A Couple Of Things To Watch Tomorrow (Friday)

Evergrande declares bankruptcy, bonds & REITs continue to collapse. But some asset classes may be starting to be cheap.

This will be a really brief evening post, in preparation for Friday.

Likely, by now you have seen the news that embattled Chinese real estate giant Evergrande has filed for bankruptcy protection in a U.S bankruptcy court.

As I write this, Asian markets are falling on the news.

But I actually wanted to feature something else quickly to get you ready for tomorrow.

As I featured in a July 31 article, I upped the cash balance in my personal portfolio from 36% to just a hair shy of 40% as July ended.

In a follow-up article just two days ago, I added this:

In my last article, I revealed that during July I added 4% to my cash reserves, electing to decrease my allocation to U.S. stocks and REITs by 2% each. That decrease in REIT weighting actually took my normal 5% allocation all the way under 2%. As an extremely interest-rate sensitive sector, that one caused me particular concern.

I will share that, as of this morning, two limit-buy orders triggered for me on VNQ at prices roughly 5% where I sold those shares just a few weeks ago. I have similar limit-buy orders pending at levels between roughly an additional 3-10% lower in the event this trend continues.

Quickly, over the ensuing two days, two limit buy orders for VNQ at even lower prices have triggered for me.

Here are just a couple of stats I wanted to bring to your attention. Since the July 31 close, here are the declines for the 3 major U.S. indexes as well as selected ETFs I own.

Dow: 3.05%
Nasdaq: 7.17%
S&P: 4.76%

BLV: 5.97%
TLT: 6.61%
VNQ: 5.95%

Here’s what I wanted to feature. Please note that BLV and TLT, representing overall U.S. long bonds and Treasuries, have both experienced August declines greater than the S&P 500, and almost that of Nasdaq. Same with VNQ, Vanguard’s excellent REIT ETF.

But here’s the deal. These asset classes, at some level, were already cheap compared to stocks, as they far underperformed the U.S. stock market, and in particular the Nasdaq YTD, even before any of these drops.

I’ve been following a regularly-updated series of tweets from Markets & Mayhem that gives a very nice visual representation of this. Have a look:

For any interested in reviewing the actual tweet, here’s a link. (Substack does not appear to be natively bring in the actual tweets at the moment as they used to do, and I have not yet had a chance to look into why this is the case).

Basically, the idea is that long-term treasuries and Nasdaq tend to mirror each other. As yields on long-term treasuries rise, the price of TLT falls. And so, generally, does QQQ, representing the Nasdaq index. After all, higher interest rates are a headwind to growth stocks.

But, as Markets & Mayhem puts it, look at those “jaws” open over the last year. Long-term rates have been rising, yet Nasdaq rocketed upward, creating a huge disconnect. The implication? One or the other had to give.

Interestingly, as can be seen in both the August numbers I gave you above, as well as the very end of the line in the graphic above, Nasdaq has begun to collapse. But guess what? So have long term bonds. So, while the “jaws” are closing, they are far from closed.

For my part, over the past couple of days, not only have those VNQ limit buys triggered, but I have also begun to nibble at both BLV and TLT. Yes, they could still have farther to fall. But, in my opinion, they are cheap enough now that they may be worth a look.

As far as the market as a whole? I have a few modest limit buys on various ETFs in my portfolio, such as ITOT, DGRO, VTI, and VYM, that will start to trigger in modest, but increasing, quantities at prices just below where we are now and roughly about where the S&P index gets into the 4,200s.

I wanted to share this now because, well, sometimes Fridays get a little crazy when things are unsettled. Keep an eye out for bargains.

That’s all. Just a little food for thought. Be well, everyone.