Several Mutual Funds and Hedge Funds are in negative territory for the month of September. And most have gone negative YTD. The redemption calls came in fast and furious and forced the funds to liquidate their profitable positions first. Thus we saw gold being sold off and gold bugs a bit shaken. I think the sell-off of precious metals is not over yet.
The situation in Euro land is not stable yet for any sustainable rally in the world stock markets. The TBTF banks will use this weakness to create further panic in the US stock markets to force the Feds hand with QE3.
I expect that the stock markets will continue to show high volatility in October and S&P may well go below the August lows. Which means the fund will sell their most profitable positions to keep up the illusion of profitability and meet the redemption calls. We can expect precious metals to go below the current level. Silver in range of $20s and gold somewhere in the range of $ 1400 or below is well within the realm of possibilities.
One of the next sell-off will be the stock most widely held by the hedge funds. That one stock is Apple. Notwithstanding the new high, it is logical to expect that Apple, the darling of the stock markets, will see a huge drop in price in the coming weeks. That will be induced by technical selling and redemption calls. From the enclosed table of GS, you can see that Apple has the highest return YTD and it will be the next on the sell list to generate cash and show profit.
I have written about “Balance Sheet” contraction and many readers have difficulty understanding it. Basically the current and impending deflation is and will be caused by credit contraction and destruction of the asset value. The TBTF banks have assets in their balance sheet which are worth much less than being shown. At best they are worth 50% of the book value and at worst 10%. This is the sole reason of the QE1 and QE2 and incessant speculation by these banks to generate profit from other sources to cover the losses. The banks have sat on trillions of dollars of reserves and are either unable or unwilling to give loans and advances to business. Some banks are charging fees for accepting deposits. Thus there is credit contraction in one hand and asset value erosion on the other hand. There is no growth in real income of the consumers and the businesses are not investing either. US products are not globally competitive and the next export by USA is negative as a result. So the only part of GDP that is growing is the government spending and that is coming through borrowing.
The whole equation is unsustainable both mathematically and fundamentally and it has to burst to balance the equation. TPTB are trying their best to keep the Goldilocks economy going for ever by injecting more and more liquidity but their ability to get results is getting reduced with every crisis. We are seeing social unrest developing now close to home with people protesting in Wall St.
It is sure going to be an interesting time. In the mean time, let us see if my bold call of Apple sell-off materialize in October.