Michael Burry’s New Comments Highlight the Importance of Pivoting
With most major indexes in positive territory for the year but still, well below their 2022 starting point, are markets moving to make up their losses? Michael Burry thinks so. In the most positive tweet I have seen from him in almost four years, Burry posted he was “wrong to say sell.” As recently as late January, Burry posted a one-word tweet, “Sell.” The pundits read into it that perhaps another economic crisis similar to the one that occurred in 2008 will crush markets. His almost cult-like following was built by being one of the few individuals who correctly positioned his investments for the housing and subprime mortgage problems that shook the U.S. in late 2008.
Michael Burry Suggests We Have a Bull Market
Market participants are surprised at both Burry’s bullishness and open acknowledgment that he believes he was overly negative and has gotten it wrong this time. The widely followed investor has been bearish and broadcasting this sentiment to his 1.4 million Twitter followers. The suggestions have been that they should consider lightening their holdings. Burry even caught investor attention with his own 13F reported short position in Apple (AAPL).
Burry points to high levels of dip buying, which may have changed today’s market landscape. This is backed up by other reports, including one from Bloomberg that gives a reason that 2023 is shaping up to be one of the best years for dip-buyers.
Importance of Pivoting
He may not have been “wrong.” The best investors understand their time frame and will recognize when market moves are not as expected. On February 2nd, a few days after Burry’s January 31st “sell” tweet, the S&P 500 index closed at 4,180 just after the Fed interest rate target increased by 25 basis points. To date, that is the large-cap index’s highest close of 2023, as weeks of declines followed. The NDX had fallen nearly 3% since that day.
But the trend, if it continues, appears to have changed. The equity market in March has been surprisingly resilient. It has been able to shrug off multi-country concerns surrounding the banks, elevated expectations of an economic downturn, and forecasts that S&P 500 companies will report their biggest quarterly earnings decline since the second quarter of 2020.
Moving from a sell to a more bullish position, for those that are looking to capture short-term moves, seems to be what is implied in his tweet. It may be that Michael Burry was not wrong in direction, as the markets did fall, just wrong in how long they would stay weak.
Take Away
There are long-term trends and short-term trends. Also, trends that are weak and strong through different sectors at the same time. While time will tell if Burry is correct in his most recent direction, the ability to see market sentiment changing and go with it is characteristic of a successful trader.
To Show Banks at Risk, Michael Burry’s Picture Equals 1000 Words
Michael Burry has a well-deserved reputation for foreseeing approaching crises and positioning his hedge funds to benefit client investors. While he’s most famous for his unique windfall leading to and after the mortgage crisis of 2008-2009, the current banking debacle has him tweeting thoughts most days. His most recent bank-related tweet is worth sharing and, for most investors, needs some explaining.
Recently Burry posted a chart of some large banks and their insured deposit base relative to their Tier 1 capital.
@michaeljburry (Twitter)
Common Equity Tier 1 Capital (CET1)
To best understand this chart it helps to be aware that for U.S. banks, the definition of Tier 1 capital is set by regulators. It’s an apples to apples measure of a banks’ financial strength and easily used to compare bank peers. Overall it is the bank’s core capital, and helps to understand how well the banks financial infrastructure can absorb losses. It includes equity and retained earnings, as well as certain other qualifying financial instruments.
Unrealized Bank Losses
The sub-prime banking crisis of 2008 is different than what banks are struggling with now. The problem then was created by lax lending practices, including liar loans, floating rate mortgages with teaser rates, significant house flipping using these introductory (teaser) first year rates, and repackaging and selling the debt – often to other banks.
The current issue facing banks today is the prolonged period of rates being held down by monetary policy. Low rates makes for easy money and economic growth, but there is eventually a cost. The cost is overstimulus and inflation, then what is needed to fight inflation, in other words, higher rates.
Higher rates hurt banks in a number of ways. The most calculable is the value of their asssets, including publicly traded fixed rate obligations (Treasuries, MBS, municipal bonds, corporate bonds, other bank marketable CDs) all decline in worth when rates rise. The other way banks get hurt is that loans extend out when rates rise by a significant amount. As a bank customer, this is easy to understand, if you took out a 30-year mortgage two years ago, your rate is between 2.75%-3.50%. If mortgage rates move, as they did to 7%, the prepayment speeds on the loans extend out farther. That is to say fewer borrowers are going to add more to their principal payment each month, and those that may have bought another residence by selling the first and paying the loan off, are staying put. The banks had assigned a historic expected prepayment speed to each loan that represents their region, and the low rate loans are now going to take much longer to repay.
