Mentioned in Video:
- Everything You Need To Know About the Chinese Evergrande Crisis (So Far) @How Money Works: https://www.youtube.com/watch?v=vq4n3DXD7z0
- The Evergrande Crisis Explained – Today's The Deadline, Why The World Is Worried (@The Plain Bagel): https://www.youtube.com/watch?v=6VDPmDPombs
- 😨 Cathie Wood on @ARK Invest's Positions in China Stocks: https://www.youtube.com/watch?v=3PQgrAqQrCA
- 5 things to know about the Evergrande crisis: A simple breakdown: https://edition.cnn.com/2021/09/24/investing/china-evergrande-group-debt-explainer-intl-hnk/index.html
- China Makes Preparations for Evergrande’s Demise (@Wall Street Journal): https://www.wsj.com/articles/china-makes-preparations-for-evergrandes-demise-11632391852
- Support the channel and get extra member-only benefits by joining us on Patreon: https://www.patreon.com/tickersymbolyou
💥 The #EvergrandeCrisis grips wall street and everyone wonders if this is a small dip or the start of a true #MarketCrash. #CathieWood is trading around the ongoing bad news in her six #ARKInvest funds to get some of the best stocks to buy now at a cheap discount. This episode overviews #Evergrande Group leading up to the current crisis, whether the Evergrande China collapse is another #LehmanBrothers event, and the resulting changes to @ARK Invest‘s funds.
Video Transcript:
00:00
When it comes to recent stock market news, China always seems to be on the mind. As the
00:04
CCP continues to clamp down on high-tech companies that use sensitive consumer data to drive their
00:09
businesses, Cathie Wood has divested from most of these Chinese holdings because they expose ARK
00:15
Invest's funds and their investors to increased regulatory risks. Over almost this entire year,
00:20
we saw Cathie Wood exit many of ARK Invest's biggest positions in Chinese stocks like Baidu,
00:25
Tencent, K E Holdings, Alibaba, and more, but very recently, a different kind of fiasco has started
00:31
in China and is affecting economies all over the world. I'm talking about the Evergrande Crisis,
00:37
which many people are comparing to the collapse of Lehman Brothers in 2008.
00:42
So, in this episode, I'll give a quick overview of what's happening, what we should keep track
00:46
of while this story develops, and how Cathie Wood's holdings changed during the initial dip.
00:52
Your time is valuable, so here's the bottom line up front: I do believe this is just a dip but it
00:57
may put a lot of downward pressure on stocks with a lot of direct exposure to China, either through
01:03
financing or manufacturing. Since I'm always fashionably late on covering world news, I'll
01:09
keep this overview short and sweet. I'll provide additional resources in the description below,
01:14
and enable timestamps in case you want to skip right to the stocks. Let's get right into it.
01:20
Evergrande is China's largest property development company, employing over
01:25
200,000 people directly, as well as millions of subcontractors. They mainly build and sell
01:30
apartments to middle- and upper-class people and they own more than 1300 big projects across
01:36
over a hundred different cities in China. The first thing you need to know is that the Chinese
01:41
housing market is VERY different than here in the US. Property isn't “owned” by people in China,
01:47
it's leased from the government for decades at a time. These land leases are then purchased by
01:51
property developers like Evergrande, who will then design apartment buildings and pre-sell
01:56
them to regular investors. Those investors put down a deposit of as much as 50% of the price
02:01
and wait for these buildings to actually be completed. The second big difference is that
02:06
the value of these properties is very very high compared to the incomes of people buying them,
02:11
so it often takes an entire family to save up for these huge deposits. Between that and the
02:16
high population density of urban Chinese areas, real estate has become one of the only things that
02:22
most people in China really invest in. So, while the average joe who just put his life savings down
02:28
on 50% of an unfinished apartment building waits for it to be finished, what is Evergrande doing?
02:34
They're either using these down payments to pay for the construction of the pre-sold buildings
02:38
or using them to secure more land leases from the government and pre-sell more buildings.
