Back in February, I introduced the “smartest guy in the room,” Michael Burry.
Unless you hang out with NASA rocket scientists or Nobel Prize winners, I doubt you know anyone smarter than Burry. In case you need a reminder, he’s the eccentric hedge fund manager played by Christian Bale in The Big Short. He was one of the few managers smart enough to not only predict the 2008 meltdown years ahead of time but to successfully bet against it and make a fortune.
Burry also made news a couple of years ago by recommending GameStop Corp. (NYSE: GME). Who can forget the short squeeze earlier this year that sent GME up by a factor of 30 in weeks? Yeah, Burry was way ahead of the crowd on that one too.
A Huge Tesla Short
I bring this up because Burry is in the news again. His firm, Scion Asset Management, holds put options on 800,100 shares of Tesla (Nasdaq: TSLA) stock. At current market prices, that represents about half a billion dollars worth of shares.
Burry isn’t God. He’s human and as fallible as the rest of us. He doesn’t get every trade right, and he’s often really early with these predictions. He hemorrhaged cash and faced an investor revolt that nearly cost him his firm before ultimately being proven right in 2008.
But he doesn’t misfire often. And shorting TSLA seems like a high-conviction bet for him.
So, what are our takeaways here? Should we short Tesla too?
Maybe. I’m not going to tell you not to short Tesla. I like Elon Musk. His contributions to environment-friendly electric vehicles and consumer space travel are commendable. I’d love to see Tesla become a major automaker with fat profit margins rather than a novelty company that produces half a million cars per year and struggles to turn a profit doing so.
But I also think the current share price is ludicrous and that most of the Tesla bulls are a cult. You won’t see me buying the stock any time soon.
But I’m more interested in the bigger picture here.
When the Bubble Bursts…
Tesla has been the poster child of the bubble market. When the Federal Reserve flooded the market with liquidity following the COVID-19 outbreak, a lot of that freshly-created money found its way into the stock market. Wildly speculative tech plays were the beneficiaries in a lot of cases. It also found its way into Bitcoin and other cryptos. Tesla dumped a crazy amount of its corporate cash reserves into Bitcoin, turning the company into a pseudo-cryptocurrency hedge fund that also sells electric cars.
When the Tesla bubble bursts, I expect it to take down the broader bull market with it. It won’t happen instantly, and not all stocks will drop in unison, of course. Just as we saw when the Nasdaq bubble burst in 2000, there can still be strong winners even if the market leaders break down.
We’ll be ready for it. Our Green Zone Ratings system is designed to find market-beating stocks, no matter the conditions. If you’d like to learn how to use Green Zone Ratings to find your own stock winners, check out my colleague Matt Clark’s video here.
Until next time…
To safe profits,
Charles Sizemore
Editor, Green Zone Fortunes
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.