May 29, 2012

Dear Partner: The Greenlight Capital funds (the “Partnerships”) returned 6.8%1, net of fees and expenses, in the first quarter of 2012. In the first quarter, the market rose steadily with eleven weeks of gains and only two weeks of trivial losses. In its relentless climb, the market took nearly every stock in our portfolios along with it, resulting in profits on the long side and losses on the short side. In aggregate, the longs advanced more than the market and the shorts advanced less than the market, so we generated positive alpha on both sides of the balance sheet. During the presentation at our annual Partners’ Dinner, we talked about a number of stocks that have suffered multiple compression, where businesses have performed nicely, but have not seen a corresponding uplift in their share price. Apple (AAPL) is the clearest example of this. In 2011, AAPL’s revenue grew 66% and earnings per share grew 78%. Both of these growth rates greatly exceeded market expectations and even our own expectations, which were considerably more optimistic than consensus. Nonetheless, the stock appreciated by only 25%. As a result of this mismatch, AAPL’s P/E multiple compressed by about one third. Several other names in our portfolio including General Motors (GM), Microsoft (MSFT), Delphi (DLPH) and Arkema (France: AKE) also suffered multiple compression in 2011. This trend reversed in the first quarter, with all of these companies enjoying rising share prices that reflect both current earnings performance and some P/E multiple catch-up from last year. None of our long portfolio investments have recovered with as much fanfare as AAPL, which surged from $405 to $600 per share in the quarter, bringing its P/E back to where it was at the end of 2010. Yet not everyone agrees that AAPL’s stock price is merely playing catch-up to its fundamentals. Some see the stock surge as a bubble, while others go so far as to mock that AAPL is its own asset class. Here are some of the common concerns we have heard: 1. Too many hedge funds own AAPL. 2. If AAPL’s share price doubles, it will have a $1 trillion market capitalization, and everyone knows there can be no such thing as a $1 trillion company.


Source: Greenlight Capital. Please refer to information contained in the disclosures at the end of the letter. 2 G rand Cen tr a l Tower 140 East 45 t h S tr e e t, 2 4 t h F lo o r N ew Yo rk, NY 10017 Phon e: 212-973-1900 Fax 212-973-9219 www.g reen ligh tcap ital. com

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3. Motorola, Research in Motion and Nokia were all market leaders that proved unable to hold onto their dominant positions and healthy margins; this too will be AAPL’s fate. 4. AAPL can’t possibly maintain its current hyper-growth trajectory. Let’s address these one at a time: 1. Too many funds. It’s not clear what the objection is here. We suppose the worry is that there is a herd mentality among hedge funds, and that when one fund sells, there could be a cascade of hedge funds selling shares and the stock price will collapse. Moreover, if everyone already owns AAPL, who is left to buy it? Collectively, hedge funds currently hold less than 5%2 of AAPL’s outstanding shares, and no hedge fund ranks among the top 40 holders of the stock. The average hedge fund has less than 2%2 of its equity assets in AAPL versus AAPL’s 4% weighting in the S&P 500, which means hedge funds are actually underweight AAPL. 2. A trillion dollars? We’ve scoured the Nasdaq listing rules, reviewed the Securities Exchange Act of 1934, and engaged a leading numerologist. We can’t find any prohibition on trillion dollar market capitalizations. 3. All empires must fall. This concern, while not as arbitrary as the first two, reinforces our belief that the skeptics have a fundamental misunderstanding of AAPL. Their view suggests that AAPL is a hardware company. We disagree. 4. Growing pains. AAPL shares are not priced for growth. Its current valuation is justified without it. The latter two concerns merit further discussion. Despite its size, AAPL remains one of the most misunderstood stocks in the market. AAPL is a software company. The value comes from iOS, the App store, iTunes and iCloud. A Motorola RAZR phone was a one-time winner because when someone else made a phone that was just a little better, RAZR sales stopped. In contrast, a consumer with one AAPL product tends to want more AAPL products. Once the user has a second device, AAPL has captured the customer. At that point, a future competitor has to make a product that isn’t just a little better, but a lot better to get people to switch. The high switching cost makes AAPL’s business much more defensible than that of its predecessors. Further, AAPL’s ability to consistently offer innovative features (as opposed to marginal improvements on the current features) encourages users to upgrade every couple of years. This provides a recurring revenue stream. And because AAPL embeds its software into its hardware, it doesn’t face Microsoft’s piracy problem. If the Chinese want AAPL, they have to buy AAPL. Rather than view AAPL as a hardware company, we see it as a software company that monetizes its value through the repeated sales of high margin hardware.