02:43
Makes sense, right? Well, real estate in Chinese urban areas has been appreciating
02:48
at over 10% annually, so Evergrande decided to acquire as many land leases as they could,
02:54
which means securing more big loans from more big banks and other financial institutions, as well as
03:00
ramping up these pre-sales of apartments that have yet to be built. Well, fast forward to this time
03:04
last year, when the Chinese government started introducing new laws around the amount of debt
03:09
that real estate developers could take on AND regulating how money from pre-sales could be used.
03:15
These regulations were called “the three red lines” and basically dictated the asset-to-debt
03:21
and cash-to-debt ratios that these real estate developers could have, the same kinds of ratios
03:26
I always talk about when I look at the balance sheets for the growth companies I talk about on
03:30
this channel. In addition to the three red lines, some Chinese cities banned real estate pre-sales
03:37
altogether. As a result, Evergrande was forced to hold onto more and more properties for longer and
03:42
longer, as well as reduce their pre-sale prices to attract more new buyers, which lowered the value
03:48
of their properties, which made it harder for them to borrow money from banks, which means they had
03:52
to attract more new buyers by slashing prices on these pre-sales to keep the money flowing in,
03:57
which created a vicious cycle. And of course, they can't just sell off their buildings at a
04:02
massive discount to service their debt, since that would by definition lower the value of
04:07
their remaining buildings, which means they'd have a harder time borrowing money, which means they'd
04:11
have to keep slashing prices, and so on. Fast forward to today, and that's how we get to this:
04:17
Evergrande Gave Workers a Choice: Lend Us Cash or Lose Your Bonus. The Chinese property giant
04:23
owes $300 billion dollars and is on the hook for as many as 1.6 million apartments. It may owe tens
04:30
of thousands of its employees money, too. When the troubled Chinese property giant Evergrande
04:35
was starved for cash earlier this year, it turned to its own employees with a strong-arm pitch:
04:40
Those who wanted to keep their bonuses would have to give Evergrande a short-term loan.
04:45
Some workers tapped their friends and family for money to lend to the company.
04:49
Others borrowed from the bank. Then, this month, Evergrande suddenly stopped paying back the loans,
04:54
which had been packaged as high-interest investments. Now, hundreds of employees
04:58
have joined panicked home buyers in demanding their money back from Evergrande,
05:02
gathering outside the company’s offices across China to protest last week.
05:35
Remember those big loans from big banks I mentioned earlier? Well, once China’s most
05:39
prolific property developer, Evergrande has become the country’s most indebted company. It owes money
05:45
to lenders, suppliers, and foreign investors. It owes unfinished apartments to home buyers
05:51
and has racked up more than $300 BILLION DOLLARS in unpaid bills. Evergrande faces lawsuits from
05:57
creditors and has seen its shares lose more than 80 percent of their value this year, going from
06:02
2 dollars per share to well under 40 cents. This backlash also puts the spotlight on other property
06:08
developers in China: who are THEY borrowing money from? Will THOSE banks now pull out? Are THEIR
06:13
property prices going to crumble? Will THEY be able to finish their projects? The combination
06:19
of Evergrande's creditors not getting their money back and increased scrutiny on the credit lines
06:24
extended to other real estate developers is how you get that “Evergrande contagion effect”
06:29
that the news is talking about. And like all contagions, the 300 billion dollar question is;
06:35
can it be contained? And that brings us to the comparison between Evergrande and the collapse
06:40
of the Lehman Brothers, who found themselves in the kind of same vicious cycle about 14 years ago,
06:45
except with Mortgage-Backed Securities instead of actual apartments. To be honest, I'm actually not
06:51
the right guy to tell you whether or not this is a Lehman Brothers moment that could reshape the
06:55
world's economy. I know, you're shocked. I don't really think any one YouTuber has the answer if
07:01
there even is just one answer, but if you're looking for other great videos on this story,
07:05
I've linked a few in the description below. Here's what we should remember about Lehman
07:10
Brothers and the financial crisis of 2007 and 2008, and why I'm still comfortable buying
07:16
stocks on dips like this one, for now. Lehman Brothers didn't crash overnight;
07:21
their stock took over a year to crumble, from May of 2007 to September of 2008. Once they finally
07:28
capitulated in September of 2008, that's when the market really tanked, because Lehman was at the
07:34
center of a pretty big web of bad debt, to say the least, just like Evergrande appears to be today.
