Sly

Hoping for a Rally in This Whipsaw Environment

With regard to the comment 'it's different now'… I think I can help put it in perspective…
What we are seeing is the result of the Fed avoiding a crash/panic in March. Crash/panic is bad for the recapitalization of equities. You can't prop things up equities forever so the best case is an orderly decline down (i.e., better than a crash). It's like holding a heavy weight with a rope… you can't pull the weight up and dropping the weight would be bad. You just have to hold on with all your might and let it slide down a little at a time.

The idea is that:
1) Many banks would be below their minimal capital threshold and some would be insolvent… if they had to value loans at MTM value. Though, of course, the banks are liquid… for now.
2) The banks, being undercapitalized, need to recapitalize
3) The Fed is helping them to recapitalize. By the way, the Fed is owned by and run by the big banks (not a secret)
4) The banks will recapitalize in three ways… a) By making profits (and putting their profits into capital b) From selling new shares and c) selling assets
5) The Fed is helping with 4a by keeping short term interest rates low. Banks borrow short and lend long so the steeper the yield curve the more profits and the more quickly they recapitalize
6) The Fed is helping with 4b by propping the equity markets up (i.e., propping the stock price of the banks up). For example, cutting interest rates by 75 basis points in one night.

In a certain sense the plan is working. By avoiding a crash in March, the S&P bounced off 1270 and went up, given banks a chance to sell equity at higher prices than they would have seen otherwise. Banks and investors hopefully took the hint (since you can't explain the plan explicitly otherwise it won't work)… some did and some didn't. In any case… don't expect the equity markets to return to 'normal' until the props the Fed introduced (TSA, etc.) are removed… or rather, once the banking system is recapitalized. Until then there is the pressure, like a weight, forcing things down. By the way, I don't think the Fed cares about what equity prices are, per se… or, rather, that the recapitalization of the banking system is 100 times more important to the Fed.

Putting $1T Subprime Mortgage Losses in Perspective

With regard to your comment:
"I'm pretty sure the stock market losses and the losses from 9,000 bank failures (about 1/3 of all banks) in the 1930s was a lot bigger than 2%."…
Thank you for understanding correctly the phrase "since the…". If the current situation was as bad as the Great Depression I am sure George would have said "as bad as". He might have even used the phrase "worse than" if that is what he meant to say.

It's been around 70 years since the great depression so George saying the current environment is "the most severe" it has been during the past 70 years then that means things are pretty bad.

Citigroup Dividend Cut: Just Talk

Try this link:
money.cnn.com/2008/01/...
"... a 41 percent cut to its dividend..."
"Citigroup (C, Fortune 500) shares gained 1.5 percent in pre-market trading on the news."

Citigroup Dividend Cut: Just Talk

Citi's dividends by year were:
Year Dividend Growth
2003 $1.10
2004 $1.60 45.45%
2005 $1.76 10.00%
2006 $1.96 11.36%
2007 $2.16 10.20%
The dividends grew are profits grew. Here are some comments:
1) There is nothing magical about the $0.54 a quarter / $2.16 a year dividend number, which is about twice what it was in 2003. Moreover, the dividend grew at a rate faster than it should have because profits were inflated by about $3 to $5 billion a year for the past few years by subprime excesses. The dividend never should have been raised to its current level in the first place so what's wrong with setting it back lower?
2) Stocks would have priced in a certain grown rate to dividends based on recent experience. E.g., Stocks would have expected dividends to grow by 10% to $2.38 in 2008. Just by keeping dividends the same in 2008 Citi is in effect lowering the dividend relative to expectations and also lowering the dividend if you compare values adjusted for inflation. If Citi doesn't lower the 2008 dividend and instead just keeps it unchanged for as many years as it takes for inflation and/or profits to catch up then that strategy isn't any better and, I would argue worse, for shareholders who collect dividends.
3) Employees of Wall Street Firms get bonuses that are tied to a company's profit. Employees have good years and bad years. Dividends should be a share of the profits… if profits are down, then bonuses will be down… and why not dividends too?
4) About the best reason I have heard to keep the dividend as-is is to help people who are retired who live off dividend income. However, that reasoning is flawed. That's because there is another way to extract income for living expenses out of a stock… to sell the stock. For example, for years Microsoft stock went up even though it didn't pay a dividend… and lucky retirees who owned Microsoft could have sold off some shares each quarter to mimic the effect of dividends. (I agree that dividend payments are different that selling stock when you take into account taxes… this difference should be of lesser consequence to retirees).
5) Citi's stock has already been reduced by about 40% in anticipation of a 40% cut in dividends. So I don't expect the stock to drop once Citi reduces its dividend…. the market has already priced it in. Citi's stock will go up when the dividend it cut as investors and Citi restores a strong capital base and that is a good thing.
6) When you say that the Citi CEO doesn't want to cut dividends because that is 'taking the easy way out' here is what I think… when I get lost I ask for directions… I take the easy way out rather than wander around lost. Sometimes the easy way out is the smart thing to do and the right thing to do.