China Evergrande Files Chapter 15 Bankruptcy!

If you're looking to take your investing knowledge to the next level, make sure to check out our latest free courses offered on mainstreetwolf.com!

Market News and Short-Term Predictions

Panic has hit the market this week with a flurry of negative news out of China.

People’s Bank of China unexpectedly lowered the rate on its one-year loans by 15 basis points to 2.5% earlier this week, the most since 2020. This is something done normally in order to deter an economic slowdown.

We also just found out that China Evergrande sought Chapter 15 protection in Manhattan bankruptcy court which is causing newfound fears of contagion that may spread through the global financial system.

Evergrande reportedly owes money to about 171 domestic banks and 121 other financial firms. A complete default could potentially lead to a credit crunch, which would negatively impact China's banking system and the global economy.

The real estate sector and related industries account for as much as 30% of China's GDP. Therefore, the collapse of Evergrande could trigger wider risks for China's property market, affecting homeowners and the broader financial system.

If Evergrande fails, the Chinese government is expected to prioritize protecting homebuyers and creditors. Existing shareholders, including the founder's family, maybe the last priority and could lose their equity.

The crisis exposes vulnerabilities in China's property sector and could have significant implications for the middle class and the global economy. The Chinese government faces the decision of whether to allow Evergrande to fail or intervene.

Granted we don't have the full picture of what is happening in China, but there is some concern that if their economy starts to collapse there would be negative impacts on the US stock market.

We also have the latest FOMC meeting minutes revealing a split among board members on further rate increases, with some favoring no change. This increased the likelihood of a rate hike in November.

With the China worries and possible rate hikes still on the table, it makes sense that the VIX is spiking close to its 200 DMA. The good news is that this is usually the best time to start nibbling on some stocks that have sold off if none of the news coming out turns into a black swan event. I think a 10% pullback is healthy rather than concerning that we are headed for a crash/bear market.

I did want to point out that my fears over tech running too hot a month back have finally started to play out with the sector underperforming while health care has actually been outperformed which was a laggard. I still think this trend may continue for a little longer and get a little bit more defensive, but keeping my eye out on my Patreon watchlist as some names are nearing my targets, and also looking to add to current names like $MSFT/$AAPL if they continue to sell off.

Real estate is another sector that is getting hammered in the short term on two fronts (rate hikes/bond yields being higher and contagion fears), but again may actually be setting up for a nice longer-term entry. If rates start to top out and these rates go down it may be a tailwind for the sector.

Lessons to Be Learned

You may have heard in the news about the tragic Maui fires. The stock of Hawaiian Electric (HE) has fallen hard due to the potential liability claims against the company. It was trading in the $40s only a couple of weeks ago but is now trading at $12.

I had a patron reach out to me about the stock today and asked what usually happens with a stock facing this type of legal issue.

Something like this happened with PG&E which was forced into bankruptcy after its equipment was linked to wildfires that spread across California in 2017 and 2018, So we can use that as an example of what happens to stocks that fall into these situations.

With PCG, the stock had a similar decline. See the chart below.

Here was their situation:

$PCG faced a $70 billion liability. It settled in court for a $13.5 billion liability covering all charges. Half was paid in cash and half in stock. That’s a drastic decrease from the $21 billion liability fund established earlier.

Essentially the stock has struggled and the investors that got in too early haven't really done well while the ones that timed the perfect bottom have done okay, but were opportunity costs as they could have just invested in another stock and gotten better performance from buying a quality company without all the headaches.

Current $HE estimated liability is $5.5 billion. The market cap of the company is only $1.3 billion. The options market is pricing that this company is going to $0 shortly or they will settle and bounce back to $15-$20.

At the end of the day, the outcome is entirely unknown. I would rather not have my capital tied up in what I see as binary speculation (could jump massively to the upside or downside based on what is decided in court).

Portfolio Update

Stock/Option Watchlist

Stocks: TSLA, LLY, CHDN, ROK, ADSK, PTLO

Options: SPLG, PLTR, BAC, MPW, F, AAL, T, DISH

See premium membership for details on interested entry points/strike prices/current wheel positions.

Options Trading Portfolio

Closing Trades

Got caught by the more significant down move in MPW after their Q2 earnings (which is the inevitable part of selling puts if you do it long enough), and decided to cut the short put position instead of keeping it for assignment for a $185 loss.

If you don't want to miss out on the following: weekly buy/sell activity in the stock/option portfolios (Excel Spreadsheet with full details), real-time alerts through Discord, and access to premium courses & tools check out the premium membership. Start your 7-day free trial today!

If you want to score 1 FREE month of premium membership, refer 3 friends/family/coworkers who would enjoy the weekly investing newsletter!