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Quote of the Day
“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
-Ben Graham, in The Intelligent Investor
October 3rd – This Day in Stock Market History
October 3rd, 2008 – Wells Fargo makes a surprise offer for Wachovia bank for $7 per share.
On September 28th, Citigroup saved Wachovia, offering to buy Wachovia’s retail banking business for $1 a share. However, the deal was never formally finalized, and when Wachovia was offered $7 a share from Wells Fargo, Wachovia quickly accepted.
Under the terms of the deal, Wachovia shareholders received 0.1991 shares of Wells Fargo common stock for each share they owned of Wachovia. At the time the deal was announced, Well Fargo shares were trading at $35.16 a share.
Wachovia shares, which traded below $2 just a week prior, jumped significantly on the news, along with Wells Fargo shares:
Although long term Wachovia investors still took a significant hit:
Shares of Citi fell 18% on the news. Citi would attempt to legally fight the deal, but would drop the case by October 9th. Eventually, Citi would be paid $100 million by Wells Fargo in a settlement.
October 3rd, 2008 – President George Bush signs the TARP (Troubled Asset Relief Program) bill into law.
The $700 billion dollar bill provided an infusion of capital into the troubled banking system by purchasing subprime mortgages from banks.
However, only about $441 billion of the $700 billion was ever deployed into the economy.
The program led to a $15 billion profit for the government.
Passing of the bill would not help the stock market in the short term. Stocks fell 3.22% the day before, on this day in 2008 stocks would fall another 1.5%, fall 3.5% on October 6th, 5.1% on October 7th, 2% on October 8th, 7.3% on October 9th and 1.5% on October 10th.
It was the second attempt to pass the bill. Initially, the House of Representatives voted down the bill on September 29th, 2008, which caused the Dow Jones Industrial Average to fall 7%, or 777 points, at the time the largest point decline in the Dow’s history.
Best October 3rd in Dow Jones Industrial Average History
1923 – Up 2.68%, 2.36 points.
Worst October 3rd in Dow Jones Industrial Average History
1931 – Down 4.24%, 4.11 points.
Read of the Day
Valuing Community Bank Stocks – By David B Moore
“If a bank is relatively profitable – that is, it earns more than 1% on assets on a fully-taxed basis – the company should be valued based on its cash earnings (and/or dividends). A healthy company (bank or otherwise) that consistently generates a high level of net income (re: cash flow) should be valued by estimating the present value of projected future cash flows. For banks that fit this description, book value is largely (but not totally) irrelevant as long as the institution has enough regulatory capital to keep growing as projected. In these instances, earnings and/or dividends are the primary valuation issues. One must, however, take note of the leverage a bank applies to generate such earnings and adjust the valuation to reflect incremental risk….There are deep value investors who invest solely with book value in mind. Typically, these investors intellectually understand the argument for using earnings-based valuation techniques but choose to invest with the mindset that, “Problems could surface at any time and earnings could decline substantially – book value has significantly less downside volatility.” This group falls firmly into the “you make your money when you buy the stock” camp. Unfortunately, such an attitude relegates these investors largely to the securities of troubled banks and overcapitalized and/or modestly profitable.
<– Go To Previous Day: October 2nd, 1990 – Japan’s Nikkei index has its best day in history, rising 13.2%
Go To Next Day: October 4th, 1957 – The USSR launches Sputnik, beating the U.S. into space. –>
