The Market Is Crashing: Here’s What I Am Buying

D-KeineLast week’s Monday was something to remember. The Japanese stock market (JPXN) just had its worst trading day since the “Black Monday” in 1987, dropping by 13% in a single day… Bitcoin (BTC-USD) also dropped by about 16%. And the fears are now also spreading to the American (SPY) and European (VGK) stock markets, with Tech (QQQ) stocks being hit especially hard. In fact, they are now officially in a correction as their share prices have dropped by 12% on average: Data by YChartsThis has led many of you to ask me: Why is the market crashing? And even more so, what are you buying following this correction? So let me answer that in this article. I think that the market is crashing because of three key reasons: Firstly, there are growing fears of a recession. The consumer is weakening, real-time inflation is down to 1.5%, and the Fed is now talking about cutting interest rates… All signs of a coming recession. This reminds me of a meme that I saw scrolling Twitter the other day: rhnterh on X Secondly, there’s that whole Japan carry-trade thing. In case you are not familiar with this, essentially what happened over the past many years is that interest rates were consistently much lower in Japan when compared to the US. As a result, a lot of investors were tempted to borrow in Japan to invest in the US and pocket the spread in between. This worked well in recent years because there was a large yield spread and the US Dollar was also appreciating relative to the Japanese Yen because the Fed kept hiking interest rates – resulting in additional currency gains. But now it is the opposite. The Fed clearly signaled that interest rates would be cut in the US and to make matters even worse, the Japanese Central Bank just hiked its interest rates, causing the Japanese Yen to surge in value relative to the US Dollar: Data by YChartsAs a result, all these carry-trade investors are suddenly suffering large losses, and they are forced to sell their US assets to pay off their Japanese debt. This led to a lot of forced selling in the past weeks. Finally, the third reason for the recent volatility is what’s happening in the Middle East. It is widely expected that Iran will launch a big missile and drone attack on Israel at any moment now. The world is inching closer and closer to a third World War and, understandably, it is concerning the market: Google maps Here you may think that now is a good time to hold cash and be out of the market. We are facing significant uncertainty and yet, stock market valuations still remain at historically high levels. Therefore, I wouldn’t blame you if you wanted to hold some cash to sleep better at night. After all, even Warren Buffett’s Berkshire Hathaway (BRK.B) is sitting on a mountain of cash right now after recently selling over half of their stake in Apple (AAPL). But I am not doing that. I don’t think that it is possible to time the market. I have a long time horizon. I don’t mind volatility. And most importantly, I am still able to find great pockets of value in some key sub-segments of the market that are hated by most investors. The first one is Real Estate Investment Trusts (VNQ). I may sound like a broken record to some of you because I have been pitching REITs for so long, but the reality is that they are priced at near their lowest valuations in a decade, and it seems that valuations finally matter again. REITs have surged by 10% even as Tech stock corrected in July, and I think that this strong outperformance could continue for a long time to come: YCHARTSFollowing the dot-com crash, tech stocks went through a long multi-year period of zero returns and REITs massively outperformed the market, generating strong returns as investors finally regained their senses. Could we see a repeat of that? It wouldn’t surprise me. Right now, you can still buy high-quality REITs like SBA Communications (SBAC) and Rexford Industrial Realty (REXR) at 1/2 lower valuations than at their peak in late 2021, and I think that they will strongly recover as interest rates are cut in the near term. Their businesses are not very cyclical, they use relatively little leverage, and their rents keep growing at a solid pace. Data by YChartsBut I am not just buying REITs. I am also taking more risk by investing in cyclical companies that have recently sold off heavily. Think of companies like asset managers, nightclub operators, gaming companies, etc. Their near term outlook is more uncertain because they will likely suffer if we hit a recession, but I am still buying a lot of them because I think that this is more than reflected in their valuations, providing an opportunity for long-term oriented value investors like myself. Take the example of Caesars Entertainment (CZR), the leading casino operator: it is down 62%, largely due to fears of a recession: Data by YChartsYes, it will likely see its profits decline in a recession because Las Vegas is cyclical and relies on discretionary spending, but I think that it is more than priced in. The company is strongly free cash flow positive, it has its leverage under control, and what many investors appear to be missing is that the company owns a ton of very valuable real estate and its digital gaming business is now at an inflection point. If you now look a few years out, and you remove recession fears, and we have lower interest rates, I think that it is quite plausible that the share price will be 2-3x higher than today. There are many such cases in the market, and I am taking advantage of the short-termism of most investors.

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