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David Einhorn’s Hedge Fund Sheds More Than $400 Million in Investor Outflows

Greenlight Capital fell 2% in the first half of the year, prompting withdrawals

Nearly half a billion dollars is out the door at David Einhorn’s hedge fund.

Mr. Einhorn’s Greenlight Capital Inc. hedge fund was forced to pay back more than $400 million in clients withdrawals at midyear, as more than 15% of eligible investors chose to redeem their money, people close to the firm said. Greenlight, a U.S.-stock specialist, was down 2% in the first half of the year, while the S&P 500 gained 9%, including dividends.

A fixture at investment conferences, Mr. Einhorn is famed for his call against Lehman Brothers Holdings Inc. just before the bank’s collapse. He subsequently made highly public bets against companies such as Green Mountain Coffee Roasters Inc. Firmwide, Greenlight manages around $7 billion overall.

But recently, the 48-year old Mr. Einhorn has been humbled. His repeated predictions of a swoon for some highflying technology companies are so far unrealized, while a recent push to split General Motors Co. stock was rejected by his fellow shareholders.

Greenlight is just two years removed from its worst year ever, double-digit losses in 2015 that led Mr. Einhorn to confess at the next annual investor dinner that he had “failed miserably.”

Mr. Einhorn isn’t alone, as hedge funds of all stripes are under sustained pressure.

Some other high-profile funds, such as Eton Park Capital Management, have shut down. Many of those that remain are lowering their legendarily high fees to appease disappointed backers or retooling their strategies to be more similar to mutual funds or private-equity managers. Investors have yanked money from hedge funds for a record six consecutive quarters, according to researcher HFR.

Mr. Einhorn’s representatives have told investors that the billionaire plans to continue his longstanding practice of seizing on perceived mispricing in stocks.

He’s declined requests from backers to alter his relatively high fees. Greenlight collects a performance fee even when it hasn’t made back its historical losses, a rare practice in the industry.

The fund made back some of its losses last year but has slipped again in 2017. Some of the firm’s short positions, or wagers against, in-vogue stocks such as Tesla Inc. have backfired as the stocks continued to climb, investors said. Meanwhile Greenlight’s portfolio has included a relatively low proportion of bets on rising stocks overall, making it a laggard as U.S. stocks recorded their strongest first half since 2013.

The average stock-picking hedge fund was up 6% in the first half, HFR says.

A prodigious poker player, Mr. Einhorn is also in the midst of a divorce, traditionally a sore point for hedge-fund investors wary of any distractions for their highly paid managers. Some hedge-fund investors have automatic policies to withdraw from managers undergoing divorce.

Greenlight has relatively strict withdrawal rules, protecting it from an outright run on the firm at any given point. Only half its investors are allowed to take out money at midyear, while the remainder are permitted at year-end. The fund also has substantial long-term backing from Mr. Einhorn’s personal fortune, an arm that invests money with other hedge-fund managers, and a reinsurance vehicle that feeds permanent capital to the main fund.

The fund has been closed to new investment since late 2014, people familiar with the matter said.

QE and the S&P, Italy’s debt load and US oil exports to hit Opec

Your “springboard” guide to current market concerns, presented in a logical and concise manner, with direct links to more details.

1 - QE and the S&P 500 (new)

2 - Italian debt load expected to fall

3 - Central banks and excess liquidity

4 - US oil exports to hit Opec

5 - The great Bund yield bounce — does it continue?

1. The importance of central banks for equity prices

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The bullish performance of stocks as central banks keep buying bonds

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The S&P 500’s lengthy bull run began in 2009 as the Federal Reserve fired up quantitative easing. Suppressing bond yields and financial market volatility via QE has certainly been a boon for equities. All told, the big central banks have bought some $14tn of assets, providing a very supportive tide of liquidity for global equities led by the S&P 500.

Now as the Fed looks to start reducing its $4.5tn balance sheet this year and the European Central Bank discusses tapering bond purchases in 2018, equities will soon need to reflect a reduction in the so-called ‘punchbowl’. Having outperformed other leading equity markets during the post-financial crisis era, some believe US stocks are vulnerable, once the liquidity tide slackens in the coming year.

