The verdict is in. After days of anxiously awaiting political negotiations in Washington, the $700 billion bailout proposal was finally put to a vote on Monday in the House of Representatives but failed to pass. The Dow immediately dropped over 700 points in response, marking the worst one day drop in history. Every index was down across the board. The failure to pass the plan is clearly devastating news to the stock market and investors hoping for an injection of cash into the financial sector. It can also be devastating for the economy. 

Given the disastrous reaction in the stock market, Congress will have to consider another- or an updated- rescue plan, which could give the stock market a needed rebound. Amidst all the chaos, there will still be opportunity for the astute investor to take advantage of. We will closely monitor the situation and keep you updated.

 After a weekend of rumors involving Wachovia, on Monday the FDIC brokered a deal between Wachovia and Citigroup. Under the terms of the agreement, Citigroup will purchase Wachovia's banking operations for $2.1 billion. With the acquisition, Citigroup will greatly expand its retail franchise and become the largest U.S. bank in total assets, but it will also take on $53 billion in debt and $42 billion in possible losses in loans sitting on Wachovia's books, with the FDIC on the hook for anything beyond the first $42 billion. 

The FDIC was quick to point out that Wachovia remains in business with its brokerage and asset management divisions. Paulson and Bernanke both praised the deal as a step toward stability, but with a different major financial institution going out of business or being bought seemingly every week, investors did not react too enthusiastically. 

As U.S. financial troubles spread overseas, the Federal Reserve and other central banks around the world announced new action to increase the availability of dollars in the global financial market to support dollar-denominated obligations. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the central banks of Denmark, Norway, Australia and Sweden are participating in the currency swap agreement. 

While the extra cash flow may help ease financial strains, there is fear that the value of the already depreciating dollar will plummet further. With the potential for the decline of the value of the dollar, we reiterate our strong recommendation for gold as an investment. 

It also seems that with the renewed optimism about the rescue package for the economy may come a bottom for oil prices and for the stock markets. This, of course, will remain to be seen- but today's rally (that pales in comparison with yesterday's selloff, for sure) can be seen as a sign of optimism.

Vought Aircraft (Symbol to be determined)

Another positive of the passage of the economic bailout plan by Congress would be the revival of capital markets. And we don't mean just the stock market- the IPO market is just as important. This is the market that allocates new capital to new companies. When it is frozen, new capital is not feeding into new companies.

We think that among the deals that have the chance to be done first are the IPOs of defense suppliers. They are somewhat immune to the economic cycle but they do need capital. Vought Aircraft is one such potential IPO.

Vought traces its roots to 1917 as an aircraft manufacturer founded by an aviation pioneer Chance Milton Vought. After numerous mergers and acquisitions, it became Northrop Grumman's commercial aircraft division. In 2000, Northrop decided to divest the business and this is when the Carlyle Group, a well known and politically connected buyout firm, became the owner of Vought. Now it wants to sell it in an IPO.

Today, Vought is a leading manufacturer of aerostructure products for commercial, military and business jet aircraft. The company has most major airplane manufacturers as customers, with nearly 90% of its latest full fiscal year revenues generated on programs where Vought was the sole-source provider. Since aerostructures are very complicated and require highly specific project expertise, Vought rarely loses any contract once it gets it signed. Among its customers are Airbus, Bell Helicopter, Boeing, Cessna, Gulfstream, Hawker Beechcraft, Lockheed Martin, Northrop Grumman and Sikorsky, as well as the U.S. Air Force. Aerostructures is a growing field, which is becoming more and more complicated due to the use of composite materials. This makes companies like Vought even more important as they have the capability to handle the complications.

The company has a reasonably diversified revenue base, with the commercial, military and business jet markets representing 49%, 33% and 18% of its latest full year revenues, respectively. The good thing about the business is that orders come with a year or two advance notices, which gives the business visibility and decreases the cyclicality of operational performance. At latest count, the company had $3.9 billion of order backlog, on a revenue base of $1.625 billion. The caveat is that the company calculates its backlog using only firm orders from commercial and business jet programs and funded orders for government programs, which causes the backlog to be substantially lower than the estimated aggregate dollar value of contract awarded. (This is one of the most conservative ways to calculate the total amount.)

The investment bankers for the IPO were Goldman Sachs, Lehman Brothers and JP Morgan. The IPO is small enough only for Goldman and JP Morgan to handle, but the confusion over Lehman Brothers may have contributed to the delay. We'll keep you posted.

Until next week,

Your Ground Floor Trader Team

Your next regularly scheduled issue, Tuesday, October 7^th, 2008.