Barry Ritholtz has an excellent post illustrating how the brain processes text when we read:
I once had someone send me a similar piece as evidence supporting the use of the whole word rather than phonetic approach to teaching reading. I rejected that on the basis that it works for people who know how to read, not necessarily on those learning to read. Speed readers read “chunks” of text. Does that mean you do not need to know how to read individual words first? I think not.