“We think the swing in global liquidity will weigh on the performance of stocks,’’ say analysts at Bank of America Merrill Lynch. “With the Fed about to reduce its balance sheet and the ECB likely to end quantitative easing by the end of 2018, growth in central bank assets is likely to decelerate significantly next year and turn negative in 2019.’’

For now, there appears further room for equities to run higher as central banks are likely to take their time withdrawing stimulus. Soothing words on the interest rate outlook from Janet Yellen in her semi-annual testimony to Congress has bolstered equities ahead of the latest earnings season. Michael Mackenzie

2. Italy’s national debt predicted to fall

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Whether the nation at the heart of the European debt crisis is recovering

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Is Italian debt sustainable? The question matters because the country has the most sovereign debt outstanding of any member of the eurozone, both in absolute terms and when compared with the size of annual economic output. Fears about Italy’s ability to support the debt and so remain a member of the single currency were at the heart of the European debt crisis in 2011.

Borrowing costs have come down considerably since then, suppressed in particular by European Central Bank purchases of sovereign debt since 2015. As bond markets have begun to anticipate a reduction, or tapering in that programme, Italian bond yields have crept upwards this year, from 1.6 per cent to 2.1 per cent.

Elections due within the next year have also caused market nerves, with Japanese investors among the sellers wary of strong Eurosceptic sentiment. Yet analysis from UBS suggests the relative size of national debt should decline over the next decade.

Taking IMF growth forecasts as a starting point, the bank assumes an annual government surplus of 2.5 per cent from 2019 onwards and ongoing funding through the bond market. For its tapering shock scenario it assumes a jump in bond yields of 50 basis points for debt maturing in five years, and of 100bp for longer-dated debt.

The shock changes the debt dynamics only moderately, because only a small portion of debt is refinanced each year, and much of the stock was issued at much higher interest rates than today.

Lefteris Farmakis, strategist for the bank, says “it is highly improbable that ECB’s tightening pushes Italian debt off the cliff. Such an outcome would require the ECB allowing Italian rates to hover for several years at high levels (circa 5 per cent), while growth there hovers close to zero and inflation runs below 1.5% in the long run.” Dan McCrum

3. Central bank tightening put in perspective

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Central bank tightening

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Is the market getting central bank tightening out of perspective? Robert Bergqvist thinks so. SEB Group’s chief economist has looked at the amount of excess liquidity in the world economy and calculates it at $15tn — or one-fifth of global stock market capitalisation.

Even if the Federal Reserve starts to unwind its balance sheet as soon as September, the pace towards normalisation will be so slow that come the end of 2018 there will still be plenty of liquidity lubricating the financial system.

The Bank of Japan’s umbilical link to quantitative easing is responsible for a large slice of unconventional monetary policy over the next year. 

Global monetary policy may be entering a new phase, but talk of a shift to a “tighter” policy is overblown, says Mr Bergqvist. “Monetary policy will continue to be very expansionary for many years,” he says.

“The overall liquidity situation, together with a very slow adjustment upwards for nominal policy rates, will continue to provide strong support to asset markets. Any correction in assets prices is likely to come from other factors, not the expected changes of monetary policy.”

His conclusion: bank reserves will continue to rise and the Fed’s monetary policy downsizing will have a limited impact on stock and debt markets. Roger Blitz

4. US oil exports set to lengthen Opec’s struggle

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Opec’s drive to raise oil prices by reducing supply

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The US crude oil export boom is set to kick into a much higher gear. 

By 2020, exports of US crude would reach 2.25m barrels a day, according to PIRA Energy, an influential consultant. By comparison, last year Kuwait exported 2.1m b/d, Nigeria 1.7m b/d and the US itself 520,000 b/d.

The forecast suggests the Opec exporters’ cartel faces a drawn-out struggle as it tries to raise crude prices by curtailing output in the face of a prolific US shale oil industry.

Other analysts have more modest targets: IHS Markit sees US crude oil exports reaching 1.4m b/d by 2020, while the most bullish scenario from the US Energy Information Administration does not envisage exports surpassing 2m b/d for a quarter of a century.

The US still depends on imports of crude oil, having bought 7.9m b/d last year. But the type of high quality, “sweet” crude flowing from fields in Texas and North Dakota has a limited appetite from US refineries configured to run heavier grades of oil.

