💥 ARK Invest’s HUGE Trades Around the Collapse of Evergrande Group

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