By now, you've probably heard about Michael Burry's recent billion-dollar bet against artificial intelligence ("AI")...
The AI Trend Isn't Out of Steam Yet
By Pete Carmasino, chief market strategist, Chaikin Analytics
By now, you've probably heard about Michael Burry's recent billion-dollar bet against artificial intelligence ("AI")...
Burry is a hedge-fund legend. He's most famous in the investing world as "the man who called the 2008 housing crash"...
Before the bubble burst, Burry foresaw the collapse of the U.S. subprime lending market. And he got in position to capitalize on the crash through credit default swaps.
In the end, Burry made $100 million for himself and $725 million for his investors.
Author Michael Lewis popularized Burry's story in his 2010 book, The Big Short. Then, five years later, actor Christian Bale played Burry in the movie made from the book.
And not long ago, Burry was back at it...
Specifically, he targeted AI leaders Nvidia (NVDA) and Palantir Technologies (PLTR). Earlier this month, Burry's hedge fund revealed "short" positions against both stocks. As regular readers will recall, my colleague Ethan Goldman briefly mentioned the big move from Burry in the November 6 edition of the Chaikin PowerFeed.
Burry's latest bet looks enormous at first glance. But he didn't actually spend $1 billion.
In reality, it was a leveraged bet using "options" – which is dangerous in its own way...
If you're not familiar with options, one contract controls 100 shares of the underlying stock.
So if you bought one put-option contract for $1.84 on a $190 stock, you'd only need to use $184 of your own money. That's the $1.84 cost times 100 shares.
In other words, for just $184, you'd get the exposure or return of a $19,000 investment.
The catch is that you can lose all the money you put into the options...
Options are only good until a predetermined date. They continue to lose "time value" as they get closer to that date. And eventually, they can expire worthless.
During the third quarter, Burry bought 50,000 put options on Palantir at $1.84.
Knowing what you now do about options, you see that he spent roughly $9.2 million on his bet. That's 50,000 contracts times 100 shares for each contract times $1.84.
This bet amounts to 5 million shares of Palantir's stock. At roughly $184 per share, the "notional value" of Burry's position is about $920 million.
Burry did the same thing with Nvidia for another $187 million in notional value.
That's more than $1 billion in notional value overall.
To be clear, I need to give Burry credit. He put his money where his mouth is – at least some of it. And as you know, tech stocks recently endured a terrible stretch. So Burry could've made a short-term profit.
But folks, let's be realistic...
Calling tops in bull markets is a brutal game. That's true even for guys like Burry, who got famous doing it one time almost two decades ago.
And despite a tough period for stocks recently, the bull market hasn't ended yet. Just consider the big news with Nvidia last week...
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Nvidia's CEO Says Sales Are 'Off the Charts'
This past Wednesday, Nvidia released its third-quarter earnings. And leading up to the earnings release, we saw plenty of investor uncertainty over how the results would come in – and over the AI narrative in general.
Burry's big move certainly played a role in all that anxiety.
Put simply, investors have been on edge. Just take a look at Nvidia's stock from the perspective of the Power Gauge...
As you can see, the Power Gauge rated Nvidia as "bullish" or better for almost the entire past six months. And the stock has mostly enjoyed sustained positive activity from the "smart money" on Wall Street as well. That's the panel below the chart measuring Chaikin Money Flow.
More recently, you can see the stock's pullback from its October highs. And you'll notice that the Chaikin Money Flow dipped deeper into the red. Plus, you can see that Nvidia's Power Gauge rating dropped into "neutral" territory leading up to the earnings announcement.
However, you'll notice the big recovery in Chaikin Money Flow from its low point. Meanwhile, another key indicator has remained steady across this entire six-month period...
I'm talking about Nvidia's relative strength versus the S&P 500 Index. It never dipped into negative territory.
Then last week, as Nvidia CEO Jensen Huang noted in the earnings release regarding the company's chips, "Blackwell sales are off the charts, and cloud GPUs are sold out."
Those aren't empty words, folks...
During the quarter, Nvidia brought in record revenue of $57 billion. That's a year-over-year jump of 62%. And looking ahead to the fourth quarter, the company expects to see revenue of $65 billion, give or take 2%.
Put simply, Nvidia is still printing money.
Plus, keep in mind that earlier this month, Palantir beat earnings and raised guidance.
This should help calm some investors' nerves about the AI boom running out of steam.
And coming back to Burry, only time will tell if he proves right over the longer term...
The news of his billion-dollar bet has created a bunch of "noise" in the market. But I doubt he'll make anything close to what he did with his bet against the housing industry in 2008.
Folks, my point is simple...
I think Burry is way too early in the cycle.
To be clear, don't be surprised to see volatility along the way. But I'm not backing away from the AI megatrend just yet.
Good investing,
Pete Carmasino
Market View
Major Indexes and Notable Sectors
# Hld: Bullish Neutral Bearish
Dow 30
+0.4%
8
13
9
S&P 500
+1.47%
97
243
160
Nasdaq
+2.56%
23
46
31
Small Caps
+1.83%
495
1015
399
Bonds
+0.57%
Information Technology
+2.38%
19
40
9
— According to the Chaikin Power Bar, Small Cap stocks remain somewhat more Bullish than Large Cap stocks. Major indexes are all bearish.
* * * *
Sector Tracker
Sector movement over the last 5 days
Health Care
+2.35%
Communication
+1.65%
Materials
+1.25%
Financial
+0.86%
Real Estate
+0.69%
Consumer Staples
+0.3%
Consumer Discretionary
-0.09%
Industrials
-0.35%
Utilities
-0.46%
Energy
-1.3%
Information Technology
-1.39%
* * * *
Industry Focus
Transportation Services
8
16
19
Over the past 6 months, the Transportation subsector (XTN) has underperformed the S&P 500 by -6.41%. Its Power Bar ratio, which measures future potential, is Weak, with more Bearish than Bullish stocks. It is currently ranked #17 of 21 subsectors and has moved up 1 slot over the past week.
Indicative Stocks
CAR
Avis Budget Group, I
CSX
CSX Corporation
FIP
FTAI Infrastructure
* * * *
Top Movers
Gainers
AVGO
+11.1%
WDC
+8.43%
MU
+7.99%
APP
+7.6%
HOOD
+7.15%
Losers
CCL
-6.78%
PSKY
-5.22%
CPRT
-4.47%
TYL
-4.17%
LYV
-3.84%
* * * *
Earnings Report
Earnings Surprises
WWD Woodward, Inc.
Q4
$2.09
Beat by $0.20
ZM Zoom Communications Inc.
Q3
$1.52
Beat by $0.08
KEYS Keysight Technologies, Inc.
Q4
$1.91
Beat by $0.08
A Agilent Technologies, Inc.
Q4
$1.59
Beat by $0.01
* * * *
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