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Qlet2013-04.pdf

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  • pg 1
									                                                                                                       January 21, 2014


Dear Partner:
 
The Greenlight Capital funds (the “Partnerships”) returned 6.5%,1 net of fees and expenses, in
the fourth quarter of 2013, bringing the full year net return to 19.1%. Since inception in May
1996, Greenlight Capital, L.P. has returned 2,211% cumulatively or 19.5% annualized, both net
of fees and expenses.

The long, short and macro portfolios contributed 10.4%, 4.0% and 0.7% of alpha respectively to
the gross annual return of the Partnerships; market beta added an additional 10.4%. We do not
expect to keep pace with a straight up market, and we didn't – the S&P 500 index soared another
10% in the fourth quarter to end the year up 32.4%.

The parabolic rise of a growing number of market-leading story stocks created a challenging
environment for value investors. Speculators have momentarily accepted the ruse that, for these
visionary companies, profitability would be a mistake. Eventually, the market will remember that
having a disruptive product that customers will happily buy if sold near cost is not the same as
having a valuable business. Philosophically, since we would not expect to be long these high-
fliers, the best we can hope to do is not be short them at the wrong time. For the most part, we
weren’t.

For the quarter, our longs modestly outperformed the S&P 500, our shorts went up less than the
index, and macro (led by the yen) was a slight contributor. The big winners (alphabetically) were
Apple, General Motors, Marvell, Micron and the yen. The big losers were Chipotle and U.S.
Steel.

                                    Notable Quarterly Winners and Losers

Stock                         L/S 9/30 Price     12/31 Price                            Comments
Apple                        Long $476.75        $561.02     Shares continued their recovery as Apple launched new
                                                             products to a positive reception. Earnings estimates have
                                                             changed direction and are now rising.
General Motors               Long     $35.97      $40.87     Earnings stabilized and the U.S. government sold its
                                                             remaining stock, eliminating a large overhang.
Marvell Technology Group     Long     $11.50      $14.38     Quarterly results were a “Beat and Raise” as the company
                                                             continues to gain share in a variety of popular wireless devices.
Micron Technology            Long     $17.47      $21.75     A new position (described below).
Yen                         Macro     ¥98.35      ¥105.30    No sign of tapering in Japan. The main tool of “Abenomics”
                            Short                            appears to be a weak yen. So, it is weakening.




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
Page 2


Stock                     L/S 9/30 Price   12/31 Price                             Comments
Chipotle Mexican Grill   Short $428.80     $532.78     Chipotle spent a little more on advertising and got a little boost
                                                       in sales, but not enough to cover the cost of the extra ads and
                                                       food inflation. Though this led to a “Miss and Lower” for
                                                       earnings, the market focused on the marginally better sales.
U.S. Steel               Short   $20.59     $29.50     Steel prices in North America were higher than elsewhere due
                                                       to some mill outages and decent demand. Imports have thus far
                                                       remained modest, primarily because the importers did not
                                                       believe the high prices would last.


We added several new long ideas to the portfolio including a large position in Micron
Technology (MU) and medium-sized positions in BP plc (BP) and Anadarko Petroleum (APC).

MU is a manufacturer of semiconductor memory chips (DRAM and NAND flash). This isn’t our
first go-round with MU; it was a large short position from January 2001 to February 2005. Back
then, DRAM was a lousy industry with too many competitors selling an undifferentiated product,
often below cost. In the first quarter of 2001 when the shares were trading in the low $40s we
wrote:

         MU is valued at 6.5x current run-rate revenues and, today, generates no profits.
         In its best year ever (fiscal 2000), MU recorded $2.52 per share of earnings,
         making the current price 17x the peak earnings of a cyclical, commodity
         manufacturer. In the previous two years, MU lost money.

At the time, the valuation was kept aloft by the hopes and dreams of sell-side analysts. In our
next letter we shared the following anecdote:

         In an exchange of e-mails with a leading sell-side analyst who recommends
         purchase of MU with a $70 per share target, we solicited his justification for the
         current $24 billion market capitalization (let alone the $40 billion suggested by
         his target.)

