shorting: asx surveillance and price action, page-48

I'm a little outside of the professional circuit these days, but it seems apparent from the moves in LGL as well as BHP.RIO,NCM, Oz Minerals etc these past few days that a disproportionate amount of activity in late July/early August is a function of unwinding of the long resources/short financials/long gold or gold stocks/ short property and interest sensitive leveraged plays as hedge funds around the world adjust for higher risk of a China slowdown and a period of world recession possibly depression. The attraction of gold in a depression diminishes compared with what I and many others expected of a major recession in the US associated with a lesser effect in Europe and even lesser in Asia, as higher oil prices due to rapidly growing Asian demand and their infrastructure demand kept the world and resources and inflation buoyant.

It may well be that since these funds work on momentum and top down big picture (without even necessarily knowing what the individual companies do) that we traditional investors who work on fundamentals, earnings and balance sheets etc can pick the opportunities near the lows. I am learning though that these predominantly USA run hedge funds seem to disregard sense of value when entering or exiting, but their information at the macro level is often very good. So it does take a month or so before the position turns.

In LGL, I fortunately reduced my long position by 66% at the July expiry as despite the production report reiterating the production target, things seems so bad that I'm not convinced by gold bulls and seasonally its a bad time for gold anyway. But it seems hard to believe that I lost money because the stock went above $4.25 only three months ago and now I am losing again because it has dropped below $2.60 despite all decent brokers agreeing on a $4 plus target value. Fortunately I am making money on financial again and today's action is a net loss of only $100k, not enough to wipe out the gain on bank options on the last day of expiry of July.

My instincts are a) this is the worst market I have experienced since 1973/4 and it is too early and b) these hedge funds are unf by people who don't understand fundamentals and things cannot be as bad as when Hitler invaded Europe and yet many valuations suggest a similar environment. The wild card is inflation as the forgotten rule of 20 predicts eroding P/E as inflation rises - but can we have massive inflation (15% say) with world recession? Only if oil and food prices continue to rise and demand for everything else falls. In one or two sleepless nights I have envisaged such a horrible market, but I comfort myself with the thought that I know how to grow my own herbs and vegetables, my chickens are pretty self sufficient on grazing on snails and grasses, and I really am getting too old to travel to far flung corners of teh world that have have atractive young women I cannot enjoy (my wife comes with me) and we live so well in oz why bother....