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2011-Q3 Greenlight

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                                                                                                                November 7, 2011


                    Dear Partner:

                    Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital




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                    Offshore (collectively, the “Partnerships”) returned (1.2)%, (0.6)% and (0.8)%1 net of fees
                    and expenses, respectively, in the third quarter of 2011, bringing the respective year to date
                    net returns to (6.2)%, (5.6)% and (6.1)%.1

                    The quarterly letter is a little bit later than usual as we spent the window in which we
                    usually write the letter (the couple of weeks between the end of the quarter and the




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                    beginning of earnings season) preparing a presentation for the Value Investing Congress.
                    This year, David presented the thesis behind our Green Mountain Coffee Roasters
                    (GMCR) short position.

                    After our presentation, one of the largest GMCR shareholders sent us a Keurig coffee
      tf            brewer and ten K-cup boxes of coffee straight from the warehouse. Not only did we
                    appreciate the gesture, it was nice of them to assist in our field research, as the majority of
                    the K-cups were too close to expiration to be sold through normal retail channels.

                    The PowerPoint slide-show that supported David’s speech has been widely disseminated,
                    and we believe that it is contributing to the conversation about GMCR. The reaction from
                    the press has been better than our previous experiences, as the attention has focused on the
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                    merits of the argument (without the personal attacks that often follow these sorts of
                    presentations). We can’t say the same for the sell-side analysts.

                    KeyBanc Capital Markets’ analyst offered a more nuanced response than the title of their
                    report would suggest (“A New Credible Source, but the Same Old Short Thesis”), but
                    Mitchell Pinheiro of Janney Capital Markets wrote, “There is not a single argument that
                    Einhorn presented today that couldn’t have been made or wasn’t made a year ago when the
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                    stock was at $30 per share.” We disagree. Much of our analysis is dedicated to things that
                    have happened in the last year.

                    For example, we haven’t seen others question whether GMCR has inflated its March 2011
                    quarterly results by burying operating expenses from the Van Houtte acquisition into
                    goodwill. Though aspects of the recent Starbucks deal with GMCR have been questioned
                    previously, we have not seen anyone dissect the economics of the deal. And while
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                    consumers across the web have repeatedly pointed out the high cost of K-cups compared to
                    traditional alternatives, analysts seem to have ignored this. But we think two of the bigger
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                    1
                        Source: Greenlight. Please refer to information contained in the disclosures at the end of the letter.


                         2 Gr and Cen tr a l Tower 140 East 45 t h S tr e e t, 2 4 t h F lo o r N ew York , NY 10017
                              Phon e: 212-973-1900 Fax 212-973-9219 www.gr een ligh tcap ital. com
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  issues we raised are the accounting issues stemming from GMCR’s capital spending and
  the relationship with the company’s key fulfillment partner, M. Block & Sons.

  GMCR spent $350 million to expand its operations in 2011 and plans to spend twice that
  in 2012. It costs about $20 million to create enough manufacturing capacity to roast and
  package 1 billion K-cups a year. GMCR needs to expand capacity by a few billion K-cups
  a year, which may explain perhaps $100 million of annual spending. So where did GMCR
  spend the balance of the $350 million in 2011 and where does it plan to spend the balance
  of $700 million in 2012? If it can’t be explained, it raises the question: where is the




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  money going?

  The part of the presentation that has garnered substantial attention is the field research
  section. Here, we reported on the results of recent interviews we conducted with former
  workers of GMCR and M. Block & Sons, who offered consistent reports of recent apparent




