David Einhorn: Short McGraw Hill (MHP) & Moody's (MCO) - The Curse of the Triple A ~ market folly

Friday, September 11, 2009

David Einhorn: Short McGraw Hill (MHP) & Moody's (MCO) - The Curse of the Triple A

While David Einhorn's short position in Moody's (MCO) is by no means new information, we did recently learn that his hedge fund Greenlight Capital is now also short McGraw Hill (MHP), the parent company of fellow ratings agency Standard & Poor's. He initiated the position after a U.S. judge refused to dismiss a case against the ratings agencies. Those agencies were seeking refuge from such litigation under the notion that their opinions on ratings are protected by free-speech rights. This U.S. District Judge's refusal to throw out the case could be a landmark ruling, Einhorn says. While this could potentially be a chink in the armor, it is also prudent to point out that 10 of the 11 claims were dismissed; a fact that Moody's representatives have been quick to point out.

Einhorn presented his short position in Moody's back at the Ira Sohn Conference where numerous hedge fund managers shared investment ideas. While we can't track their short positions via SEC filings, we have covered Greenlight's long portfolio here. Greenlight was up 16.3% for the second quarter and year to date for 2009 is up 21.5%. For more of Einhorn's tirades shorting companies, we highly recommend reading his book Fooling Some of the People All of the Time: A Long Short Story. In it, you'll learn how Greenlight constructs and researches investment theses. Not to mention, it's just an interesting read and story in general.

Instead of summarizing Einhorn's thoughts regarding why he is short the ratings agencies, we figured we'd just let him tell you himself. Embedded below is his presentation from the Ira Sohn investment conference entitled 'The Curse of the Triple A.' You can download download the .pdf here or read on below:

David Einhorn's Ira Sohn Presentation -

So, while he presented that argument back in late May of this year, he appeared on television a few days ago to further elaborate on his argument. Below is the video where he presents his case to CNBC anchors:

And lastly, for posterity's sake, we would also like to highlight Einhorn's thoughts on credit from back in 2007 at the Annual Graham & Dodd Breakfast. You can download the .pdf here or read the embedded document below:

Einhorn On Credit -

Certainly interesting thoughts and reading all around. In addition to Greenlight Capital's short position, we found additional transactions in shares of MCO by another market guru to be intriguing as well. Berkshire Hathaway's Warren Buffett owns a large stake in Moody's (MCO) but has sold shares in 2 recent transactions. Most recently, Buffett sold 794,388 shares in the first two days of September. Initially back in July the Oracle of Omaha reduced his stake in MCO by 17%. While we are paying attention to these sales, you also have to consider that Berkshire Hathaway still owns over 39 million shares of MCO, which translates to a 16.64% ownership stake.

Buffett has owned Moody's shares for 9 years now after first receiving them in the spin-off of Dun & Bradstreet back in 2000. There are a few reasons Buffett could be selling though. On one hand, he could be reducing his ownership stake because it had been increasing as Moody's bought back shares. And, maybe the stake was getting too large for comfort. On the other hand, Buffett could be losing some interest in this oligopoly of an industry. While he was quoted as saying he still likes the business, he doesn't think it will be doing the volume it used to, especially in capital markets. The fact that his sales come amidst this court ruling and Einhorn's PR blitz is all the more intriguing, whether it is coincidence or not.

As an aside to the Triple-A debate, we also wanted to mention that fellow hedge fund Sprott Asset Management recently had some research out that deemed gold 'The Ultimate Triple-A Asset'. Their assertion becomes all the more interesting when you note that gold climbed above psychological and technical resistance of $1000 recently. (Check out this technical analysis video on gold for further insight as to upside price targets). Not to mention, Mr. Einhorn and Greenlight own the precious metal and have actually begun storing physical gold. They found it was cheaper to store the gold than to pay the expense ratio associated with exchange traded fund GLD, which they previously held. This part obviously doesn't relate to Moody's or Standard & Poor's, but we thought it made for an interesting aside given the debate as to the relevancy of 'Triple-A.'

Overall, very intriguing stuff all around. We'll end simply by asking one question: Do you remember the last time Einhorn was out openly criticizing a company and disclosing he was short? Yeah, that company was Lehman Brothers. That one certainly turned out well for him.

Compilation of resources on David Einhorn & Greenlight Capital:

- David Einhorn's Book: Fooling Some of the People All of the Time: A Long Short Story

- Einhorn's Ira Sohn investment conference presentation on Triple-A/Moody's (.pdf)

- Greenlight Capital's recent portfolio update

- Greenlight's Q2 2009 hedge fund investor letter

- Einhorn on credit, from back in 2007: .pdf here

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