FDIC Insurance
Michael Burry (on assets as described above) used his Bloomberg to chart large bank unrealized losses to the potential for depositors to remove their uninsured deposits. Currently the FDIC is only obligated to insure bank deposits up to $250,000. Customers with deposits in excess of this amount (depending on how registered) leave their excess money at a single bank at their own risk.
It would seem logical for large customers and small, in this environment to check their own risk and bring it to zero.
The Wisdom of the Chart
The further up and to the right banks are on the chart, the more at risk the bank can be considered. This is because uninsured deposits equal more than 60% of liabilities, so prudent customers would move someplace where they are better protected.
However, if depositors do move money out of the banks listed here, the bank would have to either find new deposits, or stand to lose 30% or more by selling assets that are underwater because of rising rates. The banks are currently not easily able to go out into the market and attract money. Partially because we are now in a climate where even basic T-Bill levels would be high for a bank to pay, but also because there is less money supply (M2) in the system.
@michaeljburry (Twitter)
Take Away
Michael Burry is a worth paying attention to. His communication is often through Twitter, and his tweets are often cryptic without context. His most recent set of tweets, including one commenting on the chart outlines what is happening with a number of banks that find themselves in the unenviable position of ignoring the Fed’s forward guidance on rates and very public inflation data.
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Scion’s Michael Burry Owns Online Retailers, Tech Firms, a Mortgage Servicer, and a Detention Provider
GEO Group (GEO), the publicly held prison company organized as a REIT, again tops Michael Burry’s public market holdings as of the end of last year. This is one of nine holdings; a few are on-again, off-again favorites of the revered hedge fund manager. If there is one theme in his positions, it is that of select online retail merchants. While the overall size of the positions as of quarter-end is known, these positions may not represent all investments, just those that are public and reportable to the SEC on form 13F. Burry famous for his portrayal in the movie “The Big Short” was not short any publicly traded securities as 2022 drew to a close.
Below are the nine holdings, in size order, copied directy from the 13F-HR filing. GEO, Alibaba, and JD.com are familiar to followers of Dr. Burry’s holdings as this is not the first time they have appeared in his portfolio.
Geo Group (GEO) runs private detention systems. As shown below, at the end of the second quarter of 2022, it represented 100% of Scion Asset Management’s public market positions. The current holding is roughly half the dollar amount of what it was three months prior.
Black Knight (BKI) is making its first appearance in the Scion portfolio. The mid-cap company provides mortgage and loan servicing products.
Coherent Corporation (COHR) has not been in the hedge fund manager’s portfolio prior to the last quarter. The small-cap technology company is involved in communications networks for aerospace, automotive, life sciences, and various other electronics and systems.
Alibaba (BABA) is often described as the “Chinese Amazon.com”. The only other time Scion held this well-known online retailer was during the second quarter of 2019.
JD.com (JD) is China’s largest online retailer and largest internet company by revenue. Burry owned shares once before during the first quarter of 2019.
Wolverine Worldwide (WWW) makes active footwear and apparel. Brands include Sperry, Saucony, and Hush Puppies. The small-cap company has not been in the Scion portfolio previously.
MGM Resorts (MGM) is a mid-cap company that owns and manages hotels and casinos worldwide. This is the first time Michael Burry has owned this name.
Qurante (QRTEA), formerly Liberty Interactive Corporation, is yet another direct marketer through the internet and video. The small-cap company is headquartered in Colorado.
Skywest Inc. (SKYW) is Burry’s smallest holding but still represents 4.4%. The airline has scheduled flights, including international, and also leases equipment for non-commercial flights. This is the first time the small-cap company has made an appearance in the Scion portfolio.
Take Away
Four times each year the SEC requires asset managers above a certain size to make a public filling of its portfolio.
Scion Asset Management is not exempt, but may, in addition to transacting in public securities, be creating positions in assets that are not required to be reported here. The reputation of Michael Burry has at times caused a lot of interest around less followed stocks.
