Despite the fact the House of Representatives passed the economic recovery bill earlier today, continued problems in the banking and credit markets generated an across-the-board loss for all three major indexes. The Dow Jones Industrial Average shaved off 7.4 percent for the week; the Nasdaq Composite shed 10.8 percent; and the S&P 500 bled out 9.4 percent.

As we waited for the House of Representatives to vote once again on the emergency economic recovery legislation passed earlier this week by the Senate, Wachovia announced that it’s hastily arranged marriage to Citigroup has been called off in favor of another deal.

Wells Fargo has been named the new suitor after deciding to consummate a deal that had been in the works over the weekend prior to the Federal Deposit Insurance Corporation (FDIC) taking the reins on hitching Wachovia to someone. The boards of both companies have agreed to a $15.4 billion deal, which keeps Wachovia intact, as Wells Fargo purchases the entire company for what amounts to $7 a share and assumes of all of Wachovia’s preferred shares and debt. Wachovia’s shareholders will receive 0.1991 shares of Wells Fargo stock for every Wachovia share they hold.

Needless to say, that’s a preferable deal for Wachovia shareholders as well as the FDIC; under the Citigroup arrangement, the former would have received nothing, while the latter was going to be left holding the bag on the lion’s share of Wachovia’s questionable debt.

The only company I can see getting shafted in this change of tack is Citigroup, which would have picked up Wachovia’s massive east coast retail banking operations for a song and a dance. Understandably, they’re crying foul over getting pushed to the side. And who can blame them? However, I doubt regulators will step in because it gets them off the hook for billions of dollars in bad assets.

The most interesting commentary I’ve seen so far on the deal comes from the Wall Street Journal, in which Dan Fitzpatrick characterizes the move as an aggressive new approach on the part of Wells Fargo. It’s true that Wells Fargo to this point has focused its acquisition strategy on smaller, more community-based banks, but I think the move on Wachovia is more reflective of its recognition that the landscape has changed in the banking industry than a sudden about-face on strategy.

The simple fact is that we’re entering a not-so-totally unprecedented period of consolidation in financials, and now it’s going to be a matter of the quick and the dead in the industry.

Financials have already been consolidating at a rapid clip this decade, and an interesting though dense report by the Bank for International Settlements pins the trend on rapid IT advances and the liberalization of regulatory standards, both of which make sense. Improved IT infrastructures have made it easier to integrate a new acquisition, and looser regulation has made it easier for mergers and acquisitions (M&A) to be consummated.

In the merger vein, I do the bulk of my personal banking with Wachovia, though I didn’t actively seek them out. It came about because I started out with a small community bank that was purchased by the now-defunct First Union, which was acquired by Wachovia. That will now make me a Wells Fargo customer.

Now that the FDIC is actively working to facilitate the acquisition of deeply troubled institutions rather than just footing the bill for failures, I think we’ll see an accelerating wave of buyouts as well-capitalized bigger fish go hunting. One of the best quotes from the Wall Street Journal piece was a comment made by Richard Kovacevich, former CEO and current Chairman of Wells Fargo, in a speech earlier this year, in which he said he felt like “a kid in a candy store.” Truer words have never been spoken.

Because the bailout passed the House this afternoon, a situation is set up in which the banks can dump their bad assets onto the government. They’re not going to get the full face value of the securities, so there are quite a few that will still be left undercapitalized after the deal’s done. They’ll be in situations much like Wachovia, whose only real chink in their armor was they fact that it picked up Golden West and its bevy of bad assets at what amounted to the top of the market.

And it’s true that Wells Fargo is getting those bad assets as well as the good, but at $7 a share, they can afford to take a fairly sizable write down on the mortgage assets and still come out well ahead on Wachovia’s profitable enterprises.

Finally, a Bailout Plan for Investors

Top Wall Street executives left holding millions, but many small investors got left holding the bag.

Now, however, there is a project underway that will bail out investors.  It's the biggest rebuilding effort ever undertaken, and it will reward early responders with millions of dollars for the rest of their lives.

Go here now for all the details.

If the Wells Fargo/Wachovia deal is allowed to stand, it will leave me quite bullish on the long-term prospects for Bank of America, JP Morgan Chase, and Wells Fargo. I would also say that smaller community banks are also quite attractive, though potential investors would have to be willing to dig deep into filings to determine just what their true exposure to the current market mess is. But I’m sure there are plenty of diamonds in the rough that, even if they aren’t ultimately picked up, would pay steady dividends over the long haul.

There’s still substantial risk here, and I don’t think we’re at the bottom. But I do believe new opportunities are presenting themselves in the financials.

On the economic data, the Conference Board has reported that consumer confidence inched up in September to 59.8 versus 58.5 in August, though the present situation index fell to 58.8. So although consumers still perceive the current situation to be weak, they’re expecting a turnaround soon.

Construction and factory orders didn’t show that renewed confidence though, with construction spending in August standing unchanged and factory orders falling 4 percent. Economists had forecast that spending would fall 0.5 percent, but private construction spending thwarted expectations to marginally improve in the month, preventing a further fall.

Factory orders, on the other hand, posted their biggest decline in two years, showing that business spending was slowing in August, even before the credit crunch worsened. That downward trend could continue, as the September ISM Manufacturing Index fell to 43.5, which doesn’t bode well for spending.