The mismatch favours exports of some domestic oil and continued imports from countries such as Canada and Saudi Arabia. Gregory Meyer

5. The great Bund yield bounce — Does it continue?

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The rise in German 10-year Bund yields

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The benchmark German 10-year yield has broken fresh ground in 2017, climbing to an 18-month high of 0.58 per cent.

With European Central Bank president Mario Draghi recently noting that stimulus is not forever, Bund investors have borne the brunt. German 10-year yields are up more than 24 basis points in the last two weeks.

“Complacent long positions have been shaken out of the Bund market following what appears to be a change in central bank focus,’’ says Steven Major at HSBC.

Mr Major calls recent developments a “wake-up call” for investors after the ECB highlighted fading deflation risks and noted a broadening recovery across the 19-country bloc.

Analysts at UBS think a “fair value” on Bunds is anywhere between 0.9 per cent and 1.2 per cent. But they warn that any moves close to 1 per cent “may be too fast, too soon”.

Reasons for caution abound. Eurozone inflation is still expected to fall below the ECB’s target of just under 2 per cent in 2019. Senior ECB officials have also damped any speculation of an earlier than expected normalisation in interest rates and QE following Mr Draghi’s comments last week.

Minutes from the central bank’s June meeting show policymakers are acutely aware of triggering an adverse market reaction that would make their job of raising inflation even harder by driving up the euro. 

“The ECB is likely to lean against a spike in yields that leads to a sharp tightening in financial conditions”, notes Yianos Kontopoulos at UBS, who expects Bund yields to end the year around 0.7 per cent. Mehreen Khan

Troubles faced by UK construction group risk spreading to thousands of subcontractors

One of the UK government’s biggest contractors and an employer of 50,000 people worldwide, Carillion is fighting for survival after a calamitous fall in its share price wiped nearly three-quarters off the company’s value in three days.

A damaging profit warning, revelations of a sharp increase in debt and larger than expected writedowns on four projects this week confirmed what many short sellers in the market had bet on for years — that Carillion’s finances were far shakier than appeared.

Carillion is the biggest manager of military bases for Britain’s Ministry of Defence and its other activities range from maintaining tracks for Network Rail and building roads for the Highways Agency, to hospitals in Canada and Oman’s parliament.

Fears are now growing that the shockwaves triggered by this week’s announcement will spread to thousands of sub-contractors used by the group.

On Thursday, Oxfordshire County Council said it would end in September a 10-year deal with Carillion to build schools and supply property management services, which had been signed in 2012 and was due to run until 2022 and be worth £500m.

Bankers at Lazard are scrambling to find a solution after Carillion on Monday announced a “corporate and strategic review” — and its share price has plunged by 70 per cent to 59p since, although it recovered 3 per cent on Thursday.

Already the group has written off £845m of operating profit from construction contracts, replaced its chief executive, Richard Howson, and suspended its dividend.

Its more dramatic options to stave off bankruptcy include a rescue takeover, a debt-for-equity swap or a heavily dilutive equity raising from shareholders.

The debacle puts thousands of the company’s contractors and subcontractors at risk and highlights the frailty of UK construction companies, which have almost no assets and outsource nearly all of their work. The sector is vulnerable to slow payment practices — for years Carillion has had a reputation for late payments to suppliers.

Questions are also being asked by analysts over accounting practices in the industry, including how early companies record profits on long-term contracts, which can affect how much they can borrow.

“Everyone will be watching the Carillion process with a lot of anxiety,” said Rudi Klein, chief executive of the Specialist Engineers Contracting Group. “There’s thousands of contractors and sub-contractors tied up in the company and the way things are going they will be incredibly concerned. Now the subcontractors are wondering if they will get paid in three months and if they are paid late they may suspend work.”

Mr Klein added that Carillion’s woes “will raise questions on how the industry is built on balance sheets that don’t have any foundations; they don’t have any assets”.

Carillion has been shifting from construction to less risky support services contracts, such as facilities management, which now accounts for almost two-thirds of revenues. Almost all of the losses have come from its building arm, which was hit by a squeeze on contracts and margins after the financial crisis.

