Thursday, August 4, 2011

Correction Confirmed; Bear Market, Recession, Deflation to Follow

Technically, a stock index correction is defined as a 10% decline from a recent high.

If one takes a look back just three-four months ago, the highs were put in place in late April, just around the time of the Japan earthquake, tsunami and the Fukushima nuclear disaster (still worsening).

The closing highs for the individual indices, all made on April 29, were:
Dow Industrials: 12,810
S&P 500: 1363
NASDAQ: 2873
NYSE Composite: 8671

The numbers needed for a 10% decline - a correction - are:
Dow Industrials: 11,529
S&P 500: 1226
NASDAQ: 2585
NYSE Composite: 7803

By today's close all of those numbers had been exceeded to the downside, easily.

The reasons for markets being down nine of the last ten (the Dow) or 8 of the last 9 (S&P) sessions are various, but interrelated. Most obvious among them is the absoute fact that Europe is suffering through a financial crisis which rivals that of the US in 2008. In many ways, Europe and the United States have never recovered from the disastrous events of the housing bubble and subsequent deep recession. The time to pay the piper is past due.

Along with woes in the Eurozone, the United States faces its own hard times, in many ways similar to the Great Depression of the 1930s. Joblessness, millions on food stamps, homelessness and a housing crisis deeper than most people living today have ever witnessed have led to the worst three years of non-growth in the US economy since World War II.

Whatever has been done to cure the ills that plague us - $700 billion for TARP, two rounds of quantitative easing (money printing) and a failed $780 billion stimulus program - have been for naught because the nation's leaders failed to do what any free market economy should have done: allow the decrepit and deceitful large banking institutions to fail, reorganize them and shed the underlying bad debt.

That course was not taken because, simply, Wall Street controls Washington, and the politicians had the gun of losing elections pointed squarely at their heads by Wall Street's banking elite, headed up by then-Treasury Secretary Hank Paulson and still-Fed Chaiman Ben Bernanke.

Today's final figures are a chilling reminder of what happens when leaders are not actually men of principle, but rather are guided by greed. They make bad decisions and continue to do so. The cascading declines of Thursday, August 4, are the worst tumbles in the markets since the dreadful Fall of 2008 and Winter of Discontent in 2009.

Dow 11,383.68, -512.76 (4.31%)
NASDAQ 2,556.39, -136.68 (5.08%)
S&P 500 1,200.07, -60.27 (4.78%)
NYSE Composite 7,428.41, -424.79 (5.41%)

Advancers were decimated by decliners, with losing stocks outpacing winners 6233-574, a ratio of 12:1 losers to winners. On the NASDAQ there were only 13 new highs, but 237 new lows. The NYSE was a disaster area, with 7 new highs and 366 new lows. The combined total of 20 new highs and 603 new lows is the widest gap since early 2009. The most reliable indicator - new highs vs. new lows - has once again proven infallible in predicting market turns. The Bears are growling and hungry for more equity meat.

Volume was easily the highest of the year. Quite possibly, today was the highest volume day since March of 2009.

NASDAQ Volume 3,223,976,000
NYSE Volume 8,432,305,000

One consolation from all of this is that crude oil has been taking a beating and took a serious one today, losing $5.30, to a 2011 low of $86.63, a number not seen since last December.

Gold was pricing higher early in the day, as was silver, but margin calls and the need to raise cash quickly ended their brief moments in the sun. Gold fell $7.30, to $1,659.00, while silver tanked $2.32, to $39.43. The losses in the precious metals, though serious, are not as bad as what happened in equities; not by a long shot. Gold had been making new highs almost daily for the past few weeks. Silver had broken out of a range and was siting at 4-month highs before today.

Undeniably, this is not the end of stock market declines. Bracing for Friday's non-farm payroll report, stocks will be lucky to see even a glint of hope in that data. Consensus estimates are for gains of roughly 100,000 jobs from July, but after today's initial unemployment claims came in at 400,000, making the 18th straight week they have been 400,000 or worse, hope is a scarce commodity.

Today's climactic losses may be only presaging what's ahead for the global economy. With US GDP somewhere between ZERO and 1% growth for this year, the remainder of 2011 offers quite a challenge. And politics being what they are in an upcoming presidential year, with a Democratic president and all legislation held hostage by a Republican majority in the House of Representatives, 2012 might offer an even worse set of economic circumstances.

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