One of the funds that has just released its fourth-quarter letter to investors is billionaire David Einhorn‘s Greenlight Capital. Given that one of the main events of the last quarter was the election of Donald Trump, it’s not surprising that Greenlight provided its views regarding the Trump presidency and the impact it can have on the financial markets and individual companies. Overall, the fund considers that under Trump, we can see a reversal in policies, which “would be good for Main Street but rough on Wall Street”.
“While it’s hard to know exactly where President-elect Donald Trump stands from day to day, his main economic policy objective appears to be employment. To that end, he has proposed corporate tax cuts, infrastructure investment, and military build-up, combined with anti-emigration policies and trade protectionism,” Greenlight said.
Even though the implementation of these policies could help the economy to accelerate, a low unemployment rate of under 5% could also lead to a labor shortage, the fund added. This could lead to a tighter monetary policy, while an increase in interest rates from “ultra-low to merely low” would represent a fiscal stimulus because the higher interest payments to holders of government bonds and interest on overnight liabilities at the Fed will raise the deficit.
“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,” the letter said.
Aside from providing its macroeconomic view, Greenlight also mentioned its performance as well as provided some analysis on several of its holdings. In the fourth quarter, Greenlight returned 4.5% net of fees and expenses, which put its 2016 return at 8.4%, underperforming the S&P 500, which advanced by 12%. Since its inception in 1996, Greenlight’s annualized return stands at 16.1%. Overall, the fund’s long exposure contributed 19.9% to the gross return, while the short portfolio generated a loss of 11.7%. Having said that, let’s take a closer look at the fund’s comments regarding some of its long investments, such as Apple Inc. (NASDAQ:AAPL) and General Motors Company (NYSE:GM), as well as some short bets, which include Caterpillar Inc. (NYSE:CAT) and Netflix Inc. (NASDAQ:NFLX).
Greenlight considers that Apple Inc. (NASDAQ:AAPL), one of the most interesting companies in the world, should benefit from some policies that can be implemented under a Trump administration. More specifically, the tech giant could repatriate the over $200 billion in cash it has stashed overseas, while lower corporate tax rates could help Apple, which generates a significant part of its earnings from foreign sources, to have a lower GAAP tax rate. At the end of September, Greenlight held 5.19 million shares of Apple Inc. (NASDAQ:AAPL) worth $586.82 million and the company represented the largest holding in Greenlight’s last 13F filing.
Then there’s General Motors Company (NYSE:GM), which was Greenlight’s second-largest holding heading into the fourth quarter, with the fund having reported ownership of 17.0 million shares valued at $540.09 million. According to the letter, the fund “dramatically” increased its exposure to the company between October and December. The fund believes that a strengthening job market “will sustain the current upcycle and lead to better than expected credit performance at GM’s finance subsidiary.”
“GM’s valuation is extreme: at its year-end price of $34.84 per share, GM trades at less than 6x earnings. It is rare for a company to pay out only a quarter of its profits in dividends and still yield 4.4%,” the letter said.
Trump’s policies could also have a positive impact on General Motors Company (NYSE:GM). If Trump maintains his focus on employment, an increase in jobs combined with more income for savers and higher wages should increase the demand for consumer durables, including automobiles.
On the next page, we are going to present Greenlight’s short bets, as well as one long macro position.
Even though many investors view Caterpillar Inc. (NYSE:CAT) as an infrastructure-related stock because a company also produces equipment involved in infrastructure development, Greenlight considers that its post-election rally alongside some other “similar industrial cyclicals” was premature, because Caterpillar Inc. (NYSE:CAT)’s machines are not used only in infrastructure, but also in mining and energy, which are actually its largest segments.
“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. Even in a U.S. infrastructure boom, CAT is overpriced,” Greenlight said.
David Einhorn’s fund is also shorting a “bubble basket”, which mostly includes stocks that haven’t generated any profits and, therefore, are “unlikely to benefit from corporate tax cuts.” One of the stocks that is in the basket is Netflix, Inc. (NASDAQ:NFLX), because its domestic market has matured and the company risks in net neutrality rules. In addition, the company has not showed that its large bet on original content is paying off and Greenlight considers that it doesn’t.
“NFLX is able to report that its U.S. streaming segment is highly profitable only by allocating a disproportionate amount of content amortization to its smaller and unprofitable international streaming segment,” the letter added.
Greenlight also reiterated its position to short oil frackers (previously it mentioned that it is short Pioneer Natural Resources (NYSE:PXD)). Under a Trump administration, we are likely to see a “drill-baby-drill” attitude, which is “likely to lead to additional mal-investment”, which will result in lower oil prices and higher losses for frackers.
Finally, one commodity that Einhorn and his team are bullish on is gold. Due to the fact that the president-elect doesn’t seem to have any core policy beliefs and changes his mind as he sees fit, there might be more political and economic uncertainty under a Trump presidency. Moreover, more geopolitical, economical and policy uncertainties also contribute towards a bullish case for gold.
Disclosure: none