Image: Michael Burry on the Set of “The Big Short” (Twitter, @michaeljburry)
Washington’s Economic Playbook According to Michael Burry
One benefit to Elon Musk purchasing Twitter and ridding the platform of many of the auto posts on well-followed accounts is that the well-followed Michael Burry is no longer deleting his tweets the same day as posted. Burry, who began the new year tweeting with a very clear economic roadmap, said less than a month ago that he trusts Elon. As far as the hedge fund manager’s 2023 economic roadmap, his expectations show that he is critical of all those in Washington that have a hand on the economic steering wheel and continue to resist oversteering.
Source: Twitter (@michaeljburry)
While it can be frustrating for someone like Burry or any investor to forecast missteps by those that most impact the economy, especially if the official entities continue to repeat their behaviors, there is some consolation in the idea that patient investors can use these repeated actions to enhance their account’s performance.
Burry’s New Year’s Message
In 50 words, Dr. Burry, the investor made famous by Christian Bale’s portrayal of him in the 2015 movie The Big Short, said that he expects that inflation for this part of the interest rate, or market cycle, has already passed its high. In fact, he expects that it will be unmistakable, as the year progresses, that the US has fallen into a recession. A recession that can’t be denied or redefined because it will be that deep.
With this economic weakness, the hedge fund manager expects that we will not only see lower CPI readings but by the second half of this year, inflation may even turn negative – deflationary readings.
Burry then goes on to say that this will cause stimulus from both the fed and fiscal policy. This stimulus will be overdone if keeping inflation at bay is the goal. He expects we will have an inflationary period that may outdo the one we are coming off., Burry tweeted. “Fed will cut and government will stimulate. And we will have another inflation spike.”
Source: Twitter (@michaeljburry)
Take Away
If you ask ten experts what will happen over the next 12 months, you will get ten or more conflicting projections. The Scion Asset Management CIO is often correct on what will eventually occur but just as often as he is right, he is far off on the timing. The scenarios that seem obvious to him have in the past played out a lot slower in the economy and marketplace.
His first tweet in 2023 said that he expects more of the same from the folks in Washington, including the Federal Reserve and the US Treasury. The fed is now pushing hard on the economic brake pedal, which will could cause activity to reach recessionary levels. He expects that this will be followed by a panic move to the gas pedal that will create shortages, increased demand, and consumer price increases.
If he is correct, this means different things to investors with different time horizons. But it appears that Burry expects the tightening cycle to end soon.
If Cryptocurrency is not the Safe Haven it was Expected to Be, Will Assets Move Into Gold Investments?
In addition to any information discovered from Michael Burry’s 13F filing earlier this week, he’s been coming out in support of gold. He seems to expect that those that were seeking a “safe harbor investment” in various crypto-related investments are now having a change of mind. Despite his long positions held on September 30 and made public on November 14, he has teased that he could be extremely short the market; presumably, this could include any tradeable asset when you’re an investment analyst of this caliber.
Will Investors Rediscover Gold?
“Long thought that the time for gold would be when crypto scandals merge into contagion,” Burry wrote in a tweet this week.
@michaeljburry
The financial pressures spreading across the crypto industry that have helped destroy the crypto exchange FTX and exposed characters like Sam Bankman-Fried that may have been given too much trust, are causing reduced trust in digital assets.
Supporters and believers in the benefit of crypto had been using bitcoin and other tokens as a means of storage outside of securities. Their expectation has been that crypto is superior as a store of value during periods of inflation, currency depreciation, and economic turmoil.
Crypto prices have not offered much protection against plunging stock, bond, and real estate values. In fact, relative to the strong US dollar, crypto’s value has fallen off a cliff, offering no protection. The overall outstanding crypto worth has gone from $2.2 trillion to around $830 billion. Gold has not been rising during this period, but relative to US dollars, it is down only 3%.
Burry’s likely message is that the escalating cryptocurrency negatives will reduce demand for coins, yet demand for a safe haven asset would not be reduced. This could make gold again one of the only games in town for investors looking to protect against asset erosion.
Is Burry Short?
“You have no idea how short I am,” Burry said in a tweet this week.
@michaeljburry
He does not say he is short at all in this tweet. However, against the backdrop of many previous tweets warning against a market he believes will become more bearish, coupled with a holding report released that has five long holdings, the hedge fund manager of The Big Short fame is likely warning investors not to read too much positive into his fund’s holdings report. That report was released just before the tweet.
The value of long securities held in his roughly $292 million AUM was $41 million. As he demonstrated during the financial crisis, there are non-publicly reported ways to be short, even short beyond your AUM. Fund managers with assets over $100 million only have to disclose US-listed stocks in their 13F filings with the SEC each quarter. Excluded in the reporting are shares sold short, overseas-listed stocks, and other assets such as commodities.