Goldman Sachs & Co. Hedge Fund Trend Monitor, February 21, 2012

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We continue to hold AAPL. Not only do we think the skeptics are misguided, we believe the shares remain cheap. AAPL trades at a lower multiple than the average company in the S&P 500. A below-market multiple implies that this is a below-average company. We have a hard time seeing how anyone ranks AAPL as below average. Seagate Technology (STX) was the other significant winner during the quarter. It is STX's normal practice on earnings calls to provide financial commentary looking ahead only one quarter. However, in January, STX shared its financial outlook for all of calendar year 2012, forecasting revenues of $20 billion. The prior consensus was for less than $15 billion. A good chunk of the increased forecast comes from higher pricing enabled by the industry shortage following the floods in Thailand last year. STX also announced that it would be using some of its excess cash to ramp up its stock repurchase program, with a target of decreasing outstanding shares by 25%. When business conditions eventually normalize, the lower share count will enable STX to generate higher earnings per share. Though the shares advanced from $16.40 to $26.96 during the quarter, the share price remains at a very low multiple of both near-term and longer term earnings. Based on our somewhat more conservative revenue outlook in 2012, we expect earnings to reach $10-$15 per share this calendar year, before settling at an average of about $5 per share in future years when the industry shortage will have ended. We did not have any significant losers during the quarter (the closest was our Moody’s short, which traded in line with the financial sector). The debate around currencies, cash, and cash equivalents continues. Over the last few years, we have come to doubt whether cash will serve as a good store of value. If you wrapped up all the $100 bills in circulation, it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money. Alternatively, you could take every U.S. note in circulation, lay them end to end, and cover the entire 116 square miles of Omaha, Nebraska. Of course, if you managed to assemble all that money into your own private stash, the Federal Reserve could simply order more to be printed for the rest of us. There were a few notable developments elsewhere in the portfolio. First, an update on the situation in Japan: The Japanese Yen finally showed some weakness, falling more than 7% during the quarter to ¥82.79 per dollar. Several times during the past couple of years, we’ve thought the Yen was on the verge of weakening, only to be proven wrong. While the long-term fundamentals of Japan’s economy have not improved, the Yen has nonetheless continued to strengthen, to the