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  misconduct. While most of the sell-side has largely ignored this topic, SunTrust Robinson
  Humphrey (whose banking arm, along with Janney Capital Markets, has received
  significant fees from underwriting GMCR offerings) came out with the following: “This is
  not new ‘field research.’ Instead, it was lifted from a deposition in a year old shareholder
  lawsuit.” The analyst, Bill Chappell told Forbes, “If you look, there’s no quote, there’s no
  M. Block employee talking about 2010 or 2011. It all has to do with 2009, of which
  they’ve since restated their numbers and scrubbed their numbers… It’s not new field
      tf
  research. It’s all taken from a class action lawsuit that has publicly been out there for six
  months. You’d have to ask him why he didn’t find anything new this year.” Mr. Chappell
  didn’t ask us himself and apparently he didn’t look very hard because the presentation is
  replete with quotes about 2011 and explains that our field research only began with what
  we learned in the class action lawsuit.
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  It is perhaps GMCR’s non-response that has been most surprising. It has remained silent
  since our presentation, citing a self-imposed, artificial ‘quiet period’ before it announces
  earnings, which are scheduled to be released shortly. It will be interesting to see whether
  and how management plans to address the serious questions we have raised.

  It has been an eventful third quarter. While the market had a broad decline with a lot of
  volatility, our conservatively positioned portfolio essentially went sideways with much
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  lower volatility. Generally, our longs fell a bit more than the market, but our shorts fell
  even more and our macro investments helped mitigate the loss from being net long in a
  declining market.

  The biggest winner was the energy-technology short that spiked in the first quarter, gave
  back the gain in the second quarter and fell precipitously in the third quarter. Our gold
  investment was the second largest winner as the price advanced from $1,499 to $1,624 an
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  ounce. During the quarter we exchanged a portion of our gold position for additional
  investment in the Market Vectors Gold Miners ETF (GDX). While the price of gold has
  advanced significantly, the shares of gold miners have not. It has reached the point where
  gold mining stocks should do well even in a stable gold market; we expect the price of
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  gold to appreciate further, so gold miners should do even better. Even with the reduction,
  physical gold continues to be our largest portfolio holding.

  The biggest loser in the quarter was Arkema (France: AKE), whose shares fell from !70.99
  to !44.00, as the market discounted the earnings of cyclical companies. Generally, we had
  minimal long cyclical exposure heading into the quarter, as we had sold Vicat, Lanxess
  and nearly half of our AKE stake. Nonetheless, we kept some AKE as the valuation
  appeared reasonable even at the top. We believe that the recent decline is more than
  overdone and have repurchased a portion of the shares we had sold.




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  Sprint (S) shares fell from $5.39 to $3.04 in the quarter. First the company announced a
  disappointing quarterly result, driven by increased phone subsidies in an effort to achieve
  its targeted level of customers. From there, management went into an investor relations
  meltdown, hosting an investor day where S presented a capex-driven funding requirement




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  over the next two years that was greater than it had previously communicated, and at the
  same time failed to explain how S would fund the additional investment. The company
  even managed to bungle the October announcement that it would finally offer the iPhone.
  Management is on the verge of losing the confidence of the financial markets. We believe
  the business opportunity and asset values remain sufficient to justify holding the shares,
  and we wouldn’t be surprised if shareholders begin to agitate for significant strategic
  change. Given the heavy need to invest, the S opportunity may be better pursued by a new
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  owner with a lower cost of capital.

  Delta Lloyd (Netherlands: DL) was the other significant loser during the quarter. The
  shares fell from !16.39 to !11.95 as the market sold all European financials, regardless of
  the actual exposure to the sovereign debt and banking crisis, to which DL does not have
  very much. We believe the business performed very well and that management is alert to
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  the crisis and has planned well for it.

  During the quarter, we established positions in CBS Corporation (CBS), General Motors
  Company (GM) and Marvell Technology Group Ltd. (MRVL).
  MarketFolly.com : Updates on the latest hedge fund activity
  CBS is a diversified multimedia company with businesses that include a top-rated TV
  network, digital content production, publishing and outdoor advertising. CBS stands to
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  benefit from growing retransmission fees (payments) by cable operators for the right to
  carry CBS stations. We believe this income stream could amount to several hundred
  million dollars of new earnings to CBS annually. The company has also been early and
  aggressive in pursuing high margin incremental deals with online video streaming services
  like Netflix to monetize its content library. CBS will also benefit from a broader recovery
  in advertising markets and what looks to be a big upcoming political cycle. CBS is
  repurchasing stock and has reduced debt. We established a position in CBS at an average
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  price of $20.79 per share, less than 10x our estimate of 2012 earnings. The shares ended
  the quarter at $20.38 each.

