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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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7/27/2007 3:55:36 PM by TZ

The Dow Jones Industrial Average dropped another 208.1 points (1.54%) to 13,265.47 today. The S&P 500 dropped 23.71 (1.6%) to 1,458.95 and the Nasdaq dropped 37.1 (1.43%) to 2562.24. That makes it the worst week in five years, with the Dow dropping 520 points (5.2%) for the week, the S&P 500 giving up 6.1%, and the Nasdaq falling 5.8%.

It was fairly close for most of the day - usually half to three-quarters of a percentage point down. Most of the drop came in the last hour or so of trading.

My other US Bancorp (USB) order at $30.00 executed. It ranged from $29.94 to $30.98 today. It hovered in the $30.20 to $30.50 for most of the day and then dropped precipitously near the end (along with the rest of the market.) Assuming they raise their dividend to $1.76 per share after another quarter - they-re currently paying $1.60 per share - they-ll be paying 5.87%...awesome. They-ve got very little subprime mortgage exposure but have slightly missed the last couple of quarters. That said, they-ve got an ROE (return on equity, a measure of how efficiently a bank converts working capital into profit) just north of 20%, which is far better than the other large banks (that tend to have ROE values in the 12-15% range.)

Bank of America was up pretty significantly today - it was north of $48 for most of the day. It gave up some of those gains at the end of the day but I think it-s pretty secure at this price.

Wachovia traded higher for most of the day but, similarly, dropped near the end of the day. It-s very slightly below where I picked it up yesterday. I suspect that $47 will prove to be its bottom unless another serious market drop occurs. Even if that happens, it will be hard to drop through $47 once they announce the increase to their dividend (which should be within the next week or two.)

-TZ

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