Dow plunges 504! Here's what's next …

With the Dow plunging 504 points today … with Lehman dead and Merrill sold off … with AIG on the brink and Washington Mutual not far behind … you’ll soon hear the Wall Street pundits arguing that this is the “climactic capitulation” that will end the decline. Don’t fall for it!

In reality …

• The Dow is still not far from its all-time peaks, with a lot further to fall. Our forecast is unchanged: 7,200 on the Dow.

• The recession is still in its early stages. Expect outright contractions in GDP in the coming quarters, and despite a lot of talk and some action, don’t count on the government to turn it around any time soon.

• America’s oversized debt pyramid has just begun to wind down. It could take several years to clean up the mess.

We warned you this crisis was coming and it came. We named the names of the companies that would fail and they did. We told you how to avoid the dangers. We even recommended inverse ETFs that have been surging thanks to the market’s plunge.

Our message for you today is this: If you ignored our warnings before, it’s not too late to act now. Sure, you may have missed the first phase of this debacle. But that’s water under the bridge. Looking forward, all that matters is what you do right now, before the next, deeper phases.

Here’s What’s Happening and
What We See Coming Next …

The financial failures you’ve seen so far are just the tip of the iceberg …

• Lehman Brothers is merely the first to fail. Expect more in the weeks ahead, possibly starting with those that have the smallest capital cushion.

• Bank of America is making a horrendous mistake. It’s already bogged down with its earlier purchase of Countrywide Financial, a classic pig in the poke. Now, on top of that bad move, it’s taking on all the debts and risks of Merrill Lynch.

• AIG, the biggest insurance firm in the country, is desperately trying to shore up its balance sheet after suffering $18.5 billion in losses over the past three quarters. It’s planning to dump assets, raise capital, and asking the Federal Reserve for a $40 billion bridge loan. Don’t be surprised if AIG is taken over by insurance regulators in the days ahead. And don’t be shocked if more insurance company failures follow.

• Look out for bigger financial troubles in the banking industry, including not only the names that are in the news, like Washington Mutual and Wachovia, but also at Citicorp, HSBC … and yes … Bank of America.

Late this afternoon, Treasury Secretary Paulson tried to inspire some confidence. But he failed as the shares in most of these companies plunged: Washington Mutual, down 27%. Wachovia down, 25%. AIG down 61%, the worst single-day stock decline for any major insurer in memory.

The market and the economy WILL recover eventually, but only after the nation’s bad debts are liquidated, a process that will be extremely painful and traumatic.

Here’s What to Do …

First, if you have shares that we have not recommended, go online or call your broker to sell HALF immediately, at the market. Then stand by for our next alert regarding the second half.

Second, put all the proceeds away in the safest, most liquid investment in the world: Treasury bills or Treasury-only money market funds like Capital Preservation, the Weiss Treasury-Only Money Market Fund or any of the several we have recommended repeatedly here in Money and Markets.

Third, for the stocks that you hold (including those we recommended), if you have not bought inverse ETFs or put options to help protect you against losses, get ready to do so at the very next opportunity.

Fourth, for a hard-hitting, detailed forecast of the NEXT phase of this crisis, be sure to watch the recording of our 1-hour video webcast, “Plague to Pandemic,” which we just posted on our Website this afternoon. Just turn up your computer speakers and click here now.

Never before in our lifetimes has there been a more urgent need for this guidance! And never before have we been more concerned about investors who might miss it! Be sure to take advantage of it now while you still can.

Best wishes,

Martin and Mike

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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.

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