Financial Sector Woes Continue

The stock markets are under extreme duress at this time, as increased concerns regarding the state of the U.S. economy and consumer spending have raised the probability that a recession could occur this year. The impact on financial companies has been significant from the fallout in the housing market, which is continuing with no signs of bottoming.

The Federal Reserve has tried to prop up the economy and credit markets with decreased interest rates and tens of billions of dollars of cash infusion, but with minimal effect it seems. The key variable driving market risk at this time continues to be the soft housing market and its impact on consumer spending and the economy.

As we have seen in recent weeks, the impact on financial companies has been evident. One company that is struggling under the financial burden has been heavyweight Citigroup, Inc. (NYSE/C), which has announced major write-offs. After writing off over $11.0 billion in losses related to the housing and subprime problems, Citigroup also announced massive job losses that could swell up to 45,000 additional cuts or over 10% of its global workforce in order to pare down expenses.

On Tuesday, Citigroup stunned investors after saying it had lost close to $10.0 billion in its fourth quarter, representing the largest quarterly deficit in the 196 years of operation. Citigroup also cut its dividend, as it struggles with the housing crunch by writing down its mortgage portfolio by a staggering $18.1 billion.

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We view the situation as troubling in the financial services sector, as many of the bellwether financial stocks are down 50% from their 52-week highs. The downward slide in stock values clearly demonstrates the market risk even in stocks that some would view to be long-term buy and hold, albeit this is clearly not the case in reality.

As we move forward, we expect to hear of more impacts driven by the fragile state of the subprime market and increased credit concerns in the banking system. Clearly, the credit and housing market is not improving and could get worse.