The company has faced delays to payments on public-private partnership contracts in the UK — an area it is withdrawing from — as well as rising materials and labour costs. It has also suffered, along with industry rivals, from a slowdown in signing contracts since the Brexit vote.

This week Carillion highlighted some key projects — including Merseyside’s Royal Liverpool Hospital and an Aberdeen road project — on which it has taken large writedowns. This sparked concerns that the company’s problems could run deeper, with profits potentially set for a sharp decline.

The company announced savings from axing its £80m dividend and withdrawing from business in Qatar, Saudi Arabia and Egypt. But these are unlikely to make a significant dent in its debt mountain — its net debt has risen from £42m in 2010 to £695m in the first half of 2017 and is expected to reach £800m in the second half.

Carillion’s market value on Thursday morning was about £250m, dwarfed by its £663m pension deficit, meaning any rescue deal would need to be negotiated with trustees.

Some analysts are forecasting a diluted rights issue of about £500m — double the company’s current stock market value.

“The most likely course of action will be a rights issue, but we would not rule out a more dramatic restructuring (an exit from construction?), or potentially a combination of both,” analysts at RBC Capital Markets said in a note.

But Stephen Rawlinson, analyst at Applied Value, said he viewed a rights issue as “extremely unlikely”.

“Why would any investor put money into Carillion when the trustees would have first call on it? There needs to be an agreement with pension trustees and they don’t tend to act quickly.”

Sources close to the company said that an emergency rights issue would take time to engineer given the instability in the share price and the churn in the share register. The company is exploring a range of other options, including a debt-for-equity swap, the source said.

The option of a purchase of part or all of the business has been downplayed, as rival British contractors including Balfour Beatty — the subject of an aggressive takeover attempt by Carillion in 2013 — appeared to rule out bids.

However, industry watchers speculated that a Chinese company could make a play for the group given Beijing’s ambitions to move into the British construction market.

“I can’t see any British firm bidding for it,” said one industry source. “Why would you invest? How many businesses do you know that have only had [just] one profit warning? They have hardly any assets they could sell and the pension trustees would have first access to the proceeds anyway.”

Carillion insisted it had substantial liquidity and was in no danger of breaching banking covenants, which do not mature before 2019 and 2020. It said that with £4.8bn new orders last year and £2.6bn so far this year it was still winning work and going about its business as usual.

But there are concerns that the situation could quickly deteriorate, particularly if the group started struggling to pay suppliers.

“If you’re a contractor working for Carillion you’ll be worried about progress payments over next three months because they may slow down payment to the supply chain by even more than 120 days,” said Mr Klein, who added that he was advising subcontractors to assess the risks and chase outstanding payments.

Mr Rawlinson did, however, point to rivals of Carillion that have survived similar problems.

“The sector has been prone to over optimistic views of costs and revenues for a long time,” he said. But although some such as Jarvis, the rail contractor, have gone into administration, others such as Serco, Mouchel and Balfour Beatty have faced spectacular blow-ups and survived.

Intel: Lonely At The Top

Chipmaking giant unlikely to lose its lead, but new challenges hurt growth prospects

Losing isn’t really an option for Intel Corp. INTC 0.97% But winning may also be hard to come by, at least for a while.

Intel remains the world’s largest chip maker by revenue, with more than $60 billion in sales expected for this year. And it maintains near total dominance in two key markets—personal computers and servers. But Intel’s stock also has been among the worst performing among semiconductor peers over the past year, even to the point of ceding its crown as the largest chip company by market value to Taiwan Semiconductor Manufacturing Co. TSM 0.88%

Why? Because when you’re on top, there is nowhere to go but down. Intel is facing fresh challenges in its core markets on multiple fronts. New chips this year from longtime rival Advanced Micro Devices AMD 2.88% are targeting the sweet spots of high-end PCs and servers. And in the data center, Intel is also facing threats from the development of ARM-based processors that use a different computing standard, as well as the growing use of graphics chips from Nvidia that are better-suited to many artificial intelligence applications. Not coincidentally, Nvidia and AMD have been the best performing chip stocks of late, having gained 207% and 179% over the last 12 months respectively.

