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Diane Francis Headshot

Don't touch the stock market

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Here's my latest warning:

Do not be lulled into buying equities because there was a bounce in markets, where some losses were recouped. Or buying because there are stories of billionaires like Warren Buffett going in and cherrypicking opportunities. This is no stock market for investors. Period. This is going to be ugly for months, if not longer. Here is why, a fact missed by the mostly mediocre financial press:

Another massive market meltdown consequence looms, on top of Washington's inability to show the world it will be a leader and mount a rescue. Huge market losses may occur because the deadline for hedge fund redemptions ended September 30 which will lead to the dumping of huge amounts of stock holdings.

"Many hedge fund investors can withdraw money on Dec. 31. Some funds require that redemption requests be submitted 90 days ahead of time. That means requests have to be in by Tuesday (Sept. 30). Other funds require 45 days' notice, so there may be another round of withdrawal requests toward the middle of November," according to Market Watch.
"Some managers have already been selling positions to raise cash to return money to investors. However, if redemption requests come in higher than expected, there could be another wave of selling and market disruption during the fourth quarter."
The hedge fund industry is $2 trillion in size and dumping stock into this market is only going to hurt the funds and their investors even more than is already the case.

CFOs worse
Even worse is the so-called fund of funds phenomenon, or Collateral Fund Obligations (called CFOs). These are hedge funds who gobbled up other hedge funds and securitized them, or sold them as bonds, with the underlying collateral a bunch of hedge funds which could end up having everyone demanding redemptions. In other words, another set of investors owns these securities which may find their collateral disappearing rapidly.
Some hedge fund fine print contracts stipulates that anything more than, say 15% or 20% redemptions, can be staved off for a few months to insure more orderly, and valuable, liquidation but those funds will also end up out of business as investors will balk at delays.

So investors beware

Another wall of woe in markets will be mutual fund unitholders redeeming their units, often all along the way. This is untold billions more which will sell into a declining and weakened market.
These redemptions will blindside everyone, knocking stocks out of their boxes without any justification or warning. There will be no way to know what's going to hit which markets and which equities or when because hedge funds do not have to make full, complete and timely disclosure of redemption rates or stocks they have in their portfolios.
Ironically, hedge funds and others may be dumping their best, and keeping their worst, to meet redemption requirements. This is what happened in 1987 when portfolio managers sold their best into a downward spiral.

I blog at the Financial Post