Fear Factor: Wall Street, Europe in Full Retreat; Dow Down Another 520 Points

Wall Street suffered one of its worst losses of all time and the third major loss in the last week.

Stocks were battered right from the opening bell, though selling accelerated in the final two hours of trading, just after stocks had reached their highs of the session.

The culprits - just in case anyone needs a good villain for the orderly destruction of capital - today were European banks such as France's Societe Generale, Germany's Duetsche Bank and Italy's Unicredit. European liquidity is being pinched again, just as it was during the global financial meltdown in 2008-09, though most of the players involved do not yet see the risk as severe.

The markets are telling different story, with stocks suffering deep declines for the third time in five days. Tuesday's enormous snap-back rally was completely overwhelmed by today's selling, and the end of the crisis seems well into the future.

To put matters into perspective as to how deep these recent losses are, consider:

• On July 27, the Dow closed at 12,724.41; today's close was 10,719.94, a drop of more than 2000 points in just 14 sessions.
• The NASDAQ topped out at 2858.83 on the 22nd of July; today's close of 2381.05 is a 17.7% drop.
• The Russell 2000, comprised primarily of small and mid-cap names, is already in bear territory, down more than 20% from recent highs
• The Dow Jones Transportation Index, which topped out at 5514.87, closed today at 4377.14, technically signaling a bear market as it is down 21%
• The S&P 500 lost 32 points last Tuesday, another 60 points last Thursday, 80 points on Monday and another 51 points today.
• The Dow Jones Industrials is just 500 points from making a 20% decline and resumption of the Bear market which was interrupted for 53 months by a stimulus and quantitative easing-induced rally that is now evaporating.

A pretty picture this is not. Additionally, there's nowhere to park money with any kind of real return. The 10-year note fell to an historic low of 2.09%, the 30-year bond dropped to 3.50% at the close, while a 2-year bill fetches a ridiculous 17/100ths of a percent in interest. Might as well stuff dollar bills into a mattress for the next few years as it's likely a safer place than the bond markets.

Even after yesterday's stunning announcement by the Federal Reserve that it would keep the federal funds rate at near zero for the next two years, markets were still unrelieved. What the Fed did, in effect, was broadcast deflation with about as big a bullhorn as they could, saying that unemployment was getting worse, the housing crisis has not been resolved and prospects for further deterioration in the economy outweighed the chances for meaningful recovery.

Meanwhile, most of congress is off on its annual month-long vacation, supposedly back in their various states and legislative districts, watching the mess from as far away as they can get. It would be interesting to see how many are out of the country, and, if this stock market malaise continues, how many of those come back to face the music.

Here's the sad story of the day in numbers:

Dow 10,719.94, -519.83 (4.62%)
NASDAQ 2,381.05, -101.47 (4.09%)
S&P 500 1,120.76, -51.77 (4.42%)
NYSE Composite 6,938.23, -319.81 (4.41%)

Losing issues belted advancers again, 5050-1691, though, by those figures, there was at least a smattering of selectivity in the sell-off. On the NASDAQ, six (6) new highs were offset by 232 new lows. Over on the NYSE, a mere three (3) stocks posted new highs, while 221 made new lows. The combined total of 9 new highs and 453 new lows is indicative of yesterday's smash-up, which set many stocks above their recent lows, though the feeling is that it's only a matter of a few more days before the new lows reach well beyond the 1000 mark.

Volume was robust again, in keeping with the current trend of being "all in."

NASDAQ Volume 3,437,055,500
NYSE Volume 9,282,671,000

Oil stopped skidding for a day, gaining $3.59, to $82.89. Gold briefly priced at over $1800, but fell back, to $1,784.30, a $41.30 gain on the day. Silver picked up finally, gaining $1.44, to $39.33. Both gold and silver are up as trading heads to Asian markets.

Tomorrow will begin with an 8:30 read of initial unemployment claims, which is still expected to be hovering around the 400,000 mark. It will likely be a non-market-moving number, as the macro condition is truly driving the declines.

Some are already saying that stocks are cheap, but many were saying that a few weeks ago, before the bottom began falling out.

Cheap is such a relative term. A particular asset may be "cheap" to some and pricey to others. Right now, stocks look like they're being sold as fast as they can, before they lose even more value.

Maybe the worst thing about this sudden crashing is that it's only Wednesday. There are still two more trading days to get through.

Fed Honesty and Insane Markets

This was the mother of all snap-back, double-back rallies.

Let's see, first, after the sixth-worse day in US market history - taking the Dow as our guide - stocks opened sharply higher, then fell back to the flat line in the first fifteen minutes of trading, then rallied 200 points in the next 20 minutes.

After that, stocks just drifted along, as though yesterday's massive decline was some kind of mirage or a bad joke.