Intel relies on its data center business to fuel growth as PC sales continue to slip so it isn’t taking the matter lying down. The company rolled out its newest line of Xeon server chips this week. That came just a few weeks after AMD launched a new line of server chips called Epyc. Neither are likely to factor much into earnings results for the June quarter to be reported in the next few weeks, but Intel noted that it has already sold more than 500,000 units of the new Xeon family since November under an “early-ship” program.

AMD, with annual revenue that equates to about one-third of just Intel’s R&D budget, simply doesn’t have the scale to overtake its much larger rival. It can put a wrinkle in its growth prospects at an inopportune time, though. AMD is expected to grow its computing and graphics segment revenue by 34% this year. Intel’s far larger data center business is expected to grow by 7%—its slowest year on record. And while Intel’s stock is cheap at 12 times forward earnings—12% below its 3-year average—any disappointment in data center sales over the next few quarters will likely pressure the shares further.

AMD, meanwhile, has the advantage of starting from zero in servers. That means the sales it does get will likely be at Intel’s expense. In fairness, AMD will have to keep delivering strong sales into next year to show its gains have true staying power. That is far from certain now, but investors haven’t been giving Intel the benefit of the doubt

Sovereign-owned companies looking to privatise will have premium category on LSE

The UK’s financial watchdog is making it easier for state-owned companies to list their shares in what will be a boon for those lobbying for Saudi Arabia’s Aramco to choose London for its initial public offering.

The Financial Conduct Authority said on Thursday it is planning to create a new category for sovereign-owned companies that are looking to privatise. The move is part of broader plans by the FCA to reform equity and debt markets in an attempt to keep the UK open for business after Brexit.

The plans involve creating a new category within the “premium” listing rules for companies controlled by sovereign entities rather than by oligarchs or other private groups.

Saudi Arabia is seeking to sell 5 per cent of national oil company Saudi Aramco in what is set to become the world’s biggest flotation, with a valuation officials hope will reach $2tn and which would be a fee bonanza for the advisers working on the deal. Saudi Aramco is the world’s biggest oil producer, pumping roughly one in every nine barrels of crude globally.

The kingdom has narrowed its choice of venue for the IPO, scheduled for late 2018, to New York and London.

Theresa May, prime minister, and Xavier Rolet, head of the London Stock Exchange, both travelled to Saudi Arabia earlier this year in a lobbying effort.

The UK listing regime had to tighten controls in 2013 after a string of corporate governance failures in overseas-headquartered companies controlled by foreign tycoons, including ENRC and Bumi.

Both became cautionary tales about the danger bringing resource companies from emerging markets to the London market. A criminal investigation into ENRC, which crashed out of the FTSE four years ago amid allegations of corruption, is still ongoing by the UK’s Serious Fraud Office.

“Sovereign owners are different from private sector individuals or companies — both in their motivations and in their nature,” said Andrew Bailey, the FCA’s chief executive. “Investors have long recognised this and capital markets are well adapted to assess the treatment of other investors by sovereign countries.”

Since March, the FCA has been tasked by government with keeping the competitiveness of the UK’s financial markets in mind when forming policy — something both the FCA and the Bank of England previously argued against.

The FCA proposed on Thursday to not treat a sovereign shareholder as a related party, meaning it would not have to seek prior shareholder approval for a transaction between the state and the company, such as the purchase of other state owned assets, for instance.

Directors and officers of the company would still be treated as related parties under the proposals, however.

The regulator also proposes that the new sovereign segment of the premium listing regime would apply to depositary receipts. This would allow a state-backed company to have a primary listing in its domestic markets, and then achieve a premium UK listing through the sale of such secondary securities, providing that underlying voting rights are passed on to the UK investor.

The FCA also says that rules governing fair disclosure of inside information under the European market abuse regime would still apply.

Companies such as Saudi Aramco would still be under an obligation to show that they maintain an independent business, requiring the appointment of outside non-executive directors. The proposal also suggests that such independence may be compromised if the company seeking such a listing grants “security over its business in connection with the funding of the sovereign controlling shareholder”.

At present, overseas companies rarely seek a standard listing on the main market, which entails adherence to the rigorous governance standards required by UK listed companies.

Many international companies, including Russian energy group Gazprom, opt to be listed using global depositary receipts, which represent ownership in the underlying shares. This allows investors to trade in overseas companies on developed markets, but is relatively inaccessible to retail investors.