Bearish Cycle Phase Two Begins As Global Markets Careen Lower

A year from now, there will be many people wishing they had sold TODAY, tomorrow or within the next few weeks. That's because in a year to eighteen months, stocks will probably be flat on their backs and Dow 10,000 will seem like a dream from some long-abandoned, mythical place in which stocks had value and companies made profits.

Beginning with the Fed's understated announcement yesterday that they would replenish their balance sheet by selling mortgage and agency debt and replacing it with shorter-term treasuries, the Phase 2 of the Bear Market Cycle has officially begun. In reality, the market break came in April, but deflation-deniers and recovery junkies saw that as a mere correction, a soft patch, a buying opportunity, when in reality, the break below the 200-day moving averages on the major exchanges was a major tipping point, signaling uncertainty and despair in markets stemming from unsustainable long-term economic conditions.

What began as a fraud, the sub-prime crisis, in which billions were swindled from the system and from individuals and from taxpayers (people not even engaged in the market), has evolved into a serious debate over the future of the United States of America and its Ponzi-like scheme of unfunded liabilities (mainly Social Security, Medicare and Medicade), debt-laced, unbalanced state and federal budgets and a national debt well into the trillions of dollars which will never be repaid.

Phase one was the meltdown of Autumn 2008 into 2009, with the requisite recovery bounce in the markets which gracefully lasted for over a year. Phase two is likely to last longer, move at a slower pace, but end up being even more severe. By the end of phase two, prior to another false bounce, most stock prices will lose half of their value or more as the panic and race for liquidity (cash) ensues. Figure that this phase will take us through the next election cycle, through the end of 2012, before any meaningful bounce, more than likely tied to false hope of a new "conservative" president and congress.

The end will come sometime within the following years - not to put too fine a point upon it - within the first two years of the next administration, when fear and panic have turned to rage and near-anarchy, when stocks will be viewed with contempt and the government (given there even is a government in control) disrespected and almost universally hated and blamed (rightfully) for the entire collapse of the economy.

In phase two, bottoms will form below the previous 2009 lows. The Dow will likely bottom out in the 4500-5000 range, the S&P around 450 and the NASDAQ in the range of 950 to 1100. After a brief sideways to upward move which will suck the last remaining dollars from those foolish enough to jump into the market while it is still collapsing, the major indices will approach levels not seen in 30 years or more. By 2014 the Dow Jones Industrials may well be hovering around 2-3000, the S&P 500 in the 300 range and the NASDAQ shattered beyond belief, possibly around 600-750. Stocks will lose almost all of their value, just as many did during the Great Depression of the 1930s, because, in reality, we are entering the most brutal stage of an even Greater Depression, one which, in all likelihood, will finish the Federal Reserve, fractional banking and fiat money.

Gold will probably reign, selling at unbelievable prices of over $4000 per ounce, as the last and only reliable store of value.

Of course, time being purely a relative factor in the grand economic experiment of the Keynesians, phases two and three could all occur in a much more compressed time frame. There will be days of maximum despair, of the Dow losing 1000 points in a day, aided by computer-generated program trading. There is no escaping the truth, nor the massive, unpayable debt the nation's leaders have promised. Life in America is about to undergo an incredible transformation, from a great nation to a poor one, and we have nobody to blame but the politicians we elected, for they have truly sold out the American people to bankers, frauds, liars and thieves.

Those who believe the next election will usher in some new form of direction or control are absolutely without a clue. The current office-holders will only be replaced by more-corrupt, less talented crooks, liars and clowns, who have neither any skill at governing nor any intention of restoring the country to the middle-class values upon which it was founded.

On the day, stocks were spanked right out of the gate, with the Dow down more than 200 points within minutes and the NASDAQ taking the brunt of the assault, off by more than 60 points in the early going. Stocks did not even attempt a rally at any point during the session, indicating broad distribution and a severe lack of buyers.

Bears took the day fully, and are just getting warmed up for the slaughter that is certain to occur over the next two months, as economic data will continue to demonstrate severe weakness in markets and stresses to the financial core. It is worth noting that US indices were not alone in their decimation. Asian and European bourses also were down by significant levels.

There was significant chart damage to the major averages. All closed well below their 200-day moving averages, a move widely expected only by honest economists with market understanding. The Dow fared better than the rest of the averages, as most of the representative stocks carry dividends, holding their values a little bit better than the majority of publicly-traded equities.

Dow 10,378.83, -265.42 (2.49%)
NASDAQ 2,208.63, -68.54 (3.01%)
S&P 500 1,089.47, -31.59 (2.82%)
NYSE Composite 6,902.72, -237.03 (3.32%)

Internals showed just how severe the damage was. Declining issues absolutely punished advancers, by a 6-to-1 tally, 5600-922. New lows clambered past new highs for the first time in well over a month, 216-210, a trend worth watching, which is likely to continue flashing bearish indications. Volume, though still at reduced levels, was much stronger today than on any of the previous two days of the week. There was enough selling strength to indicate more strain to come for the rest of the week and no end in sight, near-term.

NASDAQ Volume 2,114,243,500
NYSE Volume 4,857,608,500

On the commodity front, crude oil was crushed by the appreciation of the US dollar against most other currencies, especially the Euro, sending the front-end futures contracts down $2.23, to $78.02, the lowest level in two weeks. While most consider gold to be a safe haven, it was not an overwhelming favorite, gaining $1.30, to $1,197.50, though its positive finish was much more acceptable than what occurred in equities. The issue with gold is that it is, as a store of value, also inert. It has no usefulness other than as a place-holder. In times of unusual economic stress and especially in illiquid markets, there is a tendency for redemption. Gold gets liquidated just as quickly as other assets, as was seen during the 2008-09 phase of the crisis. It is, however, more resilient, and will probably, in the long run, prove to be more valued than any paper assets, like stocks or even cash.

The more-commoditized metal, silver, slipped 26 cents, to $17.89. One would expect silver to relinquish gains at a faster pace than gold, though it is likely more volatile as well.

It's not the beginning of the end, nor is it too late to make changes in one's asset allocations, from stocks and bonds into gold, cash, tools of trade and arable land. For those chasing value, like the millions stuck in mutual funds, pension funds and the like, there is nothing but pain ahead for years to come.

Many household names hit new 52-week lows, including our personal favorite, the discredited and illiquid Bank of America (BAC).