Once, it was only Alan Greenspan who commanded this kind of clout: the ability to simply hold up his hand, cause the financial markets to pause attentively, issue some cryptic or forthright thought (remember “irrational exuberance”) and step back to watch the madness follow as traders scrambled to position themselves according to what they thought the influential “Fed Head” had said or what they thought he meant. Jokes made the rounds about the market-moving potential of even his most offhand remarks: Someone, it’s said, bumps into Greenspan at a Kennedy Center performance, and asks how he’s feeling. Pause. “I’m not allowed to say,” Greenspan replies, deadpan.
Flash forward a decade or more, and we’ve got another financial guru with the ability to wreak utter havoc on markets – although in David Einhorn’s case, the impact seems to be more focused on a handful of carefully chosen stocks. Within seconds of the final syllable of the stock symbol “MLM” emerging from his mouth during his presentation last week at the annual Ira Sohn conference in Manhattan (a charitable event during which some of the most-watched hedge fund and other investment managers get 15 minutes or so to present their best long and short investment ideas to the audience), Einhorn had managed to erase some $300 million in market value from Martin Marietta Minerals.
That wasn’t all. A few moments later, Einhorn began heaping scorn on Amazon’s (AMZN) business model – or so it sounded to some of the avid live tweeters and live bloggers in the audience. The stock’s price immediately began to sink – only to bounce back when traders realized that while Einhorn had said he found the company’s financials “difficult to assess” given that its jump in revenue hasn’t been matched by an increase in profits, he hadn’t actually said he was shorting the stock. Whoops…
How on earth did a single hedge fund manager come to command market clout similar to that of a Federal Reserve chairman? Part of the explanation lies in Einhorn’s track record: He has generated an average return north of 30 percent since launching Greenlight Capital in 1996. He achieved a wider degree of fame by picking out the weaknesses in Lehman Brothers long before most other market participants. He bought gold in 2009, before the precious metal soared in value. At last year’s Sohn conference, he memorably roasted the business model of Green Mountain Coffee (GMCR). Since then, the company has seen two-thirds of its market value drip away, initially based solely on Einhorn’s comments and more recently on signs that those comments were prescient: Demand for its coffee brewers and K-cups does appear to be waning. Most recently, the company’s founder and its lead director – who is supposed to be a model of good governance – were hit with margin calls as the company’s share price has fallen, forcing them to sell shares against company guidelines. When the board found out, they removed most of their responsibilities from them and will deny them payment for their board services.
Another reason for Einhorn’s astonishing market impact is the nature of the market itself. After the impressive first-quarter rally, stock market investors are nervous. Corporate earnings are growing at an ever-slower pace, and the sovereign debt crisis, after lying dormant over the winter, is once again approaching meltdown levels. With nervousness and jitters at high levels, an investor offering certainty – and with a track record to back it up – is always going to command an even larger audience among traders, speculators and even long-term investors than he might otherwise. Since Einhorn closed Greenlight Capital to new investors several years ago, the only way to play along with this particular Master of the Universe is to try to follow in his footsteps as closely as possible, mimicking his every move.
The problem with this strategy is obvious, although it’s not likely to deter anyone who might be tempted to raid the garbage bags outside Greenlight’s offices in search of a stray piece of paper that might give fresh insight into Einhorn’s next target. By the time Einhorn is ready to discuss a short target, odds are that he has already established his full position, or even that the company’s stock is already rising or falling as he predicted. He has no vested interest in giving tips to the public, who he knows full well will react in exactly the knee-jerk fashion they did last week to any mention of a specific stock. After all, even his presence on a conference call with Herbalife (HLF) was enough to knock millions off the value of that stock earlier this year. When his presentation last week ended without a mention of that company as a target, traders said short-sellers who had been reading the tea-leaves and expecting him to “Einhorn” the stock as he had Green Mountain a year ago were forced to pay up to cover their bearish bets.
We’re all watching – and David Einhorn knows that we’re watching. That means that what we are seeing is the tip of the iceberg – titillating, but perhaps more dangerous than it appears. The stock-specific comments he made on a cluster of companies yesterday – he likes Apple (AAPL) , a Norwegian insurer and a North American resources play – may offer some fun, if volatile and risky trading opportunities for those with deep enough pockets and endless stocks of Pepto-Bismol.
More interesting, however, for more thoughtful investors are his bearish comments on France and China. Both countries are on the “most watched” list of nations by economists: France is in the spotlight as it tries to find a way to combine austerity with growth, while the hard vs. soft economic landing debate in China is one of those issues lurking in the background and likely to become more important than investors today may recognize on any given day. Thinking about what may be worrying Einhorn about both countries, and what kinds of trades he might be putting in place to reflect his views might end up being far more useful and potentially far more lucrative than chasing after the handful of stock-specific tips that he lets fall on occasion.