January 17, 2012
Dear Partner:
Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital Offshore
(collectively, the “Partnerships”) returned 9.7%, 8.8% and 8.5%1 net of fees and expenses,
respectively, in the fourth quarter of 2011, bringing the respective full year returns to 2.9%,
2.7% and 1.9%.1 Since inception in May 1996, Greenlight Capital, L.P. has returned 1,685%
cumulatively or 20% annualized, both net of fees and expenses.
To summarize the year: Never has so much work gone into making 2%. For all its ups and
downs, dramatic headlines, and extremely high daily volatility, the market ended the year just
about where it started. The S&P 500 index closed within a tenth of a point of its opening
price. Other developed equity markets did worse. Most European markets were down double
digits, the Japanese Nikkei index fell about 17%, and many emerging markets declined more
than 20%. While outperforming the S&P 500 has never been our goal, this is the 13th
consecutive year that we have done so, though this time by a trivial margin.
Throughout the year we found very few places to make money, but we likewise kept our
mistakes to a minimum. Our largest winner by far was our short of First Solar (FSLR), which
fell from $130.14 to $33.76 per share and was the worst performing stock in the S&P 500.
We also did well investing in various credit default swaps on European sovereign debt. For
the second year in a row, our biggest loss came from positions designed to capitalize on an
eventual weakening of the Yen. These positions cost us only slightly more than our position
in Sprint (S), which declined from $4.23 to $2.34 per share in 2011.
For the most part, our long portfolio went sideways. A raft of large holdings including
Arkema, Aspen Insurance, CareFusion, Delphi, Delta Lloyd, Ensco, Marvell Technology,
Microsoft, NCR, Pfizer (exited) and Travelers (exited) generally met or exceeded our
operating expectations, but combined to generate an insignificant return. Even Apple, with
sales and earnings growth of about 70%, saw its stock appreciate by just 25%. Perhaps the
old saw about “cheap stocks getting cheaper” applies. However, these are all good businesses
with good prospects. We believe that at some point the Partnerships will be better rewarded
for these holdings.
The global environment is very complicated. On the one hand, the Federal Reserve has taken
a much-needed break from quantitative easing (at least for the moment). Accordingly,
inflation in oil and food has abated, providing relief to the U.S. economy. Bearish forecasts
that the U.S. was headed back into recession proved wrong for the third time since the end of
the last recession.
1
Source: Greenlight Capital. Please refer to information contained in the disclosures at the end of the letter.
2 G rand Cen tr a l Tower 140 East 45 t h S tr e e t, 2 4 t h Floor N ew Yo rk, NY 10017
Phon e: 212-973-1900 Fax 212-973-9219 www.g reen ligh tcap ital. com
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On the other hand, Asia appears to be in much worse shape than it was at this time last year
and could be a drag on the world economy going forward. Very few people trust any of the
economic data coming out of China, making it difficult to gauge the situation there. Some of
the smartest people we know have very dim views. The Chinese have been a leading growth
engine for the last two decades and are largely credited with leading the world out of the
recession in 2009. A change in their economic circumstances could really upend things.
Finally, the European currency crisis has continued to worsen. The last year and a half has
been an endless repetition of the dynamic depicted below:
Crisis Deepens
Solution has Announcement
no substance of meeting to
or won’t work solve everything
(stocks fall) (stocks rise)
Announced solution Summit
(champagne party) (stocks peak)
The cycle looks like this: Time passes and the crisis deepens. Markets, eternal creatures of
habit, begin to reflect the ensuing fear. Then, just as things appear ready to unravel, there is a
reprieve, as red headlines race across the screen: “Sarkozy and Merkel to Meet at Deauville”,
“Obama Phones Cameron”, or "Christine Lagarde Waves From Bus”. The market jumps.
You'd think the media would quit falling for this charade, but having run out of clever
headlines to describe the impending doom — ‘Eurogeddon’ Really? — they herald every
briefing, meeting, assembly, and conference call.
The market embraces these announcements as eagerly as the media, behaving as if any and all
communication is equally constructive, and likely to yield a solution. The market continues
to rise until the day of that summit, as all ears await a Grand Communiqué. Within minutes
of any proclamation, the market may cheer with a final, celebratory spike. Upon evaluation
of the actual statement, it becomes clear that either nothing has truly been agreed upon, or that
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the plan is insufficient, impractical or just won’t work. The market sells off and the crisis
deepens some more. Lather. Rinse. Repeat.
