSE:ESV), gold, Pfizer (NYSE:PFE), and Vodafone Group (NASDAQ:VOD). He holds physical gold in a vault in Manhattan, not the ETF. In the last quarter he bought into BP (NYSE:BP) at an average price of $41.18/share. Some appreciation from that level has already occurred, but more is expected as they reinstate their dividend in early 2011. Another new position is Sprint (NYSE:S). Einhorn believes it’s a $10 stock using a DCF model, with the caveat that management must deliver. That’s a big if in my opinion, but with the stock in the low $4’s, there's a hefty margin of safety.

The big gains may have passed us by for ESV and BP, as well as the JOE short, but there are certainly a few other names mentioned that deserve a look. Sprint is trading at about the same price as when Einhorn bought in and, giving Einhorn the benefit of the doubt, it's worth a more detailed look. Just don't get seduced by CEO Dan Hesse's commercial appearances.

Disclosure: I am long GLRE, ESV.