David Einhorn Warns: Value Investing May Never Recover
David Einhorn’s Greenlight Capital enjoyed a robust return of 36.6% net in 2022, significantly outperforming the S&P 500’s 18.1% plunge. Since its inception in May 1996, Greenlight Capital has returned 2,358.3% for an annualized return of 12.8% net. Over the same timeframe, the S&P 500 gained 864% for an annualized return of 8.9%.
Value investing may never recover
In their 2022 year-end letter to investors, the Greenlight Capital team said the year was their best ever in many ways, drawing comparisons between 2022 and 2001. The last technology bubble popped in 2001, but the market didn’t bottom out until 2009.
The team noted that the “enormous bull market” that persisted between 2009 and the market’s top toward the end of 2021 culminated in a “massive bubble,” especially in the most speculative stocks. They feel most investors during this timeframe either never included valuation in their investment process or ceased to include it.
On one hand, Einhorn’s team warned that value investing probably won’t ever recover from the “debilitating” outflows that shifted to passive or other strategies. However, on the other, they feel the greatly reduced amount of competition for value stocks will give their strategy a boost.
Einhorn’s team believes their unwillingness to take the risks most other investors dove into enabled them to outperform in 2022. As a result, they questioned whether the risks that drove significant outperformance for many investors during the bull run were worth taking.
MORE FOR YOU
In 2022, Greenlight Capital’s long positions returned 2.4% with 30.2% alpha, while its shorts returned 30% with 15% alpha. The fund’s index hedges gained 5% while losing 0.1% alpha, while its macro positions gained 5.7% with 5.8% alpha.
2022 was the best year for the macro portfolio, with the two significant winners being interest rates and inflation swaps. The fund had bet that the Federal Reserve would tighten more than the market had expected. It had also wagered that a combination of reported inflation and expectations would rise more than expected.
New position: Tenet Healthcare THC
Although Einhorn’s team believes we’re in the middle of a bear market, Greenlight established a new medium-sized long position in Tenet Healthcare during the fourth quarter. The company operates hospitals and ambulatory surgery centers.
Over the last few years, Tenet has grown and shifted its business mix toward its higher-margin outpatient surgeries, enabling it to generate significant cash flows that Greenlight believes are sustainable. In 2022, the company cut its guidance due to COVID and inflationary headwinds, sending its shares plunging by more than 50% through late October.
The fund believes that pullback presented an attractive opportunity to tap into Tenet’s transformation. They expect its growth in ambulatory surgery centers to remain strong as its reduced hospital portfolio improves in both costs and volumes.
Einhorn purchased its Tenet shares between late December and early January at an average price of $48.61, or 8.7 times the company’s 2023 consensus estimates. The company recently announced its plan and started to repurchase about 20% of its outstanding shares by the end of 2024.
Green Brick Partners
Green Brick Partners and Danimer Scientific were Greenlight’s only two significant losing positions on the long side. Green Brick generated robust operating results in 2022, although the challenging forward-looking macro outlook caused by higher interest rates more than offset those results.
Greenlight expects the company to earn $6.02 per share when all the results for 2022 are in, versus the estimate of $4.29 per share at the beginning of the year. However, Einhorn’s team noted that the 2023 estimates have declined from $4.62 to $3.17 per share, which sent Green Brick shares plummeting.
They expect the stock to do better this year after the market decides the estimates have sufficiently priced in the slowing housing market. At that point, the Einhorn believes the focus will shift to determining the correct multiple for Green Brick on trough earnings. They feel the company is well-positioned as a low-cost operator in demographically attractive markets.
Greenlight Capital has written about Danimer Scientific off and on for several quarters. In 2021, the fund shifted most of its position from the company’s common shares to its convertible bonds, but later in 2022, it added to its stock position. Unfortunately, Danimer Scientific’s bonds and stock both had a terrible year.
On one hand, the Greenlight team admits Danimer Scientific is a cash-burning technology SPAC. As a result, it’s not surprising that the company’s securities have plummeted alongside those of other unprofitable technology SPACs.
However, the fund remains convinced that Danimer Scientific has a viable product and should remain solvent. They pointed out that the company’s converts are trading below 40% of par, and its market cap has plunged below $200 million. Thus, there is a lot of optionality if the thesis ends up being correct.
Big winners in 2022
The big winners on the long side in 2022 were Atlas Air Worldwide, CONSOL Energy, Rheinmetall, Teck Resources, Twitter and the privately held Siltstone Capital.