At 2:15 pm EDT, the FOMC issued what might be the most useful statement in the 98 year history of the Federal Reserve. It's not very long, so here's the whole thing (worth a look):

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. Indicators suggest a deterioration overall in labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events of Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities of imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that Inflation will settle, over coming quarters, at levels at or below both consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The salient points are many, but the stunner of them all was the statement that the federal funds rate would remain at ZERO to 1/4 percent and that this accommodative measure would remain in effect until the middle of 2013, or, put another way, for about the next two years.

At first, market reaction was positive, then turned completely negative just minutes after the release. What the Fed is saying, in effect, is that the US economy has just about sputtered out, but there's nothing the Fed can do at this point. They surrender to market forces and will keep rates at the absurdly low levels for the next two years.

What they didn't say might have been even more important. There was not even a hint of more quantitative easing (QE), as the last two rounds produced nothing other than price inflation and the build-up of the too-big-to-fail (TBTF) banks' balance sheets. The Fed also did not mention how or when it would begin unwinding its own over-stuffed balance sheet, currently at historic highs.

Once the market got the gist of the Fed's generosity and after falling more than 350 points from before the statement's release, it was off to the races and a nearly 600-point rally in the final hour and fifteen minutes of trading.

Us markets are, and will continue to be, completely insane, out of control except under that of the TBTF banks who control it. Some people lost money today and some made quite a bit. Anyone with any knowledge of the corrupt, inner workings of the stock market knows who won and who lost, and most of the losers were surely people without super fast computers and gee-whiz algorithms.

Dow 11,239.77, +429.92 (3.98%)
NASDAQ 2,482.52, +124.83 (5.29%)
S&P 500 1,172.53, +53.07 (4.74%)
NYSE Composite 7,258.04, +362.07 (5.25%)

Advancers clobbered decliners on the day, 5880-966, but new lows remained at elevated levels over new highs. There were just 16 new highs, but 484 new lows on the NASDAQ, while on the NYSE there were only 3 new highs and 702 new lows. That puts the combined numbers at 19 new highs and 1186 new lows, an extremely negative bias.

Volume was extreme once again, nearly as pronounced as yesterday's.

NASDAQ Volume 3,819,984,500
NYSE Volume 10,180,450,000

Commodities were literally all over the place. Oil zig-zagged over the unchanged line to a $2.01 loss, at $79.30 by the end of the day. Gold was higher all day, finally settling at $1,743.00, up $29.80, another record close. Silver, however, has become the whipping boy of the lovers of fiat, losing $1.50, to $37.88. Apparently, either the decade-long love affair with gold's first cousin is over or the shorting machinery of HSBC and JP Morgan has the markets covered. The latter is more than likely the case, though eventually silver will score enormous gains, once the masters of the universe are satisfied they've done their best to squelch any thought of making silver a negotiable currency again.

The gold-silver ratio is historically around 16-1, which, were that the case today, silver would cost somewhere in the neighborhood of $109 an ounce. The current gold-silver ratio is 46-1, though that is lower than what it's been in previous years. It still needs to find equilibrium. No doubt that silver is too cheap, but is gold too high? Probably not.

Thus ends another adventure through the canyons of Wall Street. Tune in tomorrow to find out that 90% of all trading is done by computers over which humans have no control. We are slaves to technology.

Debt Downgrade Fallout: Stocks Shattered, Gold Soars, Europe a Wasteland

At 9:00 pm Eastern time on Friday night, August 5, S&P officially released their downgrade of US debt from AAA to AA+, prompting widespread panic and sharp rebukes from the White House, who claimed, in effect, that S&P had made what amounted to "math errors."

Over the weekend, much was made of the downgrade, as the Obama hit the airwaves with gusto, rebuking the call from the ratings agency. Fitch and Moody's had previously reaffirmed the US debt as AAA, the highest possible sovereign bond rating, but S&P would not back down, and the downgrade remained in effect.

What S&P reasoned was that the US government did not take the necessary steps - in its theatrical production of waiting until the last possible moment to pass a debt ceiling increase - to address the structural problems facing it. S&P rightly concluded that US debt levels were and continue to rise and discretionary spending levels have not been controlled. Therefore, they downgraded the nation's debt and threaten to do it a second time, sometime around November, if the 12-member congressional committee charged with dealing with long term debt does not come up with actionable, concrete, debt reduction proposals.

As markets opened on Monday, the effects of a global panic were evident, especially on the heels of a 10% decline in US indices over the past two weeks and Thursday's dramatic sell-off of over four per cent on major markets.

First, it was the Asian markets which tanked at their various openings and continued through the day to sell off anywhere from 1.5 to 4.0%. Next up was Europe, where the crisis over bailing out Italy and Spain have reached a point of no return. EU officials stressed that they would be in the market with the ECB, buying up italian and Spanish debt, but that did little to change the outlook of investors, which had turned sour over the past fortnight.