         Our analyst friend explained he tried to use cyclical valuation methodologies to
         come up with a rationale for buying the stock but failed because such an
         approach suggests “the stock should trade in the teens.” However, he maintains,
         should we have a good pricing environment next year, “people will treat the stock
         the same way [as they have] and take it much higher than they should.” Lest we
         be unclear about his raison d’être, he added he “could just perennially stamp an
         underperform on MU because he can’t justify the $24 billion, but that would be
         boring.” He need not worry; we are fans of boring.

This sort of unchecked cheerleading among sell-side analysts is by no means gone. Today, they
spin different fables to justify otherwise inexplicable valuations for the latest flavor-of-the-month
stocks. As for MU, a decade of poor results exposed every flaw in the business and killed any
love for the stock. The sell-side groupthink has reversed: the mostly bearish analysts now contort
themselves to justify earnings estimates that are too low, price targets that are too pessimistic,
and stock ratings that are too negative.




                                                                                                    GREENLIGHT®
Page 3



We established a position in MU at an average price of $16.49, marking the first time we have
taken a long position in a company in which we once had a material short position. The industry
has changed and so has MU. Its purchase of Elpida Memory out of bankruptcy in August 2013
marks the end of a decade of consolidation from roughly a dozen major DRAM players down to
just three. Technological advances and locked-up intellectual property have made it unlikely that
any new players will enter the industry in the intermediate term.

MU and its competitors have signaled that they will refrain from adding capacity and will instead
prioritize economic value-add. For the first time in memory, MU intends to use its excess cash
flow to shrink the outstanding share count rather than build new factories. We believe the
company will approach $4 per share of earnings and free cash flow in calendar 2014, and should
enjoy a better multiple as investors begin to appreciate the new dynamic. The shares ended the
quarter at $21.75.

We established a position in BP at an average price of $47.39. The Deepwater Horizon oil spill
was nearly four years ago. Since then, investors have focused on the ensuing legal cases
regarding clean-up and restitution efforts, while overlooking BP’s improved return on capital in
its core businesses. Allowing for more negative legal outcomes than BP has currently
provisioned, we believe the company’s net asset value (NAV) is nearly $70 per share. It can
therefore create substantial value by selling assets at or above NAV and using the income to
repurchase stock at a significant discount. This is exactly what BP has been doing. Further, BP
has restricted capital expenditures and increased dividends – all evidence of a more shareholder-
friendly approach. As the legal issues subside, we expect the market to appreciate BP’s portfolio
value and its improved capital allocation. In the meantime, we own an industry leader at 9x
earnings with a 5% dividend yield. BP shares ended the quarter at $48.61.

APC is a global exploration and production company with a high-quality upstream portfolio
comprised of U.S. onshore resources, deep-water Gulf of Mexico assets, and interests in other
high-potential oil and gas basins around the world. The company also owns 91% of Western Gas
Equity Partners (WGP), a publicly traded master limited partnership created in 2012 to hold
APC’s limited and general partner interests in Western Gas Partners (WES).

In mid-December the company suffered a legal setback stemming from its 2006 acquisition of oil
and gas assets from Kerr-McGee, whose titanium dioxide unit went bankrupt. With APC facing
potential damages of $14 billion or $5 billion, investors dumped the shares, which we then
acquired at an average cost of $78.55. Assuming a worst-case legal outcome, APC’s core
valuation net of its stake in WGP and its interest in an undeveloped, but valuable prospect in
Mozambique, is less than 4x EBITDA. This is cheap compared to peers that lack APC’s valuable
upstream assets and exciting exploration prospects, but nonetheless trade at higher valuations.
Our legal analysis suggests that the ultimate payment is likely to be the lesser of the two amounts
and will be partly tax deductible. APC shares ended the quarter at $79.32.

We closed out positions in Airbus Group, formerly known as the European Aeronautic Defence
& Space Company (France: EADS), and ThyssenKrupp (Germany: TKA).