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point where many Japanese corporations can no longer compete effectively. Last year, Panasonic, Sharp, NEC and Mazda all lost money. Industrial Japan is hurting and the country is no longer running a trade surplus. Politicians have taken note and are calling for a lower Yen and an end to the deflation. The Bank of Japan (BOJ) has largely dragged its feet, but now it might have to capitulate. The mood at the BOJ is changing and, more importantly, so is the makeup of its Board. Within the next year, five of the nine governors, including the Chairman and both Deputy Chairmen, will be replaced. Two of those seats are currently vacant, and the Japanese legislature has already rejected one candidate because he was deemed unlikely to push for aggressive action to weaken the Yen. The Partnerships remain positioned to benefit from a weakening Yen. Last quarter, we noted that we had closed a brief and successful short position in Diamond Foods (DMND). Our thesis was that the company had engaged in significant accounting chicanery. When the stock fell by 66% a couple of months after the Partnerships established their position, we chose to cover and take a profit. We hadn’t changed our thinking about the accounting, but we were skeptical that anyone would do anything to actually curtail the misbehavior. Imagine our surprise when DMND announced that its own audit committee had actually investigated, found the wrongdoing, restated earnings and dismissed the management. This sort of self-policing happens too infrequently and we think it deserves to be noticed and applauded. In contrast, there’s Green Mountain Coffee Roasters (GMCR) and St. Joe (JOE). Neither company appears to have an audit committee worth complimenting. At the Value Investing Congress (VIC) last October, David presented a detailed short thesis on GMCR, which included warnings about expiring patents and increased competition. It looks like our thesis is playing out. Last fall, the GMCR bulls believed that the coming patent expirations would not be a problem. Now, it is clearer to the market that there will be substantial competition to sell K-cups starting this fall. In response, GMCR announced its highly anticipated next generation machine, the Vue. The Vue has some additional features, but has a narrower assortment of products (which will become even narrower once competitors introduce new products compatible with the legacy Keurig system) and comes at a premium price to the Keurig. The Vue’s launch results to date have been unimpressive, which should concern the bulls who are now hanging their hat on the hopes of the opinion presented in a Janney Capital Markets research note dated March 23, 2012: “It is become [sic] increasingly clear that the Vue platform will be the primary Keurig brewer beginning in FY13. The existing Keurig brewer will continue to be sold, but we believe marketing emphasis will be on the Vue.” Even if the Vue ultimately matches the bulls’ preview, we think they should review their view. We have been short JOE for more than half a decade. David first discussed our position at the Ira Sohn conference in 2007, and then gave a second, more detailed presentation of our updated thesis at the 2010 VIC. The presentation highlighted that a number of JOE’s real estate investments were impaired and should have been reflected as such in the company’s financial statements. JOE and the bulls disagreed. We assume that JOE’s auditors did as well, seeing as they signed off on the 2010 year-end results without requiring any impairment.

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In early 2012, JOE announced a “new business strategy.” JOE is unwilling to elaborate on what this new strategy entails. At least one piece of it involved reviewing prior assumptions regarding the value of its unsold assets. In doing so, JOE was forced to recognize some of the necessary impairment that had been obvious to us for years. The following table shows that JOE belatedly recognized residential real estate impairment in three counties highlighted in the VIC presentation:
Residential Real Estate Carrying Value (as of December 2009) Our Estimate of Proper Value (October 2010) Our Estimate of Needed Impairments (October 2010) JOE’s Belated Recognized Impairment at the end of 2011 St. Johns 74.5 6.0 68.5 60.6 Franklin 41.8 14.9 26.9 34.8 Gulf 164.5 17.8 146.7 132.7 Total 280.8 38.7 242.1 228.1 Source: JOE 2009 10-K VIC Slide 122

JOE 2011 10-K

JOE took $374 million in total impairment, which represented an approximate 80% writedown of the properties that JOE chose to impair and almost 40% of JOE’s book equity. While the impairment may seem large, we believe that more will be needed. Specifically, we believe JOE continues to carry its mostly vacant commercial real estate at inflated values. JOE also has a large investment in “operating properties,” which are mostly amenities that support its various developments and do not generate adequate profits to support their capitalized carrying values. Recognition of these losses does more than merely get the accounts in order. It reveals the flaw in JOE’s business model. The company's effort to develop its best land through a historic boom has, in fact, been a cumulative money loser. If the land can’t be developed profitably under extremely favorable market conditions, its best use remains as undeveloped timber and conservation land. Perhaps this is what JOE has in mind; we have no way of knowing. But either strategy presents greater challenges going forward. The best land (on the beach) has already been sold, while timberland and conservation land values in the region have continued to fall. We remain skeptical that there is a path for any management team to create much value here. During the quarter, the Partnerships opened to new and existing investors for the first time since the fourth quarter of 2008. We offered all of our investors a March 31 liquidity opportunity, and announced a concurrent opening for April 1 investment. After covering redemptions and growing the assets by an additional 6%, we remained heavily oversubscribed and rationed capacity. A high percentage of the capital we raised was invested in the dollar series of the Greenlight Capital Gold funds and, as a result, the gold and the dollar series of these funds are now about evenly balanced. We appreciate all the support we received during this opening from our existing partners, and we welcome our new partners. If anyone would like to discuss the capital opening in more detail, please contact Justin. We had one addition to the team as Noah Edward Mickelson was born to Chris and his wife Fiona in February. Noah must have been excited about getting out in time to catch the end of basketball season because he was born six weeks early, but he still managed to weigh in at a sturdy 6 lbs. 4 oz. Noah came home in time to watch his parents’ alma mater, St.

