Tuesday, May 19, 2009

Einhorn on the Economy

David Einhorn's comments on the market,from the GLRE conference call, are excerpted below:

...In the first quarter Greenlight Re’s investment portfolio had a better result than it did in the prior two quarters.

There are several factors that contributed to this. First, we enter 2009 with a very conservative posture, about 80% long and 40% short or about 40% net long. Although we are holding a good amount of cash, we became more concerned about the market as it sold off in January and became even more defensively positioned ending January at just 29% net long.

As things continue to dislocate through February, we used this as an opportunity to cover a number of short positions and entered the March slightly more a net long. We also added to our debt portfolio particularly in Ford Motor secured bank debt. At the beginning of the year our debt portfolio was about 12% of capital. We ended the quarter was about a 17% weighting in debt instruments.

Greenlight as always invested in debt instruments with that part of the corporate capital structures offered compelling unlevered returns. We started accumulating our debt portfolio in October of last year and have built our allocation in a patient fashion as markets begin further dislocated.


Our current debt portfolio is invested in US companies and we have been mindful of the liquidity in each of the issues of which we are invested.

In addition to moving up the corporate capital structure, we have also constructed a less concentrated portfolio and we have to start it. Although we have found many compelling investments that appear to be at bargain prices, this is temporary by the worst economy most of us have seen. It is very difficult to develop a high degree of confidence in corporate revenues in earnings even in well established profitable companies with conservative balance sheets.

So we have offset some of this idiosyncratic risk by holding a more diversified portfolio.


We continue to be cautious about the environment, especially in light of the market latest rally, and aren’t as convinces as some others to the government response to the prices to date will actually fix the problems in the economy. We think this take some time to play out as the normal forces of supply and demand exert themselves. We continue to be worried about monitory actions and the fiscal situation and continue holding some of our cash involved for the time being.

It's important to remember that Einhorn is speaking for GLRE and not for Greenlight Capital. (Though his thoughts in many cases will be the same, the nature of both investment vehicles can be expected at times to lead to different strategies.)

For the rest of the transcript, which Seeking Alpha provides free of charge, click here.

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