Here’s Why Michael Burry Just Bet Against Cathie Wood’s ARK ETF
Burry, the famous investor who predicted the 2007 Financial Crisis, doesn’t think much of tech stocks—outside of Alphabet and Facebook. On the other hand, he thinks both Cathie Wood’s ARK ETF and Tesla (TSLA) are headed for a slump. Why?
Dr. Michael Burry Doubles Down on Tesla Going Down
When it comes to notable investors who have risen in the last two decades, there is hardly a more prominent one than Dr. Michael Burry, the CEO of Scion Asset Management. After all, not everyone gets to be immortalized in a feature film “The Big Short”, starred by Christian Bale. The last time The Tokenist extensively covered Burry’s market forecast, he had a visit from the SEC back in March.
Seemingly, this happened just after his projection that stimulus checks will exacerbate inflation toward possible hyperinflation. Given his status as the man who predicted the housing bubble crash, it is no wonder that federal agencies would be interested in him not rocking the boat.
Since then, the inflation did exceed the Fed’s own inflation target of 2%. The Fed Chair Jerome Powell effectively ditched the “transitory inflation” narrative and warned that it may rise even higher. In the interim, Burry was busy placing long put options contracts on Tesla (TSLA), currently worth a $731 million market value and comprising 35.11% of Scion’s portfolio, according to the latest 13F filing.
Betting that Tesla will lose value is not surprising. Among Wall Street analysts, if there is one stock that consistently pops up as overvalued, it is TSLA. One only has to notice that the stock trades at 145X its estimated 2021 earnings and 13X its 2021 revenues.
However, the other notable long put was somewhat surprising. Worth $31 million (235,500 shares), it was against Ark Innovation ETF (ARKK), led by Cathie Wood, another prominent star investor—and Bitcoin advocate.
Is Cathie Wood’s Investment String Coming to an End?
In July, Cathie Wood met up with Elon Musk and Jack Dorsey to discuss the future of blockchain technology, and Bitcoin in particular. Interestingly, she framed Bitcoin as a valuable hedge against inflation. Burry acknowledged the same as a concept, but thinks that the Fed has enough monetary power to nullify Bitcoin’s strengths if it chose to do so.
Within that outlook, betting against ARK’s crypto and disruptive ventures would make sense. Wood’s eight ARK ETFs are currently worth around $44.91 billion, with the largest one, ARK Innovation (ARKK), worth $22.62 billion. Altogether, they combine 171 holdings with Tesla (TSLA) at the top with 7.37% of portfolio, followed closely by Square (SQ) at 3.68%, Coinbase (COIN) at 3.55%, and Grayscale Bitcoin Trust (GBTC) at 0.77% of portfolio.
As mentioned previously, Burry already has a substantial long put against TSLA. The other three companies’ fortunes are heavily tied to Bitcoin, making a total 15.37% of ARK ETFs holdings that could possibly go down, according to Burry’s calculation and lack of trust in cryptos.
Moreover, much of ARK’s other holdings are allocated across disruptive technologies: robotics, gene editing, pharmaceutics, Internet-of-Things (IoT), space exploration, content delivery, etc. In essence, niches that may be cutting-edge, but potentially unproven in terms of long-term market value prospects. As a response to Burry’s long put call, Wood relies on future “explosive” growth.
Lastly, Wood seems to have her forecasts disrupted by China’s $740 billion stock wipeout due to regulatory crackdown across the educational and tech sectors. That number has now increased to $1 trillion. Accordingly, ARKK exited almost all Chinese holdings. Although this resulted in a 8% drop for Q2 2021, ARKK is still up by 30% YoY (Year-over-Year).
However, when combining all of these factors together – China’s reversal, moody cryptos, Fed uncertainty, and an overreliance on disruptive technologies and innovation – they don’t sit well with Dr. Michael Burry to make for a balanced portfolio.
It is often said that the Fed cannot seriously tackle inflation as it would negatively impact the stock market. Do you think Burry is counting on the Fed not having any choice?