The Man Who Predicted the Housing Market Crash Just Made a Big Move

Image: GQ

The 2008 financial crisis had rolled forward a series of events that many financial experts had fathomed for decades. People started defaulting on their loans, businesses went bankrupt and an asset class which people believed would never “tank” came down drastically in value due to speculation and other widespread bets placed through various derivative contracts.

Dr. Michael Burry of Scion Asset Management LLC had predicted the housing crisis way ahead of its time while many frenzy investors were still busy buying and selling CDO’s and making a hefty profit by flipping contracts like houses.

Ever since then, Dr. Burry has been a key figure in the US financial markets. His latest 13-F filing reveals massive bets placed on a handful of companies a pattern similar to the months prior to the 2008 crisis.

Even though the firm’s equity holdings are sitting at $91 million, the firm’s portfolio is in fact worth slightly over $315 million.

Image credit: Author

Image credit: Author

During the first quarter of 2020, he held diversified positions in multiple stocks such as GameStop, Jack in the Box, Qorvo, Maxar Technologies, and Facebook.

However, post the second quarter he readjusted the portfolio by acquiring smaller portions in various other stocks in addition to purchasing massive amounts of “call options” on various companies.

According to Investopedia, “call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period.

The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price”.

In general, an option is a contract between two investors. One of them is writing the option, and the other is buying the call option.

For example, if the option seller is explicitly writing calls on Tesla the contract will state that if “Tesla’s shares reach a stock price higher than X by a specific date, then you can buy the Tesla shares off of me for a strike price of X”.

An advantage for the buyer is that he/she can choose not to exercise this right if the stock is trading at a price lower than X.

But in case the stock price surges above X, he/she can buy the shares for X, and subsequently, sell it in the markets for a higher price resulting in a profit.

With regards to Dr.Burry, his 13-F filings didn’t disclose the strike price and expiry dates for all the long positions he had acquired. So, it is correct to say that they own $91 million in stocks but the firm’s “total long position” is worth slightly over $315 million inclusive of all the “long calls”.

Some of his biggest call option positions are Google, Facebook, Booking Holdings Ltd, and Goldman Sachs.

Illustration: chriswhetzel.com

The famous fund manager as portrayed in the award-winning movie “The Big Short” bought 80,000 call options on Google (GOOG), spending $113M.

Scion’s next three top holdings are also call options. Facebook (FB), Booking Holdings (BKNG), and Goldman Sachs (GS).

“The firm’s 16 call positions represent 71.19% of the Q2 portfolio of which 36% is represented by Google”.

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He sold out Facebook stock but acquired call options to perhaps weigh out the ad-controversies and profit from the stock once it rebounds.

A similar logic could be applied to Booking Holdings Ltd since the travel industry has taken a beating, once the markets rebound the stock should reflect a change in fundamentals similar to Carnival Cruises.

“Dr. Burry slashed Scion’s Gamestop (GME) stake during Q2. GME represented 3.79% of the long portfolio, down from 12.23% in Q1. Scion filed a 13D targeting Gamestop in August of 2019 when the stock was at $3.87. In a letter to management, Burry recommended a ‘game-changing’ buyback of shares”.

Calls are therefore, an alternative to buying a stock outright.

If the stock price rises you can end up with a profit, without taking on all of the downside risks that would otherwise result from owning the stock.

It is also possible to magnify your gains through leverage over a greater number of shares than you could afford to buy outright because the calls are always less expensive than the stock itself.

But one should err on the side of caution with such matters, especially with short-term ‘out-of-the-money’ calls. If you buy too many option contracts, you end up increasing your risk.

Part of the conventional definition also suggests that “options may expire as being worthless and one can lose their entire investment, whereas if someone decides to own the stock it will usually still be worth something to that individual”.

It is safe to assume that his firm is “in-the-money” for most of his positions but one can only make assumptions heading into the investment world. However, in hindsight, everything appears to be accurate.

For more interesting articles on the US financial markets, you can check out some of my other articles below:

1. Understanding The US Stock Market Via Examining Its Darling Apple Inc.
2. Berkshire Hathaway’s 13-F Filing Reveals A $9 Billion Investment And Uncertain Times Ahead
3. Why Is Warren Buffett Buying An Asset Class He’s Always Been Against?
4. What Jeff Bezos’s Sell-Off Indicated About The US Stock Market
5. Will You Enroll at “Google University” for $49/Month?
6. Can Investing Alone Turn You Into a Millionaire?
7. Can Printing Money Stabilize The Economy?
8. Is Ray Dalio Bearish About America?

Disclaimer: This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

Image: Mauldin Economics