Michael Burry Holds Short Restraint, Flags Bull Trap Risk Amid Fannie Mae Stakes

Michael Burry, the investor known for his role in "The Big Short," stated on a Substack chat that he is not adding new short positions despite viewing current stock market highs as a potential "bull trap." His caution comes as his portfolio maintains an 8% to 10% allocation to Fannie Mae and Freddie Mac junior preferred shares, a position dependent on a specific government resolution.

The warning followed a mixed trading session where the SPDR S&P 500 ETF Trust (SPY) declined by 0.06%, the Invesco QQQ Trust (QQQ) fell 0.7%, and the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.35%. The S&P 500 remained near the record high set the previous week. Burry noted that while many stocks are hitting new highs, the market environment is not conducive to adding bearish exposure. He described the challenge as staying positioned until his bearish view plays out, stating, "I just know where this will be in a few years. The trick is to get there."

Burry indicated that puts constitute approximately 10% of his portfolio, with long positions and LEAPS making up the majority of the remainder, leaving minimal cash. He expects his long holdings to perform over a three-to-five-year horizon, dismissing a one-year timeframe as insignificant. His existing short exposure is primarily expressed through puts on the Nasdaq-100 and semiconductor stocks, with options expiring in 2027 and currently 20% out of the money. He estimates the window for a significant market top is between zero and nine months.

The core of his strategy involves junior preferred stock (JPS) in Fannie Mae and Freddie Mac. Burry sold his common shares in both companies and moved into the junior preferreds, a move he made quickly due to discomfort with his risk position in the common equity. The junior preferred shares rank above common stock in the capital structure. His thesis is that these shares could benefit if the government resolves its senior claims and reinstates preferred dividends. He suggested that depending on interest rates, the potential return from current levels could reach four to five times.

A primary risk to this position is the Treasury's senior preferred stock liquidation preference, which Burry estimates at approximately $388 billion, roughly twice the combined book value of the companies. If these claims were converted into common shares, existing common shareholders would face severe dilution, a scenario in which he believes junior preferreds are better positioned. He anticipates that a resolution favorable to both common and preferred shareholders could occur within two years, though he admitted the delay has made him "antsy," citing a "quickly deteriorating" multifamily housing situation.

Burry identified the Trump administration as a key factor in this resolution. He argued that a lengthy IPO process is incompatible with President Trump's preference for "big wins" and his low tolerance for detail. However, Burry contended that resolving the senior preferred stock and its liquidation preference does not require an IPO. He stated that canceling the Senior Preferred Stock (SPS) and the liquidation preference would be an easy action that has not been taken. Government warrants expire before the 2028 election, which could force action, though they could also be extended. Burry noted that Treasury and FHFA hold all the cards, with some action needed before the end of Trump's term. Regarding Treasury Secretary Scott Bessent, Burry observed that he is "toeing a line a lot more than I thought he would."

Market performance for Fannie Mae (FNMA) and Freddie Mac (FMCC) has been poor, with both stocks falling for seven straight weeks and on track for their worst annual run since 2010. FNMA and FMCC are down 68% and 69% year-to-date, respectively. Mizuho recently downgraded both stocks and cut their price targets, estimating the odds of fast privatization by 2028 at 18% for Fannie Mae and 9% for Freddie Mac. Economist Peter Schiff was more bearish, calling a Fannie-Freddie IPO "always a pipe dream" and describing the recent rally as "just a pump-and-dump scheme," noting the stocks were down nearly 80% from their September 2025 highs.