🐻📉 Michael Burry Bearish on U.S. Stocks
Happy Wednesday all,
This week, we examine why investors aren’t rewarding companies that beat earnings and Michael Burry’s big short bets against U.S. stocks. He always seems to be betting against the economy in one way or another and always makes headlines doing so. It’s the Big Short effect.
Be sure to check out the latest video on the YouTube channel! We’re sure you’ll enjoy it!
Enjoy this week’s Hump Days!
- Humphrey, Rickie & Tim
👀 Eye-Catching Headlines
🛍️ U.S. retail sales top forecasts, showcasing consumer resilience (Bloomberg)
🧠 Amazon racing to catch Microsoft and Google in generative A.I. with custom AWS chips (CNBC)
🏦 Fed playing a waiting game to try to avoid a recession (Bloomberg)
🇦🇷 Argentina, out of options and money, presses the panic button (Bloomberg)
🧑⚖️ Trump indicted in Georgia election plot (Bloomberg)
📦 Amazon’s leader behind Alexa, Echo, and other devices plans to leave (WSJ)
The Weekly Brief
Stock Rally Stalls Despite Better-Than-Expected Earnings Season (WSJ)
Of the 90% of companies in the S&P 500 that have reported results, 79% have topped analyst estimates (2% more than the five-year average). Historically, companies that beat earnings estimates have seen shares rise 1.6% following the report, but this earnings season, companies are only seeing a 0.5% rise. Investors worry that earnings could keep deteriorating as the Fed’s rate increases work their way through the economy. Some anticipate a recession to hit later this year or early next.
Hump Days Take
Investors weren't very impressed with this quarter's earnings season and for good reason. The bar to beat profit expectations was already low to begin with because analysts at the end of last year predicted a 1% decline in earnings across the board. Many investors also believe that stocks are too expensive, especially as elevated bond yields make risk assets look less attractive.
Michael Burry Bought Bearish Options Against S&P, Nasdaq 100 (Reuters)
Michael Burry, famous for his depiction in The Big Short, bought put options against QQQ 0.00%↑ (Nasdaq 100 ETF), and SPY 0.00%↑ (S&P 500 ETF) in the notional values of $739M and $886M, respectively. Put options give Burry’s Scion Asset Management the right to sell at a fixed price in the future, meaning that he expects the stock price to decline below the price at which he can sell at a fixed rate.
Hump Days Take
According to the article, it's not clear what the fund paid to buy the puts, nor whether the puts were held outright or as part of a larger trade involving other contracts that might have been sold short.
Fitch Warns It May Be Forced to Downgrade Dozens of Banks, Including JPMorgan Chase (CNBC)
Back in June, Fitch cut its assessment of the U.S. banking industry’s health, but the move didn’t make headlines as it didn’t trigger any downgrades. However, another one-notch downgrade from AA- to A+ would force Fitch to reevaluate each of the 70 U.S. banks it covers. If this were to happen, the country’s two largest banks by assets, JPMorgan and Bank of America, would likely be cut from AA- to A+ since individual banks can’t be rated higher than the environment in which they operate.
Hump Days Take
The biggest risk to the potential downgrade to the industry is the path of interest rates determined by the Fed. Higher rates for longer than expected would put pressure on profit margins.
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