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Bonaventure, play in the NCAA basketball tournament. For those keeping score, baby Noah has now seen the Bonnies play in half as many NCAA tournaments as his mom and dad have. David gave a speech titled “Jelly Donut Policy” at the Grant’s conference in April. It has been republished in full at Huffington Post. You may read it at: At quarter end, the largest disclosed long positions in the Partnerships were Apple, Arkema, General Motors, gold and Seagate Technology. The Partnerships had an average exposure of 98% long and 62% short. “There is a great difference between knowing and understanding: you can know a lot about something and not really understand it.” --Charles F. Kettering Best Regards,

Greenlight Capital, Inc.

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The information contained herein reflects the opinions and projections of Greenlight Capital, Inc. and its affiliates (collectively “Greenlight”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Greenlight does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. All trade names, trademarks, and service marks herein are the property of their respective owners who retain all proprietary rights over their use. This communication is confidential and may not be reproduced without prior written permission from Greenlight. Performance returns reflect the dollar-weighted average total returns, net of fees and expenses, for an IPO eligible partner for Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore, and the dollar series returns of Greenlight Capital (Gold), L.P. and Greenlight Capital Offshore (Gold), Ltd. (collectively, the “Partnerships”). Each Partnership’s performance returns are calculated using the returns for partners who were invested on or prior to January 1, 2008, except for the returns of Greenlight Capital (Gold), L.P. and Greenlight Capital Offshore (Gold), Ltd, which reflect the dollar series returns for partners who transferred into these funds at inception and who were invested in a predecessor Greenlight fund on or prior to January 1, 2008. Each Partnership’s returns are net of the standard 20% incentive allocation (except the annual returns for Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., and Greenlight Capital (Gold), L.P., a portion of which reflects the modified high-water mark incentive allocation of 10%). Performance returns are estimated pending the year-end audit. Past performance is not indicative of future results. Actual returns may differ from the returns presented. Each partner will receive individual returns from the Partnerships’ administrator. Reference to an index does not imply that the Partnerships will achieve returns, volatility, or other results similar to the index. The total returns for the index do not reflect the deduction of any fees or expenses which would reduce returns. All exposure information excludes credit default swaps, gold, currency positions/hedges and other macro positions. Weightings, exposure, attribution and performance contribution information reflects estimates of the weighted average of Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Capital Offshore Partners, Greenlight Capital (Gold), L.P., and Greenlight Capital Offshore Master (Gold), Ltd. and are the result of classifications and assumptions made in the sole judgment of Greenlight. Positions reflected in this letter do not represent all the positions held, purchased, or sold, and in the aggregate, the information may represent a small percentage of activity. The information presented is intended to provide insight into the noteworthy events, in the sole opinion of Greenlight, affecting the Partnerships. THIS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY INTERESTS IN ANY FUND MANAGED BY GREENLIGHT OR ANY OF ITS AFFILIATES. SUCH AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY INTERESTS MAY ONLY BE MADE PURSUANT TO DEFINITIVE SUBSCRIPTION DOCUMENTS BETWEEN A FUND AND AN INVESTOR.

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