The “Big Short” investor Michael Burry is back in the headlines after his hedge fund's Q2 portfolio data revealed he’s betting against the market. Michael Burry in the second quarter of 2023 opened about $887 million worth of PUT options against the SPDR S&P 500 ETF Trust which tracks the S&P 500 and $738 million in PUT options against Invesco QQQ ETF, which tracks the NASDAQ 100. If one thing is clear by now, it’s that Michael Burry has been in a see-saw mode when it comes to market sentiment. At one point he declared “Sell” on his Twitter account, sending markets in a flurry of doomsday predictions. Then he admitted on Twitter that he was wrong to have advised investors with his sell recommendation and praised the market for its resilience. Despite these major changes in his stance, when Michael Burry bets against the market, investors pay attention. And Burry is not the only investor who’s betting against the market. While the US stock market went in a euphoric uptrend this year, there are notable analysts and hedge fund managers who are calling this optimism unfounded and predicting a crash or recession in late 2023 or 2024.
Will Michael Burry's Short Bets Come True?
Bloomberg recently quoted Nicholas Ferres, chief investment officer of the global macro fund of Vantage Point Asset Management, who believes the market rally that started in 2023 will stop and we are headed towards a hard landing. The hedge fund manager said that the hard landing or crash could come in September or October and it could be “underway now.” He added that seasonal factors will added pressure on the market and when the rally begins to fade “people will be panicking and selling.” However, Ferres added that this would bring an opportunity to scale up.
The opportunity Ferres is talking about, according to Bloomberg, would be to increase exposure to the hardest hit assets when the rally pops. On Ferres’s radar are Chinese equities, which are already tanking amid consistently bad news from the country amid growth concerns. The Bloomberg report said that Ferres plans to “replicate” a strategy that has worked for him in the past. This strategy includes buying large Chinese tech stocks like JD.com and Baidu and avoiding Chinese real estate stocks.
Who Else Agrees with Michael Burry?
Ferres also reiterated an oft-repeated warning in Wall Street these days: the real effects of the Federal Reserve’s rate hikes are yet to be seen and it’s too early to claim that we are out of the woods. History has also shown that when the Federal Reserve slaps the economy with rapid rate hikes, chances of recession soar and the economy often tips into recession. JPMorgan Chase & Co.’s Marko Kolanovic, who has been warning of recession for quite some time now, reiterated his concerns in July. The analyst said that while it’s not possible to time the market’s reversal there is no data point or significant change that would force him to change his thesis that market declines are on the way. Part of the reason why the markets jumped this year, according to Kolanovic, is the AI hype which caused many technology stocks to make new highs. Many analysts were quick to point out that the AI-led boom is in fact a hype or bubble that would soon pop. Morgan Stanley’s Mike Wilson is another analyst who was proven wrong on his predictions on stock market’s decline this year. But Wilson is sticking to his warnings and believes the S&P 500 could slide to 3,900 by the end of 2023.
Michael Burry is Selling These 10 Stocks
Michael Burry of Scion Asset Management
But overall, the market is defying these bearish cases upheld by the likes of Michael Burry. Data shows that amid the market’s momentum, investors are putting money into small- and large-cap stocks. A Bloomberg report recently quoted data from Deutsche Bank AG, which believes that “investors have a clear overweight exposure to stocks after long refusing to budge off their underweight positioning.” The report also said that investors are not bothering to make an effort for downside protection. The report quoted data from RBC Capital markets which showed that Put premiums for both Invesco QQQ Trust Series 1 (QQQ) and the SPDR S&P 500 ETF Trust (SPY) were at their lowest levels in a decade.
“The market is just not ready to let go of the positive narrative. Hedging is outrageously cheap. There’s more driving of demand of calls from folks who are underperforming than those who have done well and need to hedge,” RBC’s analyst Amy Wu Silverman reportedly said.
The report also quoted Count Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, who recently warned that the risk of recession is still there and that the current market rally has gone too far.
“Those same people who are probably piling in right now were wrong about their outlook nine months ago and now they’re reversing course. I’m pushing in the opposite direction. The equity market will have some difficult months ahead,” Schutte said.
Whether Michael Burry was right or not, only time will tell. Maybe his Q3 holdings data will show that by the everyone was talking about his Put options against the market, he’d already bailed on his bearish calls and was piling into the market again? Burry is, just like financial markets, volatile. For now, let's see which stocks Burry dumped in the second quarter. Some notable names include JD.Com Inc. (NASDAQ:JD), Alibaba Group Holding Limited (NYSE:BABA) and Zoom Video Communications, Inc. (NASDAQ:ZM).
Our Methodology
For this article, we scanned Michael Burry’s Q2 portfolio and picked 10 stocks that he sold off during the period. With each stock we have mentioned the stake value Burry had owned in that company in the first quarter.
One thing Michael Burry was clearly wrong about was regional banks. Earlier this year he bought 150,000 shares of First Republic Bank (NYSE:FRC), which collapsed in May and was later sold to JPMorgan. During the second quarter Burry dumped his stake in the bank.
It was reported in May that JPMorgan notified some employees of the First Republic Bank (NYSE:FRC) that they wouldn’t get job offers from the banking giant which bought the company in a government auction.
Baron Asset Fund made the following comment about First Republic Bank (NYSE:FRC) in its Q1 2023 investor letter:
“First Republic Bank (NYSE:FRC) provides banking and wealth management services primarily to affluent customers in select markets. The company’s share price collapsed in the aftermath of the failures of SVB and Signature Bank. Investors feared that First Republic could face a similar fate because a majority of its funding base is in the form of large, uninsured deposits, primarily from wealthy clients and small- and mid-size businesses. Despite a historically loyal customer base that valued the bank’s industry-leading customer service culture, we believe many of these deposits were likely withdrawn from the bank following the high-profile turmoil at SVB. These deposits would likely have been replaced with higher-cost funding, leading to significant earnings pressure. We concluded that the bank’s competitive position and earnings potential had likely been permanently impaired, so we exited the position.”
