Another Sputnik Moment

The Market Isn’t That Efficient

The Efficient Market Hypothesis (at least the strong form of it), posits that stock prices include all information about a company, both public and private. Recent price action in Nvidia (NVDA -6.71%↓) shows that that’s not quite the case.

On Friday, I posted a bearish bet on Nvidia in response to the DeepSeek news I’d read about the night before.

I didn’t have any inside information about the Chinese AI startup DeepSeek, and others knew about it weeks before me. And yet I was still able to buy $141 strike puts on Nvidia for $0.75 on Friday. I just sold the second half of those puts today for $20.80, a 2,633% gain, one of two successful exits so far this week.

1. Calls on UnitedHealth Group (UNH 1.77%↑). Bought for $1.36 on 1/23/2025; sold for $4.35 on 1/27/2025. Profit: 220%.

2. Puts on Nvidia ( NVDA -5.78%↓ ). Bought for $0.75 on 1/24/2025; sold (half) for $20.80 on 1/27/25. Profit: 2,633%.

That wouldn’t have been possible if the market were fully efficient. The reason why Nvidia shares tanked today, and not Friday, is that it apparently took the weekend for market participants to fully digest the impact of what some have called another “Sputnik Moment”. Sputnik of course was the first manmade satellite, launched by the Soviets in 1957. It was a wakeup call that the U.S. had a formidable competitor in missile technology and space. DeepSeek is a similar wakeup call that China is a formidable competitor in AI (as it is in ship building, EV manufacturing, and so much else).

The Other Big News The Market Hasn’t Digested

While most investors and techies were focused on DeepSeek over the weekend, there was another big news story: The current Trump administration is serious about deporting illegal aliens. The Department of Homeland Security has been conducting daily raids, arresting hundreds of aliens per day, and President Trump said he wanted to see that number go up to 1,200 to 1,500 per day. The President of Colombia said his country wouldn’t take back its citizens illegally here, and then quickly capitulated after President Trump threatened severe sanctions on Colombia.

The market anticipated this to some extent, driving up shares of private prison company The Geo Group (GEO -3.46%↓) after the election, assuming they’d be hired to detain illegals prior to deportation.

But the market hasn’t seemed to consider what companies will benefit from illegal aliens no longer being here. I think auto insurers will benefit, and the one we’re betting on today is actually down slightly since the election.

Anecdotally, it appears that illegal aliens cause a lot of car accidents. It’s tough to quantify how much, as under the previous administration, no one was eager to keep track of negative externalities of their de facto open borders policy. Also anecdotally, it appears there are a lot more illegal aliens here than the estimates that have been bandied about.

The Deportation Trade

Our thesis here is simple: illegal aliens generally don’t buy car insurance, but they cause a disproportionate share of car accidents. With fewer of them here, auto insurers won’t lose much in premiums, but they will pay out less in claims. Our bet is that this will be reflected in the share price of America’s leading auto insurer by late summer, after it reports results for the first two quarters of this year.

If we’re right, our maximum upside on this trade will be a gain of about 245%; if we’re wrong, our maximum loss will be 100%.

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