  GM is the largest auto manufacturer in the United States. After the business failed under
  its legacy high-cost structure during the recession, the U.S. government bailed out the
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  company and took over most of the ownership. Last November, GM completed an IPO of
  about 30% of its stock at $33 per share. The government continues to own about one-third
  of the company. After the IPO, the shares initially advanced to almost $40 before
  retreating. When the shares broke the IPO price, we determined that the shares were
  attractive, but only purchased a small position, believing that there might be a better
  opportunity later when the government exited the rest of its stock. Instead, during a weak
  third quarter where the market punished all cyclical stocks, the shares fell well below the
  price where we planned to add to our position. We decided that the shares were cheap
  enough that we were more than fully compensated for the possible overhang of the




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  government’s stake, and we established a position at an average price of $25.78 per share.

  GM is being priced by the market as a cyclical company trading at less than 6x this year’s
  earnings. While some may see it as normal to value cyclicals at low multiples of peak
  earnings, we believe that 2011 is not a peak and, in fact, is below mid-cycle. Prior to the




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  crisis, U.S. auto sales ran between 15 and 19 million units for many years. While sales
  have bounced from the recession low to about 13 million units, GM is poised to grow
  earnings from both a return to mid-cycle volumes, which we estimate to be 15 million
  units, and from a coming major refresh of its North American product portfolio. The
  market appears focused on GM’s “legacy liabilities.” However, the new GM does not
  have pension and healthcare liabilities that are likely to over-run the company. Instead,
  GM sits with $33 billion of gross cash which represents nearly its entire current market
      tf
  capitalization. We see potential for GM to begin to return capital to shareholders over the
  next year. While we are cognizant of the various investment risks that include near-term
  global economic weakness and the government ownership overhang, we think these
  concerns are more than priced in at current levels and see significant upside even if the
  U.S. experiences a very slow "new normal" type of economic recovery. The shares ended
  the quarter at $20.18 each.
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  MRVL designs semiconductors that serve as the brains of cell phones and hard disk drives.
  The Street is bearish because hard disk drives may eventually be replaced by flash memory
  (SSD, or “solid state drive”), and because MRVL’s largest cell phone customer has been
  Research In Motion (RIMM), a structural loser. In our view, hard disk drives show no sign
  of disappearing any time soon, and MRVL’s position in the SSD storage market is at least
  as strong as its position in the hard disk drive market. In cell phones, RIMM has already
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  declined sharply as a proportion of MRVL's sales, and MRVL has offset it with growth
  from new customers. Meanwhile, the shares are cheap at 6x our 2012 earnings estimate
  net of almost $4 per share in cash. We established our position in MRVL at an average
  price of $13.35 per share. We expect MRVL to buy back 12% of its stock this year, and
  still have about 30% of its market cap in cash. In short, this is a well-run company in
  structurally-defensible markets that is being valued as if it is neither. The shares ended the
  quarter at $14.53 each.
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  We exited several significant positions worth noting during the quarter.

  We exited Pfizer because much of our thesis played out and we became increasingly
  concerned about future reimbursement cuts for branded pharmaceuticals and the recent
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  disclosure of additional government investigations into its marketing practices. Over our
  two and a half year holding period, the investment generated a double-digit annualized
  return that modestly outperformed the market. We sold BP at a roughly break-even result
  in fear of falling energy prices and to make room for new opportunities, including those
  described above. We exited our profitable multi-year short in Amedisys. Reimbursement
  reductions, aggressive accounting and questionable business practices finally caught up
  with the company.

