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7/26/2007 9:11:20 PM - Stock Market Chaos

The Dow Jones Industrial Average plummeted 311.50 (2.26%) today. At one point is was down about 420 points. The S&P 500 fell 35.43 (2.33%) and the Nasdaq dropped 48.83 (1.84%.) This is on top of a roughly 4-5% pullback in the last few days.

It's always funny to see the news reporting on days like this. They always show some guy on the trading floor holding his head in his hands and looking like the world just ended.

I'm in for more shares of Wachovia (WB) at $47.84. I waited a year and a half for Wachovia to hit $50 or less. I'm now backing up the truck. I'm doing this despite their purchase of Golden West (GW) - a large mortgage lender - last year, which I always thought was a mistake. They've paid dearly recently given GW's mortgage exposure and the fear that a bank holding such loans causes these days. That said...I think that the selling is overdone if your focus is on the long term.

I think the primary danger you face at this point is that if you buy now you might miss out on the opportunity to buy a bit later at a slightly lower price. That said, with a dividend increase fast approaching - an increase that I suspect will be in the 10-15% range, and probably closer to the latter - there is a danger that if you don't buy soon you'll miss out on what could be pretty close to the bottom.

I don't think the stock will rally significantly anytime soon since concern about increasing defaults will continue to weigh on the sector for the short term. That said, I'm willing to wait given a dividend yield that is going to be well north of 5 percent. I like the fact that there's plenty of cash flow coverage. That will allow Wachovia to easily digest even multi-billion dollar loan losses without jeopardizing either the dividend or the annual double-digit increases.

My guess is that the stock will find its bottom in the $45-50 range (with the $47+ range being the most likely.) The sooner they increase the dividend - and probably surprise a lot of people with the amount - the less likely it will be to hit the lower end of that range. A major increase in their stock repurchase plan is also probably in the works.

In a few years I think that all of this will have blown over and Wachovia will have likely moved quite a bit higher. Coupled with the dividend, I suspect that it will generate very respectable 3-5 year annualized returns - probably something in the range of 15% (including the dividend) from the current $48 price.

I also picked up some more Bank of America at $47.00. They just raised their dividend 14.2% (from $2.24 per share to $2.56.) At that price it's yielding 5.45%...awesome.

I bought more US Bancorp (USB) at $31.50. I've got another buy in at $30.00 but thus far it hasn't been able to hit that. USB will be raising their dividend from $1.60 per share after one more quarter. If they increase it 10% the yield will rise to 5.77% given the current share price of $30.50.

Dividends are currently taxed at a maximum rate of 15% as compared to a maximum of 35% for normal income.

I think that tomorrow will either be a relatively muted trading day - maybe a percentage point up or down - or else it will be an up day. I don't think that another big drop will occur tomorrow. That said...if a large drop does occur it will probably come late in the day (as people decide that they don't want ot hold such volatile assets over the weekend, and as those sales spur yet others.) If that happens I'd look for a slight rebound Monday or Tuesday.

- TZ

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