07:40
So, if we look at the one year chart Evergrande's stock, ticker symbol E G R N F on the OTC Markets,
07:46
it's been falling HARD over the last year, just like Lehman Brothers stock did. So,
07:51
if we look at the Dow Jones over this same one year time period, we can see that Evergrande isn't
07:51
dragging it down the same way Lehman did during the financial crisis of 2007. I'm not a financial
07:52
advisor and this is not financial advice, but in my personal opinion, this Evergrande
07:57
collapse doesn't seem to currently be causing the same amount of widespread damage as Lehman's
08:08
collapse did, based on the last year of it already crumbling. What I will say is that companies that
08:16
rely on China heavily for manufacturing or have serious exposure to China's economy in other ways
08:22
could see more dips as more bad financial news comes in. From that perspective,
08:29
Cathie Wood selling out of ARK Invest's biggest holdings in Chinese stocks earlier this year
08:33
seems like a great call, or at the very least, great timing.
08:36
Comment below or tweet me at ticker symbol you with your thoughts on the Chinese markets,
08:41
Evergrande, and whether or not you think its collapse will result in a big correction here.
08:45
Is this ongoing story changing your opinion on certain stocks you hold or that you were thinking
08:50
about buying? Are you starting to hold more cash as a result? I'm excited to hear your thoughts.
08:56
Also, thanks to the thousands of people who responded to my surveys on YouTube,
09:00
Twitter, and Patreon, asking how you feel about the market-wide dip associated with
09:05
the Evergrande story breaking. I really appreciate your engagement. I like seeing that almost 90% of
09:11
the people watching Ticker Symbol YOU understand that bad news unrelated to your direct holdings
09:17
often presents a short-term buying opportunity and that many of you have the confidence to not check
09:22
the market every single day. I'm still working on that one for myself. For the 10% that think
09:27
red days mean underperformance, do you feel that way because you're close to retirement or are
09:32
actively looking to exit certain positions for some other reason? Or maybe you've deployed your
09:37
entire cash position already. Either way, I'd be happy to hear your thoughts in the comments below
09:41
or on Twitter at ticker symbol you, because knowing my audience makes me a better presenter.
09:47
In my opinion, based on ARK Invest's latest trading data, it appears that Cathie Wood also
09:51
believes that Evergrande's effects on the American markets will be fairly limited because she bought
09:56
the dip Evergrande created earlier this week. So, let's look at that data and talk about what
10:02
she bought. This is a table looking at the changes in ARK Invest's holdings for all 6 funds combined,
10:07
from Friday, September 24th, which is the day before the Evergrande news broke,
10:11
to Wednesday the 22nd, which is when many of her positions rebounded.
10:16
Each row is one stock, the rows are sorted by ARK Invest's total position in that stock,
10:20
and each row is colored by ARK Invest's percent change in share count in that position,
10:26
so we're looking for the darkest green rows. Also, note that the third column shows you the
10:30
change in share price since then at the time of this recording. If these numbers look a little
10:32
small to you, remember: these are BIG positions and a very short time window. So, here are Cathie
10:33
Wood's biggest buys in ARK Invest's highest conviction positions since the Evergrande
10:38
news broke earlier this week. Their position in Teladoc, ticker symbol T D O C, grew by almost 5%,
10:44
or $100 million dollars. Their positions in Coinbase, C O I N, and ROKU, R O K U,
10:51
and UiPath, ticker symbol P A T H, grew by over 50 million dollars each. Those are the same stocks
10:57
that Cathie Wood has been buying aggressively all summer and I've done a deep dive on each one of
11:02
them by now. If you're interested in those deep dives, I've put them together in one convenient
11:06
playlist of Growth Stock Deep Dives for you. I'll link that in the top right hand corner of
11:09
your screen right now and in the description below as well. The other big purchases in ARK Invest's
11:15
top 20 positions include Zoom Video, ticker symbol Z M, Invitae, N V T A, and Draftkings,
11:22
ticker symbol D K N G after it dipped over 10% over the last few trading days. Each one of these
11:28
buys represents tens of millions of dollars invested over ARK Invest's 6 funds combined.