In actuality, Burry’s increased positions in prison stocks and exposure to the company involved in making Artemis’ rocket boosters is more likely a sign that he likes the prospects of some companies while at the same time doesn’t like the broader market outlook.
Positive Tweets
In addition to his positive tweet on gold, Burry has suggested the Federal Reserve’s interest-rate hikes, which have weighed on market prices, could end in the spring. This was reflected in his October 24 tweet “Still think the Fed back off on QT early next year.”
Investing in Gold
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Scion Asset Management and Michael Burry Report Third Quarter Holdings
Four times a year, the quarter-end holdings of famous hedge fund manager Michael Burry become public through his firm’s required 13-F filing with the SEC. It’s newsworthy because people are interested in this iconic investor’s thinking. The list of 13-F securities is rarely more than a dozen positions and is just a one-day snapshot, but it can help one to understand his preferences and expectations.
The latest 13-F filing became public on Monday (November 14). It shows that he is not negative on all stocks, as he has built on his one position from the last reporting period, and added a few others. He clearly does not limit himself to only meg-cap companies. In fact two of his positions are small-cap stocks, one is a midcap, and one large cap.
Scion Asset Management’s Positions
His largest position is Geo Group (GEO) and represents 37.65% of the five. The shares represent 0.409% of GEO’s outstanding stock or 501,360 shares. The average price was listed as $6.42 per share.
The quarter-end market value of Scion’s GEO position was $3,309,000 consisting of 501,360 shares. This represents 0.4092% of the company. According to Scion’s Form ADV, filed on April 18, 2022, Scion had assets under management of $291,659,289. The GEO position is not likely a significant portion of his entire portfolio, but it represents more than a third of the firm’s 13F reportable securities.
Michael Burry first reported owning GEO Group during the fourth quarter of 2020. It’s a unique company, which may be positioned to take advantage of changes in the U.S. and internationally.
The GEO Group, based out of Boca Raton, FL, specializes in owning’ leasing, and managing secure confinement facilities, processing centers, and reentry facilities in the United States and globally. In addition to owning and operating secure and community facilities, GEO provides compliance technologies, monitoring services, and supervision and treatment programs for community-based parolees, probationers, and pretrial defendants.
For the year ended December 31, 2021, The GEO Group generated approximately 66% of its revenues from the U.S. Secure Services business, 24% from its GEO Care segment, and 10% of revenue from its International Services segment.
Gomes confirmed his earlier price target of $15.00 and reported solid operating results during the third quarter.
Scion’s third largest position is mentioned second because it also provides for correctional facilities and ancillary service, it is CoreCivic Inc. (CXW). CoreCivic is a private detention facility with three segments, CoreCivic Safety, CoreCivic Community, and CoreCivic Properties. It provides a broad range of solutions to governments with corrections and detention management, a growing network of residential reentry centers to help address America’s recidivism crisis, and government real estate solutions.
In his November 4 research report on CXW Joe Gomes pointed to the excess capacity of CXW, indicating that much of that could soon be utilized as covid restrictions loosen. Corecivic has ample excess capacity from which to add to their bottom line under improving conditions.
Burry’s second largest 13-F holding is Qurante Retail Group, Inc. (QRTEA). The company is involved in video online commerce and owns the well-known HSN (Home Shopping Network) and QVC shopping network. Its segments market and sell a wide variety of consumer products in the United States, primarily using its televised shopping programs and via the Internet through their websites and mobile applications; QVC International segment markets and sells a wide variety of consumer products in several foreign countries, primarily using its televised shopping programs and via the Internet through its international websites and mobile applications; and Zulily markets and sells a wide variety of consumer products in the United States and several foreign countries. Its geographical segments include the United States, Japan, Germany, and Other countries.
Aerojet Rocketdyne Holdings, Inc. (AJRD) is a midcap company that is Scion’s fourth largest holding. It designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. It operates in two segments, Aerospace and Defense and Real Estate. The Aerospace and Defense segment offers aerospace and defense products and systems for the United States government, including the Department of Defense, the National Aeronautics and Space Administration, and aerospace and defense prime contractors. This segment provides liquid and solid rocket propulsion systems, air-breathing hypersonic engines, and electric power and propulsion systems for space, defense, civil, and commercial applications, and armament systems. The Real Estate segment engages in the re-zoning, entitlement, sale, and leasing of the company’s excess real estate assets. It owns 11,277 acres of land adjacent to the United States Highway 50 between Rancho Cordova and Folsom, California, east of Sacramento. The company was formerly known as GenCorp Inc. and changed its name to Aerojet Rocketdyne Holdings, Inc. in April 2015. Aerojet Rocketdyne Holdings, Inc. was incorporated in 1915 and is headquartered in El Segundo, California.
