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The Weak Link Mid-Day? Financials

1) Financials are again the weak link today, as all the gains of last week are now essentially gone.

Weakness in Lehman, as well as a continuing campaign by Oppenheimer analyst Meredith Whitney to take down bank estimates (today she did it for Merrill and UBS, but she has already cut estimates for most other banks earlier in the week) are weighing on financials.

But the big debate on the Street is not about bank earnings, it's about bank DIVIDENDS. The Treasury Department is clearly signalling that banks should cut dividends to preserve capital, but with huge dividend yields (Wachovia at 9.1 percent, National City 7.3 percent, Comerica 7.1 percent, KeyCorp at 6.6 percent--you get the point), that is not an attractive option for many banks.

There are obvious reasons cutting the dividend may be the preferred way to increase capital: there's less risk of having to raise common equity at depressed levels, and it's cheaper than raising debt.

On the other hand, there is fear that stock prices will drop even more as dividend-sensitive investors flee, and some funds that specialize in high-yield investments may even have to sell the stocks, depending on how severe the cuts are.

2) How bad is the current home price decline? Not as bad as it has been in the past.

According to UBS, home prices have declined nationwide about 10 percent, but during the Great Depression, it was down 28.5 percent. The big question is, have we hit bottom? Looking at two severe regional housing recessions (one in the "oil-patch" states in the mid-'80s and the other in California and the Northeast from the late '80s to the early '90s), it took five years or more to bottom. UBS says that the banks most likely to cut dividends include National City, Washington Mutual , and Regions Financial .

3) Is the run of money coming out of mutual funds and ETFs finally ending? $9.3 billion went into all equity funds in the last three days, the most three-day inflow in a long time (at least since October, according to Charles Lieberman at TrimTabs).


Questions? Comments? tradertalk@cnbc.com

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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