  Gaurav Sharma joined us at the end of August as an analyst. Prior to Greenlight, Gaurav




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  worked at Highbridge Capital Management in London. Of Indian descent, born and raised
  in Australia, formerly living in the U.K. and now residing in New York, Gaurav notes that
  he has no exposure to the sovereign debt of any of those nations. Welcome Gaurav! In
  addition, Dennis Loffredo, an Operations Analyst, left to pursue other endeavors. We
  thank him for his contributions and wish him well. Also, during the quarter we added




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  Credit Suisse to our roster of prime brokers.

  The Greenlight children continued to outpace the Greenlight staff with three new additions.
  Madelyn Offner was born in August, giving Mike another reason to stay up late at night in
  addition to researching value long-short hedge funds. Hey Mike, are Maddy’s initials a
  sign of the Red Sox envy of Mariano (“Mo”) Rivera? In October, Luke Christopher
  Lepone was born. Luke is already quite the talker and enjoys napping after power lunches.
      tf
  Sound like anyone that you know? Evelyn Mary Charecky came into the world in early
  November, arriving on her exact due date just like her brother Alex. Her punctual papa
  John is proud.

  Please mark your calendar for our Sixteenth Annual Partners’ Dinner, scheduled for
  Tuesday, January 17, 2012. The meeting will be held at the American Museum of Natural
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  History. We will be sending out formal invitations shortly.

  At quarter end, the largest disclosed long positions in the Partnerships were Apple, gold,
  Market Vectors Gold Miners, Microsoft and Vodafone Group. The Partnerships had an
  average exposure of 94% long and 55% short.
  Click here to read more hedge fund letters at MarketFolly.com
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                             “There’s no such thing as an easy two.”

                                                    -- Bernard King (NY Knicks legend)



  Best Regards,
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  Greenlight Capital, Inc.
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  The information contained herein reflects the opinions and projections of Greenlight
  Capital, Inc. and its affiliates (collectively “Greenlight”) as of the date of publication,
  which are subject to change without notice at any time subsequent to the date of issue.
  Greenlight does not represent that any opinion or projection will be realized. All
  information provided is for informational purposes only and should not be deemed as
  investment advice or a recommendation to purchase or sell any specific security. While
  the information presented herein is believed to be reliable, no representation or warranty is
  made concerning the accuracy of any data presented. All trade names, trademarks, and
  service marks herein are the property of their respective owners who retain all proprietary




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  rights over their use. This communication is confidential and may not be reproduced
  without prior written permission from Greenlight.

  Each Partnership’s performance returns reflect the total returns, net of fees and expenses,
  for an IPO eligible partner. The returns for Greenlight Capital, L.P. and Greenlight Capital




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  Qualified, L.P are net of the modified high-water mark incentive allocation of 10% and
  reflect the returns for partners who were invested on or prior to January 1, 2008. The
  returns for Greenlight Capital Offshore reflect our standard 20% incentive allocation.
  Performance returns for 2011 are estimated pending the year-end audit. Past performance
  is not indicative of future results. A partner’s actual returns may differ from the returns
  presented.
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  All exposure information excludes credit default swaps, gold, currency positions/ hedges
  and other macro positions. Positions reflected in this letter do not represent all the
  positions held, purchased, or sold by the Partnerships, and in the aggregate, the information
  may represent a small percentage of activity in the Partnerships. The information
  presented is intended to provide insight into the noteworthy events, in the sole opinion of
  Greenlight, affecting the Partnerships.
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  THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF
  AN OFFER TO BUY ANY INTERESTS IN GREENLIGHT CAPITAL OR ANY OF ITS
  AFFILIATES. SUCH AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
  BUY INTERESTS MAY ONLY BE MADE PURSUANT TO DEFINITIVE
  SUBSCRIPTION DOCUMENTS BETWEEN A FUND AND AN INVESTOR.
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