In his first-quarter letter to investors of Greenlight Capital, David Einhorn lashed out at regulators. He claimed that the market is “fractured and possibly in the process of breaking completely”, as exemplified by trading in GameStop and Hometown International.
Q1 2021 hedge fund letters, conferences and more
Einhorn claimed that many market participants and policymakers have effectively succeeded in "defunding the regulators." He pointed to the actions of billionaires Elon Musk and Chamath Palihapitiya, whose actions earlier this year, helped fuel the Reddit rally in stocks, according to the value investor.
"We note that the real jet fuel on the GME squeeze came from Chamath Palihapitiya and Elon Musk," Einhorn wrote. "Whose appearances on TV and Twitter, respectively, at a critical moment further destabilized the situation.
Greenlight's letter went on to add:
"Mr. Palihapitiya controls SoFi, which competes with Robinhood and left us with the impression that by destabilizing GME he could harm a competitor. As for Mr. Musk, we are going to defend him, half-heartedly. If regulators wanted Elon Musk to stop manipulating stocks, they should have done so with more than a light slap on the wrist when they accused him of manipulating Tesla's shares in 2018. The laws don't apply to him and he can do whatever he wants."
The letter claimed that investors could get away with these actions because there is "no cop on the beat."
Companies and management that are "emboldened enough to engage in malfeasance have little to fear."
Hometown International Shows The Market Is Fractured
To reinforce his point, Einhorn highlighted two other situations that have recently occurred.
The first related to a small-cap company, which appears to have little to no revenues, but yet is worth $113 million:
"Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey. The deli had $21,772 in sales in 2019 and only $13,976 in 2020, as it was closed due to COVID from March to September. HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing. Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators – who are supposed to be protecting investors - appear to be neither present nor curious. From a traditional perspective, the market is fractured and possibly in the process of breaking completely."
The bizarre case of Hometown extends beyond the company's market capitalization and lack of sales. Its chairman is Peter Coker Jr., who holds no shares in the business but has been a chairman of South Shore Holdings Limited, a Hong Kong-listed company, since 2013, according to Hometown's annual report. He was also the managing partner of Pacific Advisers, and a partner of TDR Capital Investment Ltd. Coker was a partner at Shenzhen-based TDR capital from 2009 till 2013.
Hometown International Inc. (OTCMKTS:HWIN)'s major shareholders include several other Hong Kong and China-based businesses. One Macau-based company, VCH Limited, entered into a Consulting Agreement with Hometown in May 2020. According to the company's own findings, VCH received $25,000 a month under the terms of the agreement.
Hometown International paid out $320,000 and $170,000 in consulting and professional fees respectively for the year ended 31 December 2020. Against the $13,976 in revenues for the year, this pushed the company to an overall net loss of $631,356.
Compared to the company's other expenditures, these consulting fees appear outlandish. In comparison, labor costs totaled $126 last year. Food and beverage costs were $10,124.
To fund this cash outflow, the company raised $2.5 million from issuing common stock during the year.
Another recent example of the lack of regulation in the market Greenlight's letter highlighted was the investigation of Tether by the Office of the Attorney General of New York.
Tether is one of the largest cryptocurrencies, with about $40 billion outstanding, and its value is supposed to be tied to the dollar. Each Tether is supposed to have $1 of cash backing the cryptocurrency. But when it was investigated, it didn't.
The Office of the Attorney General investigated for two years and found that "Tether deceived clients and the market by overstating reserves and hiding approximately $850 million of losses around the globe."
Did anyone get arrested or lose their job, the letter asked? "Of course not." Tether was fined $18.5 million and had to agree to stop trading with New Yorkers.
This relatively small punishment was "as if Bernie Madoff had been told to pay a small fine and stop ripping off New Yorkers, but to go ahead and have fun with the Palm Beach crowd," Einhorn summarized.
This article first appeared on ValueWalk Premium
