David Einhorn: View on Gold Not Changed; Profits off Yen Short

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David Einhorn spoke on the Greenlight Capital Re, Ltd. (NYSE:GRLE) call this morning about the re-insurers’ positions, returns and macro views. The fund has returned 8 percent as reported earlier in Greenlight Capital’s Q2 letter. Additionally, despite the decrease in gold, which we reported earlier,  David Einhorn made clear on the call that he is still bullish on the precious metal. David Einhorn believes that with a more unstable macro environment, a Chinese slowdown and a continuation of QE, gold could still be headed higher. Below are David Einhorn’s remarks from the call this morning.

David Einhorn: View on Gold Not Changed; Profits off Yen Short

David Einhorn Greenlight Capital Re, Ltd. (NYSE:GRLE) conference call

The Greenlight Re investment portfolio returned 2% in the second quarter, which brings the 2013 net return to 7.9%. Our longs outperformed the market as gains from many positions outweighed losses from Apple and the gold miners. Our shorts performed in line with the market, and macro was a slight contributor as gains on our Yen put position roughly offset our loss in our gold position in the quarter. During the gold sell-off in the quarter, we sold a small amount of gold to take advantage of opportunities in gold mining stocks that were in free fall.

Overall, we modestly increased our exposure to this area, and our view towards gold has not changed. The market has continued a relentless climb higher, despite year-over-year earnings growth in the low single digits. The increase in stock prices seems driven by a more stable environment and the perception of supportive monetary policy. In the face of a challenging earnings backdrop, a Chinese slowdown, and the continuation of emergency policies, we believe the market’s rapid advance is creating a potentially unstable condition, which could resolve in a number of ways and is difficult to predict.

We decided to proactively lower both our long and short exposures to better position us to withstand volatility and take advantage of new opportunities. Accordingly, we reduced our gross exposure 17% during the month of May. So, through this portfolio reduction exercise we eliminated a large number of long and short positions. During the sell-off in the month of June we found a few new long opportunities, and ended the quarter 105% long and 62% short. Our top contributors in the quarter were long positions that benefited from strong business performance.

General Motors’s North American business continues to improve, even as it is still in the early stages of a substantial product refresh cycle. With the recent launch of the new pickup trucks, we believe GM is poised for rapid earnings growth later this year. Marvell Technology Group announced a good first quarter result and has gained share in its core storage controller business, and demonstrated substantial new product wins in mobile handsets and tablets.

Aetna Inc (NYSE:AET) and CIGNA Corporation (NYSE:CI) posted strong first quarter results based upon improving medical trend and both raised guidance for full year 2013. We continue to hold the positions that cost us the most in the quarter. Apple Inc. (NASDAQ:AAPL) announced that it will return $100 billion to shareholders over the next three years through dividends and share repurchases. This represents a 9% annual return of capital to shareholders, and many companies with similar shareholder friendly capital allocation strategies are currently rewarded with a higher multiple in the market.

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), the biggest loser on the short side continues to face challenging business fundamentals as it reported disappointing sales in the first quarter, lowered its revenue forecast and faces increased competition since the K-Cup patent expiration last September. In addition, brewer sales were down year-over-year for the first time, which is a sign that it is approaching saturation of the single-serve at home market.

The underwriting team continues to perform well during the soft environment. Our business development efforts seem to be paying off, though we continue to tread carefully and wait for better opportunities. We have made several hires and are pleased with our staffing levels that we may make a few additional hires in the second half of the year.

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