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