Wells Fargo Begins the Market Value Play

Today Wells Fargo announced an aggreement to merge with Wachovia. This is clearly a surprise to Citigroup which thought they were buying Wachovia in a deal brokered by the government. This deal will be challenged by Citi as they thought they had an exclusivity agreement but the Wells deal certainly looks like it is better for shareholders and perhaps taxpayers.

More importantly, this deal is great for the long-term trends of the markets and the economy. We have discussed value investors in the past and that is what Wells Fargo apparently sees in its merger with Wachovia as it expects this combination to create great value at a bargain price. This is likely to be the first of many other banking mergers that will consolidate the industry, strengthen the bankinging system, and ease the credit crisis. The process may take a year or two but today marks the beginning of a positive movement toward propelling our economy in the right direction.

Other signs to look for which will indicate a bottoming in asset values will be increased acquisition activity in the corporate sector. Large, well-capitalized companies will sift through their industries to find the competitors who are overleveraged or have weak business models. These companies likely have taken a beating in the stock market and can be acquired at discounted prices. We should also expect to see leveraged companies who have cash announce that they have bought back their debt at discounted prices. The purchase of a company's bonds at a discount will not only reduce the interest expense of the company but also result in a capital gain. Of course, the company will end up with less debt and a stronger balance sheet.

The bottoming of a market will need to see help from many places. In addition to the above examples, we can expect the so called "smart money" will begin to deploy some of the cash they have socked away as they read the tea leaves of the market. A vote of confidence from CEO's on the acquisition trail will clearly indicate there is value in the market and investors can now forge ahead to buy stocks and distressed debt.

The economy is still weak and will likely get softer but the stock market will likely bottom out before the economy does. Today is the most recent sign of positive events to come.