Burry’s smallest holding is the largest company. As the only large-cap stock of the five, Charter Communications, Inc. (CHTR) operates as a broadband connectivity and cable operator serving residential and commercial customers in the US. The company offers subscription-based video services, video on demand, high-def TV, DVR, and pay-per-view. It also has Web-based service management and sells local advertising across various platforms for networks, such as TBS, CNN, and ESPN to local sports and news channels.
Take Away
Michael Burry’s 13F filing for the third quarter showed two of his top three holdings are privately held correctional facilities that had relied on government contracts. The lifting of covid restrictions may help bolster future profits. Along with Aerojet, his fourth-largest position, GEO and Corecivic own real estate. Could this be part of Burry’s attraction?
The TV shopping channels owned by Qurante seem obscure, but the defense company Aerojet Rocketdyne should come as no surprise in a world that is moving more militarily and Space Force is gearing up.
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Michael Burry’s Advice for Companies to Become Better Values
After my morning coffee and check on stock futures, I peruse Twitter. Coffee is necessary when you may need to translate cryptic messages from tweeters like Dr. Michael Burry. This week, the hedge fund manager, famous for his foresight and creativity in shorting subprime mortgages before the mortgage crisis in 2008, has been very active on the microblogging platform. Two tweets from October 5th are newsworthy, considering their source, their insight, and the concern they convey are described below.
The first reads: “Low price/cash flow businesses are different today vs. 2000 because they will buy back stock, buy back debt at a discount, and in general manage capital structure better. Makes them statistical value – math problems that more or less must work out.”
The second says, “Companies that are heavily leveraged but have the cash flow and termed out debt have options today, including reducing their debt loads at a significant discount brought on by higher rates. But as Graham said, in such a case, better off buying the stock.”
Taking these two tweets together, they make sense. Twenty years ago, interest rates were the lowest they had been since 1965; during the last week in December, plummeting 30-year mortgage rates had broken below 6%. Despite cheaper money, corporate treasurers and finance officers didn’t use the situation to shore up their capital structure and build a better base to grow on. The equity markets were weak from August 2000 until May 2009, after the financial crisis that in part came about because of how the cheap money was used.
Companies that are not stretched and are earning money today have the choice of strengthening their financial foundation by either buying their stock at today’s bearish prices. A stock buyback has the effect of reducing shares available in the market as they are now in the company’s treasury. Reduced float tends to increase the price and benefits shareholders. The company does have the option of selling these shares should an opportunity present itself where it would like to raise capital selling previously available shares.
Burry also mentions leveraged companies. Having just come off of 40-year lows in interest rates, it was, in many cases, prudent for companies to leverage themselves with cheap money. These loans, present-valued at today’s higher rates, can be negotiated and paid off at a discount. For companies with adequate cash flow, they may be able to substantially reduce debt for a fraction of the principal amount. Here is how to best get your head around this, if you are a lender and the borrower is paying you 2%, and rates are now 6%, how much less than the borrowed amount would the borrower have to give you in order for you to do better than breaking even? You can lend one-third of the money at 6% and earn the same cash amount. So the borrower is in a great negotiating position.
Michael Burry makes no secret of the fact that he is an avid reader. “Graham” refers to Benjamin Graham the “father of value investing.” Burry reminds us that, according to this historically significant, well-published value investor, investors and companies are generally better off buying back their own stock.
Take Away
There are showmen that are on TV and keep their jobs by keeping viewers glued to their TV sets, and there are others that comment on the market for less-commercial reasons. Those on TV and writing on well-read sites like Yahoo Finance are worth reading to understand what others are reading. Proven, outside the mainstream thinking is worth paying attention to in order to diversify the information your weighing as an investor.
You can even think of it this way; no one pays Burry for advertising on Twitter accounts used by Burry or some other well-followed investors. Whereas mainstream news only exists because of paid-for advertising from companies and industries that they cover. This doesn’t mean he will always be correct, but, who might be less biased?
