Michael Burry, the investor from ‘The Big Short’, is betting against the S&P 500, Nasdaq 100, and reducing exposure to China.

Michael Burry, the investor from 'The Big Short', is betting against the S&P 500, Nasdaq 100, and reducing exposure to China.

Betting Against the Market: Michael Burry’s Billion-Dollar Options

Michael Burry, the famed investor known for his accurate prediction of the 2008 housing crash, has once again made headlines with his latest bearish options against the S&P 500 and Nasdaq 100 Index. Burry, whose story was immortalized in the book and film “The Big Short,” has purchased put options worth $739 million against the Invesco QQQ Trust ETF, which consists of popular Nasdaq 100 companies. Furthermore, he has also hedged $886 million against the S&P 500 using put options.

Put options are agreements to sell assets at a fixed price before a certain date, indicating a defensive or pessimistic outlook on the market. While the filings do not disclose the exact cost of these options or when they will be sold, it is important to note that the figures stated could be lower than reported, possibly part of a larger long-term strategy.

Both the Nasdaq 100 and the S&P 500 have had a strong performance this year, with the Nasdaq up approximately 40% and the S&P 500 up 17.4% at the time of writing. Despite this, Burry’s bearish options suggest he is anticipating a downturn in the market.

Market Indicators Pointing towards a Correction

Burry is not the only one sounding the alarm on potential market correction. Mike Wilson, chief U.S. equity strategist at Morgan Stanley, has been warning about overpriced shares, referring to current prices as being in the “death zone” where they cannot sustain for long. Wilson, who correctly predicted the stock market sell-off and was ranked No. 1 in last year’s Institutional Investor survey, stands by his boom-bust prediction.

Another prominent voice echoing concerns is “Bond King” Bill Gross. The billionaire investor emphasized the negative implications of a yield curve inversion, stating that a finance-based economy cannot thrive if low-risk investments yield more than high-risk ones. Gross also pointed out that a reduction in government fiscal stimuli could further slow the economy, potentially leading to lower real GDP and inflation around 3%.

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Changing Tides: Michael Burry Takes a Step Back from China

Notably, Burry has also divested from his interests in China, a move consistent with his reputation for swiftly turning over his portfolio. The filing reveals that Burry has backed out of investments in the nation, despite doubling down on Chinese stocks in May. In the first quarter, 20% of Scion Asset Management’s portfolio consisted of bullish bets on e-commerce giants JD.com and Alibaba Group Holding. However, by the second quarter of 2023, Burry had liquidated these holdings.

The decision to withdraw from China comes at a time of concerns over a property crisis and potential contagion within the Chinese economy. Country Garden, the country’s largest private real estate developer, recently sought to delay payment on a private bond, raising fears of a property sector crash.

Additionally, Scion Asset Management also offloaded 150,000 shares of First Republic Bank, which is owned by JPMorgan. While it remains unclear whether this divestment occurred before or after the lender’s collapse and subsequent takeover, it is indicative of Burry’s active management approach.

Looking Towards the Future

Michael Burry’s bearish options against the S&P 500 and Nasdaq 100 Index, along with the concerns voiced by market experts like Mike Wilson and Bill Gross, highlight a growing sentiment that the market may be heading for a correction. While the market has performed admirably this year, there are underlying factors that could potentially impact its stability in the future.

As investors closely monitor the market and navigate potential risks, Michael Burry’s actions serve as a reminder that even in times of optimism, it is crucial to remain attentive to warning signs and consider strategies that align with a given outlook. After all, it is the foresight and adaptability of investors like Burry that can help mitigate risks and find opportunities, ultimately shaping the trajectory of financial markets.