                                                                                   GREENLIGHT®
Page 4



We bought the shares in EADS during a sell-off in response to the company’s unpopular
proposal to buy BAE Systems in 2012. EADS ultimately abandoned the merger and instead
repurchased a lot of stock while also reorganizing its corporate structure to reduce the influence
of several government shareholders. The shares rallied and we sold for a nice gain. We also
bought TKA shares in 2012. Though management made significant progress in restructuring the
company, a difficult external environment meant that asset sales and cash flow generation fell
short of their hopes and ours. We exited with a very small loss.

On the organizational front, we added Amanda Armstrong as an executive assistant. Amanda
joins us from the fashion industry and has a bachelor’s degree from the University of Vermont.
We believe that in addition to her office management experience, Amanda’s sartorial expertise
will raise the caliber of our Annual Partner Dinner Tie Selection Committee. Welcome Amanda!

Jaime Lester joins Greenlight as a research analyst. Jaime spent the past nine years managing
Soundpost Partners. He has an MBA from Columbia and an AB in Applied Mathematics and
Economics from Harvard. Though his official start date wasn’t until January, Jaime opted to
begin his tenure early and join us at our annual getaway in December where he was gracious
enough not to steal anyone’s thunder on the basketball court. Welcome Jaime!

Most of our operations staff has relocated from the north side of our office on the 24th floor to
our new space on the 23rd floor. When you come for a visit, Justin would be happy to give you a
tour. The new digs are so nice that the staff upstairs wants their floor updated to match.

Henry ‘Hank the Tank’ Lepone was born October 20, 2013 to Justin and Erin. Henry’s arrival
added 1% to the global population of people with the last name Lepone. Justin proudly points out
that the 0-6 New York Giants went 7-3 after Henry entered the world. We expect you will find it
more interesting that the Partnerships made a third of the annual return since then.

Finally, Alexis returned from her winter getaway married. That’s the first surprise wedding at
Greenlight … ever. Congratulations to Alexis and Rob!

At quarter-end, the largest disclosed long positions in the Partnerships were Apple, General
Motors, Marvell Technology Group, Micron Technology and Vodafone Group. The Partnerships
had an average exposure of 125% long and 70% short.


             “I did three things yesterday! Now I’m supposed to keep doing things?
                                  It’s like the things never end!”

                                                                — Allie Brosh

Best Regards,



Greenlight Capital, Inc.




                                                                                  GREENLIGHT®
Page 5


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. GREENLIGHT® and
GREENLIGHT CAPITAL, INC. with the star logo are registered trademarks of Greenlight Capital, Inc. or affiliated
companies in the United States, European Union and other countries worldwide. All other 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.

Unless otherwise noted, performance returns reflect the dollar-weighted average total returns, net of fees and
expenses, for an IPO eligible partner for Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight
Capital Offshore, Ltd., Greenlight Capital Offshore Qualified, Ltd., and the dollar series returns of Greenlight
Capital (Gold), L.P. and Greenlight Capital Offshore (Gold), Ltd. (collectively, the “Partnerships”). Each
Partnership’s returns are net of the standard 20% incentive allocation.

Alpha and beta contributions are calculated on the gross annual returns of the Partnerships and do not reflect the
deduction of management fees, incentive allocation, and other fund expenses. An investor’s actual net returns are
reduced by the management fee, incentive allocation, and other fund expenses.

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 on a monthly basis pursuant to the confidential offering memorandum for
a partner who invested at inception.

Performance returns are estimated pending the year-end audit. Past performance is not indicative of future results.
Actual returns may differ from the returns presented. Each partner will receive individual returns from the
Partnerships’ administrator. Reference to an index does not imply that the Partnerships 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 is calculated on a delta adjusted basis and excludes macro positions, which consist of
credit default swaps, sovereign debt, foreign currency positions, interest rate derivatives and others. Weightings,
exposure, attribution and performance contribution information reflects estimates of the weighted average of
Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore, Ltd., Greenlight Capital
Offshore Qualified, Ltd., Greenlight Capital (Gold), L.P., and Greenlight Capital Offshore (Gold), Ltd. 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 Partnerships.

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.




                                                                                                       GREENLIGHT®

								
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