David Einhorn reveals how he's trading the Trump presidency
Closely-followed hedge fund manager David Einhorn, the founder of Greenlight Capital, laid out how he’s preparing to profit from a Donald Trump presidency.
“Rather than look backward, we’d like to share our views of what a Trump Presidency (TP) might look like and why we believe we are well-positioned for 2017. In short, we believe that the post- Great Recession easy money policies have been good for Wall Street but bad for Main Street. It’s possible that the TP reverses these policies, which would be good for Main Street but rough on Wall Street,” Einhorn wrote in a letter dated January 17.
Einhorn continued: “While it’s hard to know exactly where President-elect Donald Trump stands from day to day, his main economic policy objective appears to be employment. To that end, he has proposed corporate tax cuts, infrastructure investment, and military build-up, combined with anti- immigration policies and trade protectionism. To the extent that he can implement these policies, the economy should accelerate, and given that we are starting with less than 5% unemployment, a labor shortage could develop.”
Einhorn, who has long been critical of the Federal Reserve’s ultra-easy monetary policy, expects that rates will go up and this will be good for growth.
“In response, monetary policy is poised to tighten. Conventional wisdom says this will slow growth, but we continue to disagree. Our Jelly Donut thesis on monetary policy contends that ultra-low interest rates deprive households (savers) of income to the point that the harm overwhelms any of the limited benefits. We believe that raising rates from, say, 0.5% to 2% would give needed income to savers without significantly impacting corporate investment decisions,” he wrote.
Einhorn’s “Jelly Donut” thesis, which he first introduced in a Huffington Post blog in 2012, essentially has to do with something being “too much of a good thing.” In other words, lower rates and quantitative easing were fine at first just like that initial donut tastes really, really good. But if you keep eating donut after donut after donut, or continuing to keep rates at or near zero for a long time, you’ll see a diminishing return.
“Further, rates rising from ultra-low to merely low would add a fiscal stimulus because the higher interest payments to holders of newly issued Treasuries and on overnight liabilities at the Fed will add to the deficit. In the near term, this stimulus combined with the benefit to savers will add fuel to an accelerating economy and a tightening job market,” he wrote in the new letter.
There’s also a risk of the economic expansion ending, he warned.
“Ultimately, wage inflation could become a drag on corporate profitability and higher inflation may force the Fed to raise rates substantially, potentially causing the next recession.”
Greenlight is preparing its portfolio by going long Apple (AAPL), which Einhorn sees benefitting from repatriation of foreign cash and tax reform. He’s also long General Motors (GM), which he expects will benefit from more jobs, higher income for savers, and higher wages that should drive demand for cars.
He’s also going long a “variety of long low-multiple, tax-paying US value stocks.” These are companies that will benefit from corporate tax cuts. He named AMERCO (UHAL), Dillard’s (DDS), and DSW (DSW) as examples.
Meanwhile, he’s short a so-called “bubble basket,” which are stocks that don’t really have profits and are therefore unlikely to benefit from corporate tax cuts. He’s also short the oil frackers on the notion that they’ll “sink cash into money-losing holes” with Trump’s “drill-baby-drill” attitude. He’s also betting against Caterpillar (CAT), noting that the company’s biggest segments are mining and energy and selling machines used for infrastructure are only a small part of the business.
Greenlight continues to own gold to protect against Trump changing his mind on core policy beliefs.
“Ultimately, we believe the case for gold is broader: greater economic, geopolitical and policy uncertainties, much wider budget deficits, and the possibility of an inflation problem all support gold (to say nothing of what might be required to redecorate the White House to Mr. Trump’s tastes).”
Greenlight ended 2016 up 8.4%, while the S&P 500 index gained 12%.
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Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.
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