CONSOL Energy rode the soaring coal prices from $22.71 to $65 per share and paid $2.05 per share in dividends. The company ended the year with no net debt. In 2023, the fund’s management expects CONSOL to see much higher earnings and significant free cash flow, most of which may be returned to shareholders.
David’s private holding, Siltstone Capital, offers vehicles that invest in Utica and Marcellus shale mineral rights. The fund enjoyed sizable gains from those holdings via royalties spurred higher by the 46% increase in 2022-2026 average Henry Hub natural gas prices and an improved outlook for drilling activity.
Meanwhile, Tech benefited from higher metallurgical coal prices and expectations of its new copper mine coming online toward the end of 2022. The stock rose from $28.82 to $37.82 per share. Teck’s 2022 earnings are expected to come in at $7.15 per share, much higher than the $4.68 per share estimated at the beginning of the year.
Rheinmetall benefited from the broad-based re-rating of defense stocks following Russia’s invasion of Ukraine. David sold the shares in 2022 after a sizable gain. The firm also exited Atlas Air Worldwide after it agreed to be sold to a private equity consortium.
Finally, Elon Musk closed his acquisition of Twitter at $54.20 per share, as Einhorn’s team had predicted, taking the company private. Twitter was the fund’s third-largest contributor in 2022.
Finally, the team outlined their long-standing bubble-basket short strategy, which boosted their 2022 returns significantly. They define bubble stocks as those that could fall at least 80% and still not look cheap to them. The fund’s goal to short speculative stocks just as the bubble appears to have popped.
While the fund has maintained its bubble-basket strategy off and on since 2014, it initiated its fifth such basket in January 2022, when it shifted from cautious to bearish. Greenlight included 31 stocks in its basket with a 6% combined short position in 2022. The basket remains in place. As of the end of 2022, 12 of the stocks had plunged at least 50%, and only one was positive, with a 23% gain.
David also maintains its short of the components of an actively managed ETF of so-called “innovation” stocks. The fund’s management thought the ETF’s components shared similar characteristics with the names they included in their bubble baskets. The fund shorted this basket in early 2021 and later ramped the position to 9% of capital. The basket has plummeted 76% since the fund’s initial entry.
Bonds See 2023 Recession, Stocks Aren’t So Sure
The yield curve is one of the most robust recession predictors and has signaled a recession may be coming since mid 2022. In contrast, U.S. stocks as measured by the S&P 500 are up materially from the lows of last October and only just below year-to-date highs, seemingly rejecting recession fears. Yet, fixed income markets see the Fed potentially cutting rates by the summer, perhaps reacting to a U.S. recession.
The Evidence From The Bond Markets
The recessionary evidence, at least from fixed income markets, is mounting. The 10 yield Treasury yield has been below the 2 year yield consistently since last July. That is is called an inverted yield curve and has signaled a recession fairly reliably when compared to other leading indicators.
Building on that, fixed income markets see almost a nine in ten chance that the Federal Reserve cuts rates by September of this year. That’s something the Fed has repeatedly said they won’t do on their current forecasts. Yet, a recession could cause it to happen.
The Stock Market
In contrast, the stock market shows some optimism. The S&P 500 is up 7% year-to-date as the market has shrugged off fears of contagion from recent banking issues. In particular, tech stocks have rallied.
In contrast, more defensive sectors such as healthcare, utilities and consumer goods have lagged in 2023. This suggests that the stock market is taking more of a ‘risk on’ position and is perhaps less worried about the economy.
MORE FOR YOU
That said the stock market is a leading indicator of the business cycle, it may be that stocks see a recession, but are now looking past it to growth ahead and are factoring in the lower discount rates that a recession might bring as interest rates decline. Also, the U.S. stock market is relatively global, so the fate of the U.S. economy is a key factor in driving profits, but not the only one.
Monitoring unemployment data will be key. Though the yield curve is a good long-term forecaster of recessions it is less precise in signaling when a recession starts. Unemployment rates can offer more accurate recession timing. Unemployment edged up in February, suggesting a recession may be near, but we’ve also seen monthly noise unemployment. Two similar monthly unemployment spikes during 2022 both proved false alarms.
However, if we see a sustained move up in unemployment from the low levels of 2022 that may be a relatively clear sign that a recession is here. Economist Claudia Sahm estimates that a sustained 0.5% increase in unemployment rate from 12-month lows is sufficient to trigger a recession. Unemployment rose 0.2% from January to February 2023, so maybe we’re on the way there. Of course, the jobs market performed better than expected in 2022 and it could do so again. Still, fixed income markets do suggest a 2023 recession is coming. Stock markets don’t necessarily share that view.
