Financials, Energy: Big Problems For Markets

In addition to the realization that economic news would have to be really bad for the Fed to cut rates further, there are two problems with the markets today, both dealing with a change in perception on two key sectors--financials and energy.

1) In financials, it's one thing to talk about writedowns due to CDOs and leveraged loan committments, but it's another thing entirely to say that some banks may have to cut their dividends, which is what CIBC talked about when it cut its rating onCitigroup . Citi pays a dividend yield of 5.2% (that was yesterday; it's now 5.6% becuase of a 7% drop in today's price). A lot of investors own some of these stocks for their dividend yield (B of A has a yield of 5.5%, Wachovia 5.9%, Washington Mutual 8.5%); so talk of cutting dividends--even if it's just from an analyst--is enough to cause concern.

With that said, is Citi really in danger of cutting its dividend? Richard Bove at Punk Ziegel thinks not. He notes that at the end of the third quarter, Citigroup posted $2.355 trillion in assets. This was more than any other American bank and possibly more than any bank in the world. He goes through several paragraphs examining Citi's income statement (I won't bore you with the details) and concludes by saying:

"These numbers do not suggest that the company is strapped for cash or lacking in equity. Assume that the bank takes $70 billion in SIV assets on to its balance sheet. There would be little strain. It added $133.8 billion in assets in the third quarter alone."

2) In energy, it's one thing to note that high oil prices are not being offset by higher gas prices, so margins for oil refiners are under a lot of pressure--we already knew that. It's another to see, for example, Exxon report a decline of two percent in oil production. This is not an Exxon-specific story; it is a systemic problem.

Oil producers are going all over the world pumping everywhere they can find, and there are signs that production is declining because it is getting tougher and tougher to get to it. Has production peaked? That is a hot topic. But here is a good case where higher oil is not going to help oil companies if they can't pump more out.

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