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Green Light 2

Green Light 2

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Published by never4330

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Published by: never4330 on Jan 18, 2012
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12/27/2012

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 2 Grand Central Tower 
140 East 45
th
Street 24
th
Floor 
New York NY 10017
January 17, 2012Dear Partner:
Greenlight Capital, L.P., Greenlight Capital Qualified, L.P. and Greenlight Capital Offshore(collectively, the “Partnerships”) returned 9.7%, 8.8% and 8.5%
1
net of fees and expenses,respectively, in the fourth quarter of 2011, bringing the respective full year returns to 2.9%,2.7% and 1.9%.
1
Since inception in May 1996, Greenlight Capital, L.P. has returned 1,685%cumulatively or 20% annualized, both net of fees and expenses.To summarize the year: Never has so much work gone into making 2%. For all its ups anddowns, dramatic headlines, and extremely high daily volatility, the market ended the year justabout where it started. The S&P 500 index closed within a tenth of a point of its opening price. Other developed equity markets did worse. Most European markets were down doubledigits, the Japanese Nikkei index fell about 17%, and many emerging markets declined morethan 20%. While outperforming the S&P 500 has never been our goal, this is the 13
th
 consecutive year that we have done so, though this time by a trivial margin.Throughout the year we found very few places to make money, but we likewise kept our mistakes to a minimum. Our largest winner by far was our short of First Solar (FSLR), whichfell from $130.14 to $33.76 per share and was the worst performing stock in the S&P 500.We also did well investing in various credit default swaps on European sovereign debt. For the second year in a row, our biggest loss came from positions designed to capitalize on aneventual weakening of the Yen. These positions cost us only slightly more than our positionin Sprint (S), which declined from $4.23 to $2.34 per share in 2011.For the most part, our long portfolio went sideways. A raft of large holdings includingArkema, Aspen Insurance, CareFusion, Delphi, Delta Lloyd, Ensco, Marvell Technology,Microsoft, NCR, Pfizer (exited) and Travelers (exited) generally met or exceeded our operating expectations, but combined to generate an insignificant return. Even Apple, withsales and earnings growth of about 70%, saw its stock appreciate by just 25%. Perhaps theold saw about “cheap stocks getting cheaper” applies. However, these are all good businesseswith good prospects. We believe that at some point the Partnerships will be better rewardedfor these holdings.The global environment is very complicated. On the one hand, the Federal Reserve has takena much-needed break from quantitative easing (at least for the moment). Accordingly,inflation in oil and food has abated, providing relief to the U.S. economy. Bearish forecaststhat the U.S. was headed back into recession proved wrong for the third time since the end of the last recession.
1
 
Source: Greenlight Capital. Please refer to information contained in the disclosures at the end of the letter.
 
 On the other hand, Asia appears to be in much worse shape than it was at this time last year and could be a drag on the world economy going forward. Very few people trust any of theeconomic data coming out of China, making it difficult to gauge the situation there. Some of the smartest people we know have very dim views. The Chinese have been a leading growthengine for the last two decades and are largely credited with leading the world out of therecession in 2009. A change in their economic circumstances could really upend things.Finally, the European currency crisis has continued to worsen. The last year and a half has been an endless repetition of the dynamic depicted below:The cycle looks like this: Time passes and the crisis deepens. Markets, eternal creatures of habit, begin to reflect the ensuing fear. Then, just as things appear ready to unravel, there is areprieve, as red headlines race across the screen: “Sarkozy and Merkel to Meet at Deauville”,“Obama Phones Cameron”, or "Christine Lagarde Waves From Bus”. The market jumps.You'd think the media would quit falling for this charade, but having run out of clever headlines to describe the impending doom
 —
‘Eurogeddon’ Really?
 —
they herald every briefing, meeting, assembly, and conference call.The market embraces these announcements as eagerly as the media, behaving as if any and allcommunication is equally constructive, and likely to yield a solution. The market continuesto rise until the day of that summit, as all ears await a Grand Communiqué. Within minutesof any proclamation, the market may cheer with a final, celebratory spike. Upon evaluationof the actual statement, it becomes clear that either nothing has truly been agreed upon, or that
Crisis Deepens
Announcementof meeting tosolve everything
Solution hasno substanceor won’t workAnnounced solutionSummit
(stocks fall)(champagne party)(stocks peak)(stocks rise)
 
 the plan is insufficient, impractical or just won’t work. The market sells off and the crisisdeepens some more. Lather. Rinse. Repeat. Nonetheless, everyone is looking to these leaders for a solution. And it’s understandable thatspeaking and meeting are necessary steps. Yet, despite the endless telephone calls andsummits, all we hear are repeated promises to “do whatever it takes,” which seems to includeeverything except making the necessary sacrifices that might actually resolve the crisis.The latest solution is a work-in-progress treaty being heavily negotiated that, in its currentincarnation, will only need to be ratified by a subset of the Eurozone countries. While theleaders have committed in principle, there is significant risk that once the details emerge (andthe necessary electorates are consulted), we will discover that some leaders pledged with their fingers crossed and, as with prior efforts, this too will fail to get the job done. 2012 may bethe year in which the currency crisis will no longer be kept at bay by politicians buying timewith empty promises. Maybe the fall of the Euro will be the 2012 catastrophe that theMayans predicted.With these things in mind, our current strategy is to own cheap stocks of good businesses,largely in the United States. We are more net long equities than we have been in some time,as we believe that many stocks have reached a point where they are simply cheap enough toown even if some trouble awaits us. We are prepared for problems in Asia by continuing tospeculate on a much weaker Yen. We have hedged the currency on our European equities,and continue to believe that European sovereign bond prices will fall regardless of whether the crisis is resolved through sovereign default or money printing. Finally, we continue tohold gold and gold mining equities, reflecting our concerns that global fiscal and monetary policies continue to tempt fate.In the fourth quarter, the Partnerships made gains on both our long and short portfolios, as themarket rose and recovered most of its third quarter loss. While our shorts often fall prey to“man-made” disasters, it was unusual to see one of our longs benefit from a natural disaster.Floods in Thailand caused significant damage to many of Seagate’s (STX) competitors andcomponent suppliers. STX’s hard drive manufacturing facilities were relatively unharmed bythe flooding and the company has been able to capitalize on the resulting shortages, which hasled to a dramatic improvement in the company’s near-term prospects.The short portfolio had two significant winners in the quarter: Green Mountain CoffeeRoasters (GMCR) and FSLR. GMCR fell after announcing disappointing quarterly resultsthat had been widely anticipated to beat expectations. The market also took little comfort inGMCR’s failure to provide any substantive response to the questions we raised at the ValueInvesting Congress, other than a blanket denial of wrongdoing. FSLR shares collapsed alongwith solar panel prices. The Solyndra scandal also hurt the company, as the Department of Energy denied FSLR some subsidies that had been baked into expectations. Ultimately,FSLR changed management and dramatically cut guidance. The Partnerships had no materiallosers during the fourth quarter.

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