Which States Have The Highest And Lowest Life Expectancies?
There’s a wide variance of life expectancies among the 50 states in the U.S., according to a recent report prepared by Assurance, an insurance technology platform that helps consumers with decisions related to insurance and financial well-being.
Figure 1 below shows the 10 states with the highest life expectancy, starting with Hawaii, the state with the highest life expectancy.
Figure 2 below shows the 10 states with the lowest life expectancy, starting with Mississippi, the state with the lowest life expectancy.
Assurance scoured life expectancy data prepared in January 2023 by the U.S. Centers for Disease Control and Prevention (CDC). With this data, Assurance created several easy-to-understand graphics that offer information about life expectancies.
Life expectancies are a basic measure of well-being
As measured by the CDC, life expectancies are a basic measurement of well-being in a broad population and not a prediction of how long an individual might live. The CDC measures the expected lifespan for a person born in the year of measurement. This measurement is calculated based on the assumption that the individual will live and die according to the rates of death that are prevalent in the measurement year for each age. There’s no assumed improvement or backsliding in the assumed mortality rates in future years for each age in the life expectancy calculation.
MORE FOR YOU
By contrast, an estimated lifespan for an individual would consider their current age, their gender, and some basic lifestyle information. It might also attempt to project future improvements or backsliding in mortality rates based on key factors.
Significant influences on life expectancy calculations
Leading causes of death in the U.S. are heart disease, cancer, and accidents in that order. These immediate causes are significantly influenced by factors in the population such as poverty rates, educational attainment, rates of obesity and smoking, access to healthcare, prevalence of violent crime, and the support people receive from federal, state, and local governments. All these factors can vary widely among different states, which can be a key reason why life expectancies vary by state.
When you think about it, all these factors also have the potential to influence a person’s quality of life. The measured life expectancy rate rolls up all these factors into one objective measurement of well-being that’s based on population data.
In addition to the factors listed above, mortality rates increased and life expectancies decreased in the past few years due to the Covid-19 pandemic. A recent article titled “Live Free And Die” summarized recent research results that show that life expectancies in most countries around the world rebounded after the Covid-19 pandemic but that they continued to decline in the United States. Many of the reasons cited in the article for the continued decline in U.S. life expectancies are the same or similar to the factors listed above.
Why should retirees care about the life expectancies reported here if these measures don’t predict your own lifespan? Life expectancy calculations indicate the general well-being of the entire population in your area. While the living conditions in your area can influence your own lifespan and quality of life, retirees should focus on their remaining life expectancy given their age. They should also consider how the factors listed above that influence life expectancies in the population might apply to them.
You can obtain customized estimates of your remaining life expectancy at the Actuaries Longevity Illustrator. Part of your planning for retirement is understanding how long you an an individual might live, instead of relying on generalized information about larger populations you see in the media.
IRS Dirty Dozen Campaign Warns Taxpayers To Avoid Offer In Compromise ‘Mills’
Owing taxes can be stressful. Unfortunately, the actions of some companies can make it worse. As part of its “Dirty Dozen” campaign, the IRS has renewed a warning about so-called Offer in Compromise “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar—while the companies collective excessive fees.
The “Dirty Dozen” is an annual list of common scams taxpayers may encounter. Many of these schemes peak during tax filing season as people prepare their returns or hire someone to help with their taxes. The schemes put taxpayers and tax professionals at risk of losing money, personal information, data, and more.
(You can read about other schemes on the list this year—including aggressive ERC grabs here, phishing/smishing scams here and charitable ploys here.)
Tax Debt Resolution Schemes
“Too often, we see some unscrupulous promoters mislead taxpayers into thinking they can magically get rid of a tax debt,” said IRS Commissioner Danny Werfel.
“This is a legitimate IRS program, but there are specific requirements for people to qualify. People desperate for help can make a costly mistake if they clearly don’t qualify for the program. Before using an aggressive promoter, we encourage people to review readily available IRS resources to help resolve a tax debt on their own without facing hefty fees.”
MORE FOR YOU
Offers In Compromise
Legitimate is a key word. Offers in Compromise are an important program to help people who can’t pay to settle their federal tax debts. But, as the IRS notes, these “mills” can aggressively promote Offers in Compromise—OIC—in misleading ways to people who don’t meet the qualifications, frequently costing taxpayers thousands of dollars.
An OIC allows you to resolve your tax obligations for less than the total amount you owe. You generally submit an OIC because you don’t believe you owe the tax, you can’t pay the tax, or exceptional circumstances exist.
