On the Aftermath of the Failed $700B Bailout

Here is an excerpt on "Where we go now" by Jon Hilsenrath of the Wall Street Journal:

3 things to look for in the aftermath of the House's failure to pass the $700 Billion bailout:

1. Congress: seems to be an opening act. Members of both sides will be going back to the drawing board to see if there are any changes to be made to reach a middle ground.

2. Markets: The DOW is way off today, as are credit markets, and will probably continue tomorrow. As long as these pressures continue to build the pressure will be on the house to find a resolution.

3. Treasury Department & Federal Reserve: Not clear at this point if Congress will be able to find a resolution, therefore the Fed may have to also go back to the drawing board to look for new ways to address this financial crisis. This could involve interest rate cuts, but the Fed has been reluctant to do this any more. They must also look for new ways to inject liquidity in to the financial markets.

What should investors do now?

Jason Zweig writes in "The Intelligent Investor":

Wall Street is dead.

Whether it was murder or suicide is beside the point; Wall Street as it has operated for the past 75 years has been obliterated in a matter of weeks. And witnessing this violent death in broad daylight has traumatized investors everywhere.

The Wall Street domino has toppled everything in sight: U.S. stocks large and small, within the financial industry and outside of it; foreign stocks; oil and other commodities; real estate investment trusts; formerly booming emerging markets like India and China. Even gold, although it has inched up lately, has lost 10% from its highs earlier this year. Not even cash seemed entirely safe, as money-market funds barely averted a "run on the bank."

Of all the dominos that have tipped over, the most psychologically damaging collapse was the last: the very notion of diversification itself.

According to the researchers at Morningstar, Inc., 91% of all mutual funds in existence have lost money so far this year. To put that in perspective, in 2001 – the year Enron imploded, Internet stocks kept crashing and al Qaeda attacked the U.S. – more than one out of every three funds still managed to generate positive returns.

...the resolve of the Fed is not in question; nor is there any doubt that the Treasury department is willing to provide the financing it takes to get the economy moving again. Furthermore, U.S. non-financial companies have just under $1 trillion in cash on their books. Even though Wall Street is dead, innovation is not: In the months to come, clever new financial go-betweens will spring up and find a way to get that cash flowing again. It's hard to see how a depression could get underway when so much capital is waiting in the wings.

Whatever happens with the bailout, don't bail out.

Read the Full article here on "The Intelligent Investor"