11:35
If I sort the data by Cathie Wood's biggest percent increases in share count instead of
11:39
by position size, many of the stocks I just covered are actually some of ARK Invest's biggest
11:44
buys overall, so far. Let me highlight Teladoc, Coinbase, Roku, UiPath, Zoom Video, Draftkings,
11:51
and Invitae again, so you can see them in context of all of these big share count increases.
11:56
It's not often we see so many top positions also get the biggest increases; in my opinion,
12:02
this shows that ARK Invest's five-year outlook on these companies is slowly but steadily increasing.
12:08
Outside of these massive positions, they also purchased a lot of Signify Health, ticker symbol
12:13
S G F Y, Robinhood, H O O D, Somalogic, S L G C, Vuzix, V U Z I, 3D Systems, D D D, Genius Sports,
12:25
G E N I, Markforged, M K F G, Personalis, P S N L, and Kratos Defense and Security,
12:32
ticker symbol K T O S. I've talked about most of these companies fairly recently as well,
12:37
but let me call out the genomics and advanced healthcare companies specifically – since I talked
12:43
about Cathie Wood rotating out of them earlier this summer and now it appears that she's starting
12:47
to rotate back in. Signify Health is an end-to-end healthcare platform for managing bundled payments
12:53
for various care programs — from diagnosis to hospitalization through recovery and care
12:58
at home. It currently sits in ARKK, ARK Invest's flagship innovation fund, and ARKG, their genomics
13:05
revolution fund. But in my opinion, Signify Health could just as easily sit in ARKW and ARKF, ARK
13:11
Invest's advanced internet and fintech innovation funds respectively. Teladoc sits in all four of
13:17
those funds, just for some context. SomaLogic is a proteomics company that focuses on biomarker
13:23
discovery and clinical diagnostics. Their platform is really good at looking for thousands of these
13:28
biomarkers simultaneously with high specificity and sensitivity, meaning high rates of true
13:34
positives and true negatives. Invitae is a genetic diagnostics company that offers gene panels and
13:40
single-gene testing for a broad range of clinical areas including hereditary cancer, cardiology,
13:46
neurology, pediatric genetics, metabolic disorders, and so on, so it's pretty core to ARKG.
13:53
Personalis, is a provider of advanced genomic sequencing and analytics solutions to support the
13:58
development of personalized cancer vaccines and other next-generation cancer immunotherapies. So,
14:03
they're a company that focuses on building tools and processes to improve every part
14:08
of the value chain in next-generation gene sequencing. Boom. You're basically a doctor now.
14:13
Let me know in the comments below if you want me to spend more time covering big global financial
14:17
events like the current Evergrande story and whether or not you want me to focus more on the
14:22
story itself or on ARK Invest's trades around it. To me, the most interesting part is what the best
14:28
money managers like Cathie Wood, Michael Burry, Ray Dalio, and many others are doing when news
14:34
like this breaks, but I'm always happy to take a step back and cover more of the stories themselves
14:39
if you find that helpful. Either way, I hope you found this episode helpful in catching you up on
14:43
the Evergrande story itself, how it's similar and different to the collapse of Lehman Brothers in
14:48
2008, and what trades Cathie Wood has made so far, as a result. If it was helpful, consider liking
14:54
this episode and subscribing to the channel, with all notifications turned on. That's a great way to
15:00
invest in the channel that invests in you. Thanks for watching and until next time, this is ticker
15:05
symbol you, my name is Alex, reminding you, that the best investment you can make… is in you.
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