David Einhorn Trims Short Positions

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May 02, 2011
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David Einhorn recently released his investor letter and he devoted a lot of ink to his short positions. Greenlight Capital had negative returns last quarter of -2.5%. The fund greatly underperformed the S&P because of the short positions Einhorn used to hedge the portfolio.

“All news is good news” was also true for individual stocks, including a number of our shorts.

We expect to take some lumps when our shorts release strong earnings and their stock prices

rise accordingly. Yet, this quarter we were repeatedly confuzzled when we read company

news announcements that we expected to cause falling stock prices, only to see them rise

instead – and sometimes sharply at that. Nonetheless, we believe that this environment is

cyclical, and that it will continue this way… until it doesn’t."

Einhorn reported that he has exited most of his short positions in this "silly" environment.

"We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above)."

Einhorn also expressed bewilderment that some of his energy-technology shorts performed poorly.

"We expect both energy-technology shorts to dramatically miss earnings forecasts this year.

Unfortunately, both stocks spiked higher in response to the Japanese nuclear disaster, on the

assumption that bad news in nuclear is good news for other competing, though less efficient,

alternative energy products."

One would have to assume that Einhorn shorted solar technology companies such as First Solar (FSLR, Financial) or Suntech Power (STP).

Last week, oil company TOTAL bought 60% of Sunpower (SPWRA) for $1.38 billion which was a 40% premium. Surely, this buyout caused the alternative energy shortsellers severe pain.

Another famous short seller, Jim Chanos made the following comments about First Solar in an interview with CNBC:

"It still costs almost three times a kilowatt hour for solar power than regular natural gas or coal fired power. That’s number one. You can’t use it for base load. Solar stocks all rallied on the Japanese nuclear problem. Wind and solar may one day be there but they cannot do base load and you need still core power plants."

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