Michael Burry said he predicted the sharp decline in the Ark Innovation ETF (NYMARKET:ARKK), the legendary Big Short investor wrote in a deleted tweet.
Cathie Wood’s popular ETF increased by fourfold in value in the period from March 2020 to February 2021, with all of those gains now gone amid the current market downturn.
“This was coming because it has always been this way before,” Burry said in a tweet Monday, coupled with ARKK’s stock chart over the past three years.
“How anyone over the age of 40 did not see it coming is a riddle. The answer is Greed.”
Q3 2022 hedge fund letters, conferences and more
Find A Qualified Financial Advisor
Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.
Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.
If you're ready to be matched with local advisors that can help you achieve your financial goals, get started now.
Fed’s Moves Crushed ARKK
Consecutive red-hot inflation reports pushed the Fed to aggressively tighten its monetary policy, which then prompted a significant selloff in risky assets, which are a backbone of Cathie Wood’s investing policy.
Aggressive tightening of the monetary policy is now also threatening to break the U.S. economy with many economists calling for a recession in 2023. Moreover, the war in Ukraine has further worsened the supply chain situation, hurting profits and margins.
The spike in yields also pushed the U.S. dollar to multi-decade highs against the Euro and Yen, therefore yielding a significant headwind for tech companies that generate a portion of their revenues from overseas.
During 2020, ARKK’s share value skyrocketed from $38 to $160, following the fund’s bets on tech giants like Tesla (NASDAQ:TSLA), Zoom (NASDAQ:ZM), Coinbase (NASDAQ:COIN), and Shopify (NYSE:SHOP), all of which have seen unprecedented growth amid the coronavirus pandemic.
However, nearly all of these companies saw their shares collapse in the last 12 months on the back of the rapidly increasing macro headwinds. For instance, Shopify shares are down 85% since November last year.
In this context, ARKK has taken a sharp U-turn, losing more than 60% in value year-to-date (YTD) due to sky-high inflation and aggressive interest rate hikes by the Fed and other major central banks across the globe.
Burry’s predictions that Wood’s ARKK would eventually lose its gains date back to February 2021.
"It is too early, she is too hot, and, today, short sellers are timid, but Wall Street will be ruthless in the end," Burry wrote in a tweet at the time.
He said ARKK was “defining an era” as investors were extremely interested in speculative assets during 2020. But Burry also mentioned, “a pattern” that can help investors who “know history.” However, those who don’t are destined to repeat it, he added.
Heavy Options Trading in ARKK
Burry even bet against Wood’s ETF through bearish put options and the fund’s largest portfolio investment, Tesla, in Q2 2021. In response to Burry’s claims, Wood said the investor did not understand the fundamentals of ARKK’s tech stock holdings nor did the investor recognize their appeal.
Burry rose to fame when he forecasted the crash of the U.S. housing market ahead of the 2008 financial crisis. He bet against the housing bubble at the time, bagging $100 million in personal profits and an additional $700 million for his remaining investors.
He was also one of the early investors in the electronics retailer GameStop (NYSE: GME) before the meme-stock craze in January 2021, when stocks like GME, AMC (NASDAQ: AMC), and Bed Bath & Beyond (NASDAQ: BBBY) saw unprecedented gains.
Michael Khouw, Chief Investment Officer at Optimize Advisors, told CNBC that ARKK traded at 1.4 times its average daily options volume on Monday, with more than 200,000 contracts traded on that day.
According to Khouw, ARKK “was the ninth-busiest ETF option” on Monday, with many of the top options alerts likely signaling activity related to ARKK’s price movement.
He noted several large trades on Monday, with one buyer of 3300 setting an average price of 45 cents per contract. Khouw estimates ARKK to decline by over 13% by weekly expiration.
On Thursday, ARKK slipped into a fresh two-and-a-half-year low following yet another very hot inflation report that is likely to act as an overhang on the tech-heavy ETF for some time.
Summary
ARKK, Cathie Wood’s flagship ETF focused on high-growth stocks, hit fresh multi-year lows on Thursday following another very strong CPI report. For Big Short star Michael Burry, the collapse of ARKK “was coming” given the unprecedented rise in valuation the fund experienced in 2020.
Get Smarter on Crypto and Macro. Get the 5-minute newsletter that keeps investors in the loop. Five Minute Finance is an independently run newsletter covering the latest and most important trends in crypto, macro, and global markets.