Jobless claims remained at seven-year highs last week, with initial claims rising by 1,000 to 497,000 new filings, though the Labor Dept reported that, without the effect of the hurricanes, the number would have only been 439,000. Continuing claims rose by 48,000 to reach 3.59 million, as out of work Americans continue to face difficulty finding new jobs.

Today’s jobs report underscored the bad employment and, by extension, economic conditions here in the US, reporting that that 159,000 jobs were cut in September. That’s the biggest monthly decline since 2003, when the national was still reeling from the problems stemming from 2001. That underscores the difficulties facing US consumers.

Finally, mortgage applications dropped precipitously, falling 23 percent last week despite decreases in interest rates for fixed rate mortgages. Potential homebuyers remained spooked by weak economic conditions and tight credit markets, which means it’s still tough to get financing. The average interest rate for 30-year fixed-rate mortgages fell to 6.07 percent from 6.08 percent, 15-year fixed-rates declined to 5.82 percent from 5.84 percent and one-year adjustable rate mortgages (ARM) rose to 7.19 percent from 7.01 percent.

Overall, it looks as though the US is facing recession, though the passage of the economic recovery legislation could make a difference between recession and meltdown going forward.

There’s still room for investors to minimize losses, if not outright make some cash though, and Roger Conrad looks at contrarian thinking in this week’s issue of his free e-zine Utility & Income.

Good businesses are what I prefer to buy. That means stocks, bonds, preferred shares and other securities backed by healthy, growing companies, which are becoming more valuable over time.

Even buying good businesses won’t save you entirely from bear markets. The best companies can and do occasionally stumble. And no matter how well you research something, you’re going to get it wrong sometimes—with the result that you’re stuck with a dog.

Buying good businesses, however, does ensure you’re always in the game. If you buy in at a bad time, the returns will be slower in coming, but they will come. And no matter how bad times get for the economy and overall market, stocks of good businesses will always bounce back when the storm passes, and the sun comes out again.

Contrary to popular belief, good businesses can be found in virtually any sector of the market. So, in fact, can bad ones. That’s why you never want to fall in love and overload your portfolio on any particular investment class, or conversely to completely shun an area.

Rather, the secret is to own the best companies in a wide range of sectors. Since different sectors perform well at different times, your overall portfolio will always remain steady, and it will gain value over time as the individual companies grow.

Remembering that good businesses can be found in every sector is particularly important when a group or industry comes under attack. One old saw on Wall Street is that more than 90 percent of the return on any particular stock comes from how the overall market does plus how its individual sector performs.

There’s definitely a grain of truth here, particularly when it comes to near-term action. For example, virtually every stock in the financial services industry has taken some kind of hit this year in the wake of the subprime fiasco.

Over the years, however, there’s been a wide divergence in performance between stocks in the sector. Some companies have grown larger and more profitable, finishing every industry crisis in a stronger market position than ever. Some are no longer in business. The sector had its ups and downs, but the best have steadily enriched their investors. Wise stock selection--not timely sector switching--was the key to wealth building.

There is one way, however, that long-term investors can use market swings to their huge advantage: by thinking contrary.

In the markets as in the outdoors, it’s always darkest before the dawn. People are always ready to throw in the towel when things look their worst. And ironically, that’s usually where the bottom forms.

Talk all you want about rational markets, true value, quants, trend lines, automatic stop/losses or any other system that’s supposed to take the emotion out of investing. The stock market is about people. That means it’s all about emotion. People go from emotional highs to lows and back again, and so do markets.

Contrary investing is all about using those emotional swings to your advantage. Contrary Investing is also the title of my favorite investment book of all time. Written by Richard E. Band--editor of Personal Finance when I began working at KCI Communications in the mid-1980s--the book posits one basic tenet: Think for yourself; don’t let the crowd do it for you.

The book describes various techniques for analyzing the market mood and detecting when the emotional highs and lows have gone to extremes. The ideal is to buy when the overall market or a particular sector is at an emotional low and to sell when it’s at a manic high.

Are You Ready For the Rebound in Commodity Prices?

Commodities prices have been on a wild roller coaster ride lately, but because of rising global demands, the long-term natural resource boom is here to stay.
 
The question is: when will the next wave of profits start and are you set to ride this wave?

Follow this link and see how you can pick your next investment windfall.

The most dramatic emotional peaks and valleys come only rarely on Wall Street. For utility stocks, the last big one was in late 2002 and early 2003. At that point, investors had just endured a two-year, crushing bear market. Some two-dozen companies were at risk to bankruptcy and the Enron implosion had everyone looking over their shoulder for the next disaster.

Few wanted to touch utility stocks at that time. In fact, the Vanguard family changed its long-running utility fund into a “dividend growth fund.” That was the bottom. Virtually any utility stock, bond or preferred stock purchased then has been a huge winner since. The most battered companies--such as AES Corp, CMS Energy and Williams Companies--have returned 5-, 10-, even 20-to-1.

It was a very hard thing to go against the hugely negative prevailing emotion in early 2003 and buy utility stocks. But even those who lost big in 2001-02 have since made their money back several times, if they bought or even just held on at the bottom.

We’ve recently setup an e-mail address, so if you have any questions or comments, please send them to fridaymarketwrapup@kci-com.com.

Speaking Engagements

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat of the federal government.

Join Neil George, Roger Conrad and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011364 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.