End-Game Begins as Stocks Are Sold, Bond Yields Rise, Precious Metals Take Off

What happened over the latter part of this week should be the stuff of history books for future economic historians, given there will even be an economic history after the worst crisis in history begins its second leg down.

Forget about Friday. That was mostly churn, finger-pointing, squaring of positions in options and a great deal of nail-biting by the financial elite and central bankers. The real action was on Wednesday and Thursday, and, more specifically, the close of the trading day Wednesday and the pre-market Thursday, when St. Louis fed president, James Bullard, made comments, first to a Rotary club in Paducah, Kentucky, at 3:15 pm EDT Wednesday, and then reiterated and expanded upon those comments Thursday prior to the opening bell.

Both attempts to jawbone the market back into a state of control were, as they say in current parlance, epics fails, because market fundamentals - those things like economic data and earnings reports - finally came to the forefront and overtook what little control the Federal Reserve had over markets - both stocks and bonds.

Wednesday was shaping up to be a painful session when Bullard attempted to soothe the pain by saying that the Fed needed more data in the second half of the year before committing to a slowdown in their bond-purchase program (aka QE) in September or sometime near that time frame. The market's knee-jerk reaction was a swift erasure of 30 losing Dow points, but almost as quickly, sellers swamped back in, with the Dow closing near the lows of the day.

After the close, Cisco (CSCO) released second quarter earnings, with a penny miss on EPS and a small shortfall in revenue. Making matters worse was the conference call afterwards, in which the company issued some negative guidance, as has been the mantra this earnings season, sending the stock down roughly 10% in after hours trading.

On Thursday morning, Wal-Mart (WMT) released their second quarter earnings report, eeril similar to Cisco's complete with negative guidance for the remainder of the year. Around 7:30 am EDT, when pre-market trading opened, Dow futures, already down substantially, took a nosedive.

Queue James Bullard, reiterating Wednesday's comments and adding some new verbiage, in a desperate attempt to satiate the trading community. Once again, Bullard's comments failed to incite any kind of rally in futures. The day was setting up to be a bad one for the bulls.

At 8:30 am, the final nail in the coffin was hammered home by the weekly unemployment claims report, which came in at 320,000, a six-year low and a complete misread by anyone thinking a better jobs picture would be a salve for jittery traders. It was the exact opposite, the thinking being that if the jobs picture was indeed improving, the Fed would be more than willing to begin curbing QE in September. Futures were pounded even lower and the market opened in a sea of red ink, the Dow quickly down 150, then 200 points, the other major indices following along in a coordinated dive. Interest rates spiked higher, prompting even the most steadfast into a selling frenzy.

The upshot is that unemployment claims, despite being at multi-year lows, is a complete canard. The jobs created over the past past year, and primarily the last six months, have been mostly low-paying, service-type, part-time varieties, due to the coming slaughter of the jobs market via Obamacare, which mandates employer-provided insurance for companies with more than 50 full-time employees. While there are no real new jobs being created, nobody's leaving to look elsewhere for work and the slack caused by full-time jobs being split into part-time increments means more jobs overall, just not good ones and, especially, not full-time ones.

Thus, unemployment claims henceforth must be viewed with a skewed eye, despite the glad-handing by the media, financial pundits and politicians. Evidence that the overall economy is not even close to the so-called "recovery" we've all been anxiously awaiting since 2009, was amply provided by Cisco and Wal-Mart, two huge employers and both Dow components.

With the close on Thursday, the market was pointed for the worst week of the year heading into Friday, and, despite a lame attempt at tape-painting late in the session, it was delivered, with all of the indices closing marginally lower.

Treasuries hit their highest yields in two years, anathema to stocks and the housing market, further clouding the picture for the Fed and their plans for a graceful exit by Mr. Bernanke later this year. The Fed has lost control of all markets; they likely cannot slow their bond purchases in September, lest they risk a complete meltdown in stocks and melt-up in yields.

Gold and silver - especially the latter - had their best week in two-and-a-half years, with both hitting three-month highs and breaking out of the recent, depressed range.

Looking out a month to three months, the Fed is completely boxed in. On one hand, they can say that the economy is improving enough - even though the data doesn't remotely support such a claim - and begin tapering in September, even October. Or, they could face reality, admit their policies have been utter failures and continue the current pace of QE. Neither scenario is particularly bullish for stocks, the reality case the worst, as the decline off the August 2nd closing high has begun to accelerate with a strong downward trajectory, sending the Dow straight through its 50-day moving average, and the S&P closing out the week resting right upon its 50-day.

Nothing good will come from the politicians' return from their month-long hiatus, when they will once again entertain the markets with their rituals of piercing the debt ceiling and coming up with a budget or suitable continuing resolution. No matter what the Fed decides in September can be perceived as good, though from a trading standpoint, keeping QE at its current $85 billion per month will appear as a victory of sorts for the Wall Street crowd, when in reality it is admission that all has failed and the Fed can do nothing, other than continue debasing the currency until is ceases to exist.

The mathematical certainty that the experiment with fiat currency, back with nothing but promises and lies, will fail, is entering the second leg, or the third, after the crash in '08-09 and the nearly five years of false, liquidity-driven recovery. Any astute observer will immediately comprehend that lost faith in the currency foreshadows another crisis, this one likely more severe than that of 2008.

While many of the status quo will cringe at the prospect of the greenback's death throes and a complete collapse of the global economy, those fed up to their eyeballs with the current regime of lies, uncertainty, complete fraud by the major banks and totalitarian fear-mongering will welcome the change with open arms.

One can only hope that it won't drag on and out for years, as in europe and the Middle East, but the best advice at this point is to stay in precious metals, away from large population centers and hope for the best while preparing for the worst.

Other than those dire words, it looks to be a fine summer weekend in most of the US. Get out and enjoy some sun and taste the bounty of our land. Food, the fuel we humans - at the most basic level - need to survive, is still readily produced and relatively inexpensive. And that, my friends, is one shining silver lining.

Dow 15,081.47, -30.72 (0.20%)
NASDAQ 3,602.78, -3.34 (0.09%)
S&P 500 1,655.83, -5.49 (0.33%)
NYSE Composite 9,465.19, -24.10 (0.25%)
NASDAQ Volume 1,458,862,12
NYSE Volume 3,532,477,250
Combined NYSE & NASDAQ Advance - Decline: 2554-3882
Combined NYSE & NASDAQ New highs - New lows: 77-369
WTI crude oil: 107.46, +0.13
Gold: 1,371.00, +10.10
Silver: 23.32, +0.387