Dow's bedrock gets shakier
The reverberations of the credit crunch that surfaced this summer hit hard again Thursday when an analyst downgraded the nation's largest bank, Citigroup. The report spooked investors because it raised the possibility that the banking behemoth might have to cut its cash dividend to investors in an effort to raise capital.
Just the suggestion that Citi's 5 percent-plus dividend might be in jeopardy - a scenario other analysts said was unlikely - was enough to remind investors that the credit crunch and subprime mortgage meltdown that has caused billions of dollars in losses on Wall Street was not over. It also reinforced the notion that major banks and brokerages will report additional losses in the months ahead.
"It raises the question: Is the worst really behind us on the credit side?" says Jack Ablin, chief investment officer at Harris Private Bank.
Selling was heavy Thursday, with all three major stock indexes falling more than 2 percent. The Dow Jones industrial average took a big hit, plunging 362 points, or 2.6 percent, to 13,567.87. The blue-chip index, which enjoyed a triple-digit gain Wednesday after the Federal Reserve cut interest rates, is still up 8.9 percent for the year.
Weakness in financials is a big weight on the market because it's the biggest sector. It still accounts for nearly 19 percent of the market's value, down from 22.2 percent at the start of the year, says Standard & Poor's. The value of the financial sector has declined $330 billion in 2007.
The fact Wall Street still does not have a good handle on how big the losses are from its bets on risky mortgages is creating uncertainty. "There's a lack of transparency," says Todd Clark, a trader at Nollenberger Capital Partners. "The banks haven't yet come clean."
Shares of Citigroup slid 6.9 percent, its biggest drop in five years, fueling a sell-off in shares of banks, brokerages and other financial stocks exposed to the imploding housing market. An exchange-traded fund that tracks a broad basket of financial stocks slumped 4.9 percent Thursday. Most of the nation's largest financial firms are under duress because they hold large amounts of hard-to-value and hard-to-sell assets backed by subprime mortgages, many of which are in default.
Citi's sell-off was caused in part by the belief that "the stock is less attractive" given its troubles if the 5 percent dividend disappears, says Bill Fitzpatrick, an analyst at Johnson Asset Management.
Not everyone on Wall Street thinks Citi's dividend is in jeopardy. Ablin described the furor as "one analyst crying fire, and the whole market heading for the exits."
Dick Bove of Punk Ziegel says Citi has enough cash flow to pay dividends for the fourth quarter and beyond: "The capital and cash flow is there. One has to assume some horrendous event going forward to eliminate it."
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