PacWest Bancorp (NASDAQ:PACW) was another wrong bet from Michael Burry. The regional bank has lost about 70% of its stock value year to date through August 15. Earlier this year Banc of California agreed to buy PacWest Bancorp (NASDAQ:PACW). After the announcement, D.A. Davidson upgraded PacWest Bancorp (NASDAQ:PACW) to Buy from Neutral to align it with the same rating as Banc of California (NYSE:BANC).
As of the end of the first quarter of 2023, Michael Burry’s hedge fund had reported owning 250,000 shares of PacWest Bancorp (NASDAQ:PACW). This stake was sold by the Big Short during the second quarter. As of the end of the first quarter, 22 hedge funds in Insider Monkey’s database had reported owning stakes in PacWest Bancorp (NASDAQ:PACW).
Manole Capital Management made the following comment about PacWest Bancorp (NASDAQ:PACW) in its second quarter 2023 investor letter:
“25 years ago, there were 13,000 financial institutions, but now there’s really only 4,000 banks left. Will we continue to see consolidation? With JP Morgan buying First Republic, the latest worry seems to PacWest Bancorp (NASDAQ:PACW). In a recent security filing, it reported that it lost 9.5% of its total deposits, with most of it happening over two days. For PacWest and other regional banks, they are fighting a two-sided battle. On one side, investors are finally demanding higher yields and the media is highlighting the risk of keeping assets at struggling banks. On the other side, short sellers are eager to identify the next possible “weak (banking) link”.”
Michael Burry also dumped Western Alliance Bancorporation (NYSE:WAL) during the second quarter. It’s another regional bank that has been troubled in 2023. Western Alliance Bancorporation (NYSE:WAL) has lost about 15% year to date. In July Western Alliance Bancorporation (NYSE:WAL) dipped after the company’s Q2 results showed that higher funding costs dented its earnings in interest on loans.
However, revenue in the quarter came in at $669.3 million, surpassing estimates.
As of the end of the first quarter of 2023, 31 hedge funds out of the 943 funds reported owning stakes in Western Alliance Bancorporation (NYSE:WAL). The biggest stakeholder of Western Alliance Bancorporation (NYSE:WAL) during this period was Ken Griffin’s Citadel Investment Group which owns a $207 million stake in the company. In addition to WAL, Burry also sold JD.Com Inc. (NASDAQ:JD), Alibaba Group Holding Limited (NYSE:BABA) and Zoom Video Communications, Inc. (NASDAQ:ZM).
Miller Value Deep Value Strategy made the following comment about Western Alliance Bancorporation (NYSE:WAL) in its second quarter 2023 investor letter:
“During the quarter, we initiated positions in Western Alliance Bancorporation (NYSE:WAL) and Gray Television (GTN). Western Alliance is a leading national commercial bank with strong regional markets. The company has a capital-light business model (less branch focus). Following the Silicon Valley Bank collapse, Western Alliance saw significant share price weakness as the marketplace tried to draw similarities between the two companies. While initially experiencing deposit weakness, that has subsided and returned to growth as Western has a significantly more diversified business model with long-term customers having multiple products and services. The company’s underwriting capabilities and operations are best-in-class in our opinion. Management also appears fully aligned with shareholders and focused on shifting underwriting to a lower risk portfolio of loans. The company has taken incremental actions that should have accretive benefits to enhance capital ratios starting this quarter and further improving into 2024. Western’s share price is down 60%+ from its 52-week high, a deep discount to book value and 30%+ normalized earnings yield. We anticipate Western’s earnings troughing in the near term and improving over the next 6 to 12 months.
Michael Burry sold 125,000 shares of Wells Fargo & Company (NYSE:WFC) during the second quarter, liquidating his entire stake in the bank.
As of the end of the first quarter of 2023, 78 hedge funds in Insider Monkey’s database had owned stakes in Wells Fargo & Company (NYSE:WFC), down from 87 funds in the previous quarter. This shows other hedge funds were also dumping Wells Fargo & Company (NYSE:WFC) during early 2023.
Warren Buffett’s Berkshire Hathaway also bailed on Wells Fargo & Company (NYSE:WFC) in 2022 after holding a stake in the company for several years.
In July, Wells Fargo (NYSE:WFC) increased its dividend by 16.7%.
Michael Burry owned around 125,000 shares of Coherent, Inc. (NASDAQ:COHR) during the first quarter of 2023. The investor sold all these shares during the second quarter. Coherent, Inc. (NASDAQ:COHR) has gained about 36% year to date through August 15.
Giverny Capital made the following comment about Coherent Corp. (NYSE:COHR) in its Q1 2023 investor letter:
“I made small additions to our holdings in Eurofins Scientific and Coherent Corp. (NYSE:COHR) during the quarter. Both stocks were down a lot in 2022 and I feel both have excellent long-term prospects. We’ve generated a good absolute return over three years, though below my expectations relative to the S&P 500. We own an eclectic collection of high-quality companies, with a low level of debt across the portfolio and a high level of exposure to founder- or family-managed businesses.”
Like COHR, some other important stocks sold by Burry include JD.Com Inc. (NASDAQ:JD), Alibaba Group Holding Limited (NYSE:BABA) and Zoom Video Communications, Inc. (NASDAQ:ZM).