Appetite for risk was at a low, as European markets suffered steep losses. England's FTSE was the best of the lot, down only 2.62%. France's CAC-40 took a 4.68% loss and Germany's DAX shed 5.02%. Other Euro-zone markets fell between 3.76 and 6.11%.

By the time US markets were to open, index futures had been hammered down to presage an inauspicious opening. Within minutes of the bell, the Dow was down more than 200 points, the S&P had taken a 25-point hit and the NASDAQ fell more than 70 points, though those declines were nothing compared to the carnage that lay ahead.

By the end of the day, after a minor rally in the first 15 minutes of the final hour, stocks were trading at or near their lows, with the Dow Jones Industrials surrendering the 6th-worst performance in its history. While the Dow suffered a 5.5% decline on the day, the other indices were actually much worse, with the NYSE Composite topping them all, coming home with a 7.05% loss.

It wasn't just the debt downgrade that spurred the sell-off. Conditions in Europe have worsened significantly over the past few months, to the point that European Union officials are without reasonable solutions to the debt contagion spreading across the region. While the ECB has managed to prop up smaller countries like Greece, Portugal and Ireland, Italy especially poses a much larger concern.

All the European leaders could muster on Monday was a terse statement which offered no concrete proposals but plenty of assurances, which was be roundly written off by markets. To wit:

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth

That was the extent of the communique from the magnificent seven of the United States, Canada, Great Britain, France, Germany, Italy and Japan.

The irony is that one of them, Italy, has been the source of the most recent anguish.

Essentially, the funds available to the ECB fall short of meeting the debt purchases needed to save Italy and Spain. Europe will have to engage in quantitative easing, as was the case in the United States over the past two years, to stave off defaults and the threat of a cascading crisis which would envelop all of Europe and likely doom the 11-year-old Euro currency.

If the EU decides upon cheapening the currency - which it almost certainly will do - theknock-on effect will be to sink the Euro, probably close to parity with the US Dollar. As the dollar would grow in strength, commodities, particularly oil and gas for auto use, would plummet, a boon to US drivers and to the general economy. Costs of imports would also decline, on a relative basis, giving American consumers more purchasing power.

Within the same scenario, however, are pitfalls for the global manufacturers and companies that populate the S&P 500, NASDAQ and the Dow. A stronger US Dollar would make them less competitive in foreign markets, shrinking margins and thus, profits. Thus, the great selling rush today was more of a statement on the global condition rather than that of the debt downgrade, which, when all is said and done, won't amount to a hill of beans. In fact, treasuries were up sharply today, as yields fell to their lowest levels in over a year.

The benchmark 10-year note fell 25 basis points in just one day, from 2.56% on Friday to 2.31% on Monday. The 30-year bond fell 19 basis points, to 3.65% as the yield curve continues to flatten. Money is going out of stocks and into bonds, and whether they're AAA or AA+ doesn't matter to those seeking a safe haven. The ridiculously low yields offered are a moot point. As one trader put it, "Investors aren't looking at making money; they're more concerned with getting their money back."

And, therein, the next crisis, in bonds, especially if the US government doesn't get its house in order soon. Higher rates and another downgrade could trigger a default of impossible proportions as the US would be unable to roll over its debt and fund itself without incurring higher borrowing costs. Ditto for Europe. Rising interest rates signals the end game for fiat currencies globally and back to some form of honest money, most likely on a gold standard.

The market events of the past few days, in which the major indices lost more than 10% are not the end of the crisis, but rather the beginning of the end of a great generational bear market that began in 2007 and will eviscerate all risk assets until nobody wants to hold anything any more.

Markets have entered the final stages of the third leg down. QE 1 and 2 staved off the collapse, but there will be no bailouts this time around. It's every man, woman, child and company for itself. There will be some winners, but mostly there will be losers, anguish, agony and the disappearance of great hordes of wealth.

Dow 10,809.85, -634.76 (5.55%)
NASDAQ 2,357.69, -174.72 (6.90%)
S&P 500 1,119.46, -79.92 (6.66%)
NYSE Composite 6,895.97, -523.10 (7.05%)

The internals were equally as stunning as the headline numbers. Declining issues decimated advancers, 6553-375, a ratio of 17.5:1. It was truly one of the deepest, broadest declines in stock market history. On the NASDAQ, there were four (4) new highs next to 725 new lows. The NYSE had just three (3) new highs, but 1292 stocks making new 52-week lows. The combined total of seven (7) new highs and 2017 new lows rivals or exceeds the figures presented during the fallout of 2008-2009.

Volume was at the highest levels of the year, exceeding that of last Thursday, which was then the high volume day of the year. Investors aren't just scared, they are trampling each other running through the exits at breakneck speed.