Nonetheless, everyone is looking to these leaders for a solution. And it’s understandable that
speaking and meeting are necessary steps. Yet, despite the endless telephone calls and
summits, all we hear are repeated promises to “do whatever it takes,” which seems to include
everything except making the necessary sacrifices that might actually resolve the crisis.
The latest solution is a work-in-progress treaty being heavily negotiated that, in its current
incarnation, will only need to be ratified by a subset of the Eurozone countries. While the
leaders have committed in principle, there is significant risk that once the details emerge (and
the necessary electorates are consulted), we will discover that some leaders pledged with their
fingers crossed and, as with prior efforts, this too will fail to get the job done. 2012 may be
the year in which the currency crisis will no longer be kept at bay by politicians buying time
with empty promises. Maybe the fall of the Euro will be the 2012 catastrophe that the
Mayans predicted.
With these things in mind, our current strategy is to own cheap stocks of good businesses,
largely in the United States. We are more net long equities than we have been in some time,
as we believe that many stocks have reached a point where they are simply cheap enough to
own even if some trouble awaits us. We are prepared for problems in Asia by continuing to
speculate on a much weaker Yen. We have hedged the currency on our European equities,
and continue to believe that European sovereign bond prices will fall regardless of whether
the crisis is resolved through sovereign default or money printing. Finally, we continue to
hold gold and gold mining equities, reflecting our concerns that global fiscal and monetary
policies continue to tempt fate.
In the fourth quarter, the Partnerships made gains on both our long and short portfolios, as the
market rose and recovered most of its third quarter loss. While our shorts often fall prey to
“man-made” disasters, it was unusual to see one of our longs benefit from a natural disaster.
Floods in Thailand caused significant damage to many of Seagate’s (STX) competitors and
component suppliers. STX’s hard drive manufacturing facilities were relatively unharmed by
the flooding and the company has been able to capitalize on the resulting shortages, which has
led to a dramatic improvement in the company’s near-term prospects.
The short portfolio had two significant winners in the quarter: Green Mountain Coffee
Roasters (GMCR) and FSLR. GMCR fell after announcing disappointing quarterly results
that had been widely anticipated to beat expectations. The market also took little comfort in
GMCR’s failure to provide any substantive response to the questions we raised at the Value
Investing Congress, other than a blanket denial of wrongdoing. FSLR shares collapsed along
with solar panel prices. The Solyndra scandal also hurt the company, as the Department of
Energy denied FSLR some subsidies that had been baked into expectations. Ultimately,
FSLR changed management and dramatically cut guidance. The Partnerships had no material
losers during the fourth quarter.
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During the quarter, the Partnerships established a new position in Dell (DELL) and re-
established a position in Xerox (XRX).
DELL is a large seller of computer and technology products. We established our position at
an average price of $15.53. DELL is another example where the recent business performance
has exceeded the recent stock performance. While the computer business is mature, DELL
has broadened its offerings over the last few years, so that about half its sales and more than
half of its gross profits come from other products. DELL has roughly $7 per share in net cash
and investments and currently earns about $2 per share (up from $1.50 in 2010).
Accordingly, DELL’s P/E multiple is about 7x, and net of the cash and investments, it is less
than 4x. This reflects a valuation usually associated with collapsing businesses. We expect
DELL to continue to grow its earnings per share, albeit at a modest rate.
Over the years, DELL has done a miserable job of allocating capital. During the dot-com
heyday, when the P/E multiple was sky-high, DELL routinely plowed every available dollar
back into share repurchases. After the tech bubble burst and the P/E came down to earth, it
opted to hoard cash and pay fancy multiples to acquire growth. More recently it seems to
have figured out that buying back stock at nosebleed prices makes no sense, but share
repurchases at bargain prices can add real shareholder value. During the first three quarters of
2011, DELL repurchased 7.5% of the company and has the balance sheet to do much more.
DELL shares ended the year at $14.63 per share.
XRX is a document management provider that entered business process outsourcing when it
acquired Affiliated Computer Services (ACS) in February 2010. The combination allows
XRX to sell more value-added services to its current customers and apply XRX’s technology
to deliver ACS's services more cheaply. This is our second investment in XRX since the
acquisition. The first time, we bought with the stock price around $9.35, and sold with a
modest gain over concerns about XRX’s Japanese exposure after the earthquake. That issue
appeared fully discounted by the market during the fourth quarter when we re-established a
position at $7.61 per share, which is less than 8x estimated 2012 earnings. In the first nine
months of 2011, XRX signed a significant amount of new multi-year outsourcing services
contracts. XRX has been aggressively cutting costs within the legacy ACS organization.