Because of the nature of the OIC—and the dollars involved—the process can be time-consuming. It can also be confusing for taxpayers who may not have a complete grasp on their finances.
First, you must complete a detailed application, Form 656, Offer in Compromise. You must also submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses, with supporting documentation (generally, bank and brokerage statements and proof of expenses).
You’ll also need to submit a non-refundable fee of $205 and payment made in good faith. The payment is typically 20% of the offer amount for a lump sum cash offer or the first month’s payment for those made over time. Generally, initial payments will not be returned but will be applied to your tax debt if your offer is not accepted. Payments and fees may be waived if the OIC is submitted based solely on the premise that you do not owe the tax or if your total monthly income falls at or below income levels based on the Department of Health and Human Services (DHSS) poverty guidelines.
The IRS will examine your application and decide whether to accept it based on many things, including the total amount due and the time remaining to collect under the statute of limitations. The IRS will also review your income—including future earnings and accounts receivables—and your reasonable expenses, as determined by their formula. The IRS will also consider the amount of equity you have in assets that you own—this would include real property, personal property (like automobiles), and bank accounts.
Before your offer can be considered, you must be compliant. That means you must have filed all your tax returns and paid off any liabilities not subject to the OIC. After you submit your offer, you must continue to timely file your tax returns, and pay all required tax, including estimated tax payments. If you don’t, the IRS will return your offer.
Additionally, you cannot currently be in an open bankruptcy proceeding, and you must resolve any open audit or outstanding innocent spouse claim issues before you submit an offer.
You can probably tell—it’s a lot to consider. You may want representation. A tax professional can help marshal you through the process and offer practical guidance, while communicating what fees could look like.
By contrast, according to the IRS, an OIC “mill” will usually make outlandish claims, frequently in radio and TV ads, about how they can settle a person’s tax debt for cheap. Also telling: the fees tend to be significant in exchange for very little work.
Those mills also knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing taxpayers money and time. You can check your eligibility for free using the IRS’s Offer in Compromise Pre-Qualifier tool.
“Pennies On A Dollar”
What about those promises that taxpayers can routinely settle for pennies on a dollar? Not true. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full through an installment agreement or equity in assets, including your home. That’s why the IRS tends to reject a majority of OICs that are submitted. The acceptance rate is less than 1 in 3, according to the 2021 Data Book.
The IRS will generally approve an OIC when the amount offered represents the best opportunity for the IRS to collect the debt. It’s true that there’s a formula that the IRS uses to figure out how much they think they can collect from you. But there is some wiggle room to account for special circumstances, including a loss of income or a medical condition. It’s worth noting those are the exceptions, not the rule.
While submitting an OIC may keep the IRS from calling you, it doesn’t stop all collections activities—don’t believe companies that suggest that submitting an OIC will make your tax debt disappear. Penalties and interest will continue to accrue on your outstanding tax liability. Additionally, the IRS may keep your tax refund, including interest, through the date the IRS accepts your OIC.
You may also be liened. In most cases, the IRS will file a Notice of Federal Tax Lien to protect their interests, and the lien will generally stay in place until your tax obligation is satisfied.
An OIC is a serious effort to resolve tax debt and shouldn’t be taken lightly. Be skeptical—if it sounds too good to be true, it likely is. If you’re considering an OIC, hire a competent tax professional who understands the rules and is willing to level with you about your chances of being successful—including other options. Don’t fall into a trap that can make your situation worse.
Interviews1 year ago
Interview with Jean-Francois Desormeaux, Real Estate Investor
Technology6 months ago
Amplio helps companies find components when supply chain breaks down
Business News1 year ago
NFTMagazine.com Is Bringing NFTMag Conference 2022 to Miami this Year Says JetSetFly
Technology9 months ago
General Atlantic buys out SoftBank’s 15% stake in edtech Kahoot, now valued at about $152M vs the $215M SoftBank ponied up 2 years ago
Interviews1 year ago
Paying it Forward — Meet Dr. Jonathan Kenigson, the Founder of the World’s Leading Think-Tank in the Quadrivium
Interviews6 months ago
Interview with Justice Mitchell, A 16-year-old Student-Athlete Who Received a Basketball Scholarship Offer from Pennsylvania University Greater Allegheny
Entrepreneurship2 years ago
600% In Under 5 Years, Financial Advisors Grow Business By Podcasting And YouTube
Entrepreneurship1 year ago
Muminovic Benjamin E-commerce on Shopify the Course of the Business Man