NASDAQ Volume 4,002,857,250
NYSE Volume 11,046,384,000

Crude oil futures were pounded again, as the front-month contract on WTI crude fell $5.57, to $81.31. Gas prices will soon fall below $3.50 - and possibly below $3.00 - a gallon as current supplies are depleted and replaced by less expensive distillates. According to AAA, the average price of gas in the US is now $3.66 per gallon, but the deep declines have not yet been factored into the equation. That will happen over the next two to three weeks.

Gold was the big winner of the day, soaring $61.30, to $1,713.20, another all-time record price as investors, companies, nations, central banks and housewives scrambled to find reliable assets. Silver, still constrained by high margin requirements, gained $1.17, to $39.38. Silver is almost certainly the most under-appreciated asset in the world, though that will soon change. As the crisis escalates and governments make more and more bad moves, the precious metals will skyrocket to unforeseen heights.

The banking sector took it on the chin, but none more than Bank of America (BAC) which is on the verge of a well-deserved bankruptcy. shares of the nation's largest banks fell 20% on the day, losing 1.66, to close at 6.51. Just a few weeks ago, BofA was trading at a price nearly double that. The unfolding mortgage crisis, brought about by Bank of America's 2008 purchase of Countrywide, has become a fatal blow to the once proud institution.

David Tepper's Appaloosa Management Fund has reportedly sold its stake in Bank of America (BAC) and Wells Fargo (WFC), while significantly trimming Citigroup (C) from the portfolio.

Adding to the irony, AIG has sued Bank of America for $10 billion, citing "massive fraud" in its representations of mortgage-backed securities (MBS).

However, Citigroup analyst Keith Horowitz takes the booby prize for reiterating a "buy" rating on Bank of America shares this morning. Timing is not one of Mr. Horowitz's strong points, it would appear.

On top of all this, the FOMC of the Federal Reserve will issue a policy statement Tuesday at 2:00 pm EDT, followed by a news conference from Chairman Ben Bernanke. That alone should equate to another 300-point decline in the Dow.

For those with a morbid curiosity, check out the slideshow of the 10 worst days on the Dow, already outdated, as August 8, 2011, will go down in the history books as the 6th worst day for the blue chip index of all time.

Henry Blodgett and Aaron Task have a nice summation of the situation in the video below:

Wild Swings, Ugly Market

There's probably no good reason for the wild ride taken by stocks on Friday other than people are confused about what's really happening in Europe and in the United States.

The best guess is that the Euro is still a dead currency walking and the US has issues ranging from housing to jobs to ineptitude in government. Ditto that last bit for Europe as well.

The font of endless fiat money is beginning to run dry and useless because every nation is seemingly engaging in a race to devalue their currency in order to remain "competitive."

What may substitute for the truth is that sovereign nations are failing and the global banking system is decrepit and defunct. Time for a grand reset is upon us, though it could be years off before the reign of money backed by "good faith and credit" - two commodities in very short supply - is ended for good and some form of gold/silver standard is established.

In the meantime, citizens of most of the world's developed nations will suffer through recessions, inflation, deflation and depression as the financial engines of the world run off the rails, run by a vacuous leadership.

Friday's non-farm payroll report in the US set the stage for a strong opening rally, with the Dow up more than 170 points within the first five minutes of trading, making the high of the day. Within 20 minutes all of the major indices were negative and by noon the dow sported a loss of more than 240 points. By 2:00 pm EDT, the Dow was back up, close to the highs, eventually settling for a minor gain, with all three other majors closing in the red.

Dow 11,444.61, +60.93 (0.54%)
NASDAQ 2,532.41, -23.98 (0.94%)
S&P 500 1,199.38, -0.69 (0.06%)
NYSE Composite 7,419.07, -9.33 (0.13%)

Declining issues led advancers by a wide margin, 4812-1952, as investors scrambled into Treasuries and blue chips. NASDAQ new highs were 7, with 436 new lows. On the NYSE, there were all of 6 new highs and 828 new lows, blowing out the gap in the combined total to 13 new highs and 1264 new lows. This side margin indicates that a long, deep, sustained bear market is underway, and the next 6-12 months could be pure equity hell.

Volume was again substantial; the gains on the Dow Industrials nearly meaningless, as they will be wiped away in the next round of selling, which is more than likely to begin in earnest on Monday.

NASDAQ Volume 3,775,836,000
NYSE Volume 9,798,826,000

Oil gained a mere 25 cents on the day, to $86.88. Gold lost $7.20, to $1,651.80, and silver was down $1.22, to $38.21. These are true deflationary signs and nothing - yet - to stop them. Of course, the Fed will likely announce some new form of QE, since the Jackson Hole conference is just weeks away.

It was a remarkable week for stocks and bonds, with the major indices taking their worst beatings since early 2009.

There is simply more downside risk ahead, and no bailouts coming this time around... we hope.

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.