Citigroup (C) options are now pricing in that the company will cut its dividend by $0.15 per quarter out to January 2009. The company supposedly sold a convertible at a dilutive price to a Middle East fund (that has tons of dollars to spend shipped to it by U.S. consumers paying higher gas prices) in order to raise capital and protect its dividend, but the options market doesn't believe it will be enough.

How ironic is it that what got stocks going, except for the usual rally before a Fed rate cut (also talk of desperation 50 basis point cut) was a rally in C, while it clearly underperformed the financial stocks in general? That the reason is the bank was starved for capital, as is the rest of the banking industry. But because the deal is very dilutive and should hurt profits per share going forward, the deal really helps bond holders at the expense of stock holders.

We will see more desperate moves to shore up a broken banking industry. The rumor of a merger between Bank of America (BAC) and C reminds me of what happened in Texas in 1983 as the major banks merged with one another just before they all went bankrupt. Just like then this seems just a shell game to buy time. A Fed rate cut will do the same thing it did last time: merely get sentiment going for a while before the market realizes that the cuts are becoming self-defeating.

The talk of the year-end rally persists. But the situation is much different than previous years, where "liquidity" naturally comes in at the end of the year. This is the first time in 13 years that the S&P 500 has declined in the 30 days prior to Thanksgiving, down 5% or so.

Risk is increasing.