In his latest Greenlight Q3 2023 Letter, David Einhorn says he’s on a ‘buyers strike’ amid the current extreme levels of geopolitical tension which will lead to lower stock prices. At that point, he intends to be positioned to buy beaten-down stocks and some truly distressed debt, should the opportunity present itself. Here’s an excerpt from the letter:
In early August, we developed a macro thesis that long-term interest rates would continue rising and as a result the stock market would fall.
We observed at the time that the derivatives markets implied that stocks and treasury bond prices would continue to exhibit their typical negative correlation. However, we believed that this correlation was reversing and implemented a position consistent with our thinking. As stocks and bonds both fell, we made multiples on our investment.
GRBK fell from $56.80 to $41.51 during the quarter. The company announced second quarter earnings of $1.63 per share, which far exceeded consensus estimates of $1.18 per share. Full-year estimates for 2023 and 2024 rose from $5.16 and $5.54 to $6.13 and $6.49, respectively. However, the market has become concerned about the impact of higher mortgage rates, and most homebuilding stocks reversed a portion of the gains achieved earlier this year.
We are effectively on a “buyers’ strike” again and did not establish any material long positions during the quarter. It’s a tricky time and we remain worried about the direction of the market. We have reduced our gross exposure from 191% to 160% in order to enable us to deploy capital into new ideas, when we eventually decide to take a more positive view… which brings us to geopolitics.
There is an old joke: A newscaster reports, ‘The Russians launched ICBMs at America this morning, causing the stock market to plunge, but it rebounded sharply in the afternoon on a rumor that the Fed might cut the discount rate.’
Investors have been conditioned to ignore geopolitical risk.
When Russia invaded Ukraine, the S&P 500 opened down about 2.4%. That was enough selling, as it finished the day up 1.5% and advanced another 2.2% the following day. After the Hamas terrorist attack in October, the S&P 500 opened down 0.5%, but finished up 0.6% before tacking on another 1.0% over the next two trading days.
Apparently, these days geopolitical risk presents itself as a small overnight sell-off creating an immediate buying opportunity.
You can read the entire letter here:
Greenlight Capital Letter Q3 2023
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