Over the long-term, XRX is expecting over 6% revenue growth and 10-15% adjusted EPS
growth. XRX expects to spend $1.0-$1.4 billion on share repurchases in 2012, which should
make a good dent in the share count given its current equity capitalization of $11 billion.
XRX shares ended the year at $7.96 each.
We exited several significant positions during the quarter. We sold Becton Dickinson (BDX)
with a slight gain in response to disappointing guidance given with the release of the third
quarter earnings. We sold CVS because it had appreciated and we wished to redeploy the
capital into cheaper ideas. We sold Employers Holdings (EIG), a company that could simply
never execute over the nearly five years that we held the stock, at a break-even result.
Finally, we exited Travelers (TRV), with a double digit return, because the recent losses due
to various catastrophes have hampered its share repurchase program, causing us to cut our
forward earnings forecast. On the short side, we closed out our FSLR position. This was one
of the most profitable shorts in the history of the Partnerships. We also closed out our short of
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Diamond Foods (DMND) which, while small, was one of the fastest performing shorts in our
history.
Greenlight Capital, Inc. and its affiliates registered as investment advisers with the Securities
and Exchange Commission (SEC) effective as of January 4, 2012. Over the last six months
we have prepared for registration and we don’t foresee any operational changes. We have
promoted Sean Farrell to the role of Chief Compliance Officer. You can find the Form ADV
on the SEC’s website at www.adviserinfo.sec.gov.
We continue to be gold acquirers, in this case hiring Mitch Golden to be co-PM of Greenlight
Masters, our fund of funds. Mitch’s previous experience includes working in private equity at
Oak Hill Capital, and as an analyst at both RH Capital and most recently at Senator
Investment Group. Mitch earned an MBA from Wharton after undergraduate studies at
Stanford University. Welcome Mitch!
Emily Proctor has joined us as an Executive Assistant. Emily has a degree in Anthropology
from BYU and an M.A. in Women’s Studies from George Washington University and shares
her full name with a hiking trail in Vermont. The eponymous route runs for nearly 13 miles
through the Breadloaf Wilderness, and is rated strenuous by multiple trail guides. For a
shorter, easier hike, we suggest the David Einhorn Trail. Start at the pile of breadcrumbs in
the kitchen and follow the trail of spilled coffee all the way to David’s office. Welcome
Emily!
Our long-time Office Manager Camille Granato is retiring. For those of you who have been
with us since the early days, you might recall that Camille was once our entire operations and
administrative team. With our current operations staff of sixteen, we can almost replicate
Camille’s single-handed productivity and are reluctantly willing to let her retire. We wish her
the best and will miss her dearly!
At quarter end, the largest disclosed long positions in the Partnerships were Apple, General
Motors, gold, Market Vectors Gold Miners and Microsoft. The Partnerships had an average
exposure of 93% long and 53% short.
“The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.”
--Stephen Hawking
Best Regards,
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 rights over their use. This communication is confidential and may not be reproduced without prior
written permission from Greenlight.
Performance returns reflect the total returns, net of fees and expenses, for an IPO eligible partner. The 2011
returns for Greenlight Capital, L.P. and Greenlight Capital 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 2011 returns for Greenlight Capital Offshore reflect our standard 20% incentive allocation.
Performance returns for Greenlight Capital L.P. since inception reflect the total returns, net of fees and expenses,
for an IPO eligible partner and are net of either the modified high-water mark incentive allocation of 10% or the
standard 20% incentive allocation applied pursuant to the confidential offering memorandum on a monthly basis
for a partner who invested at inception.
Performance returns for 2011 are estimated pending the year-end audit. Past performance is not indicative of
future results. Actual returns may differ from the returns presented. Reference to an index does not imply that
the funds will achieve returns, volatility, or other results similar to the index. The total returns for the index do
not reflect the deduction of any fees or expenses which would reduce returns.
All exposure information excludes credit default swaps, gold, currency positions/hedges and other macro
positions. Weightings, exposure, attribution and performance contribution information reflects estimates of the
weighted average of Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., and Greenlight Capital
Offshore, and are the result of classifications and assumptions made in the sole judgment of Greenlight.
Positions reflected in this letter do not represent all the positions held, purchased, or sold, and in the aggregate,
the information may represent a small percentage of activity. The information presented is intended to provide
insight into the noteworthy events, in the sole opinion of Greenlight, affecting the portfolio.
THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY INTERESTS IN ANY FUND MANAGED BY GREENLIGHT 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.