OPEC oil ministers on Friday downplayed expectations of, but didn't dismiss outright, an immediate output cut as they faced a third test in as many months of their ability to engineer a rebound in oil prices.

The outcome of the hastily convened Cairo meeting Saturday, billed as a consultative gathering to assess the impact of earlier production cuts, likely hinges on a key issue with which the cartel has had a checkered past: unity.

Kuwaiti oil minister Mohammed Al-Aleem told reporters in Cairo that while the market was oversupplied, he believed there was "no need" for the Organization of Petroleum Exporting Countries to decide on cuts ahead of its regularly scheduled Dec. 17 meeting in Algeria.

But Rafael Ramirez, oil minister for price hawk Venezuela, later said the option remained to cut production by "at least 1 million barrels" at the weekend gathering. "Maybe it's necessary, a new cut," Ramirez said. He quickly added, thought, that such a decision could be taken now or next month.

The diverging takes highlighted the difficulty of the task facing producers of almost 40 percent of the world's oil.

"There is total confusion" among OPEC's 13 members, said Fadel Gheit, managing director of oil and gas research at Oppenheimer & Co. in New York. "These people ... really have no business model. They basically thrive when oil prices go up, and now they are crying uncle when prices go down."

And, down they have gone, in a financial avalanche triggered by demand destruction, itself sped along by a world financial meltdown that also threatens to cut deeply into OPEC member states' government budgets.

Whereas crude stood at about $147 a barrel in mid-July, it now hovers about $90 lower. On Friday, the U.S. benchmark West Texas Intermediate crude for January delivery was trading at down about $3 per barrel at about $51.

"They (OPEC) simply don't react quick enough, and prices keep going down," said Vincent Lauerman, OPEC expert and president of Calgary, Canada-based consultancy Geopolitics Central.

This meeting will come down to what kingpin and traditional price dove Saudi Arabia wants, he said.

Saudi oil minister Ali al-Naimi told reporters answers would come on Saturday.

The cartel has already held one emergency meeting - on Oct. 24 in Vienna - to try to halt the slide in prices with an announcement of a 1.5 million barrel per day drop.

It failed to support prices, and the cartel cobbled together the Cairo gathering on the sidelines of the Organization of Arab Petroleum Exporting Countries' meeting.

But members have been circumspect about expectations, leading some to speculate OPEC is staying quiet to maintain the element of surprise.

"As long as they do a substantive cut, they may be getting ahead of the curve, and should be cutting enough to get ahead of demand destruction," said Lauerman, citing about 1 to 1.2 million as the magic number.

That has been the figure most readily cited by those nations proposing cuts, including Venezuela which, like fellow price hawk Iran, need crude of about $90 per barrel to meet current spending needs aimed in part at propping up its domestically unpopular regime.

The two have found support from non-OPEC oil giant, Russia. Its president, Dmitry Medvedev, said Thursday his country would cooperate with the group to support prices.

Other OPEC members, such as Nigeria and Ecuador, face budget problems too, making them reluctant to implement more cuts that might shrink revenues further.

Nigerian envoy, Odein Ajumogobia, said the ministers were "just going to exchange ideas and views" at the gathering.

Kuwait's al-Aleem said current low prices benefit neither consumers nor producers and could undercut investments in future projects - a scenario that could lead to another spike down the road.

"We think a decision could be taken, but I think it will happen in Algeria," he said.

OPEC's last round of cuts would put its total production at about 30.5 million barrels per day, according to the IEA.

Unlike many of their fellow members, the Saudis are better positioned to cope with the drop in prices. The International Monetary Fund estimates Riyadh needs crude in the range of about $50 per barrel for 2008 fiscal accounts to break even.

While al-Naimi refused to tip his hand, an indication of the Saudi thinking may have emerged earlier this month when, during the Group of 20 meeting in Washington, King Abdullah pledged the kingdom would do everything in its power to help the global economy recover.

Higher oil prices would undermine that promise.

Also unclear, after two earlier cuts failed to push prices higher, is what the group can do without prolonging the global economic downturn.

"I would play 'good cop' and not do anything," said Oppenheimer's Gheit. "If they are patient, they will be rewarded because you will see a precipitous drop in capital spending, and that will tighten the market, in itself."

But demand has shown little indication of rebounding soon, and global crude stockpiles are growing - as evidenced by a U.S. government report showing a surprisingly large 7 million barrel build in stocks last week.

Those factors argue against restraint if some in OPEC want crude back up to at least $70.

Even so, Algerian oil minister and OPEC president Chakib Khelil has urged a wait-and-see approach, saying that the group risks losing credibility if it enacts new cuts in Cairo only to find members were not complying with the Vienna decision.

Political considerations are also likely to factor prominently.

Saudi Arabia is a close U.S. ally in the Middle East, and is eager to see concerted Washington backing for peace efforts in the region.

One way of winning new support from the incoming administration of U.S. President-elect Barack Obama would be by tacitly working to undercut two of Washington's most strident foes, Venezuela and Iran. It would not be an onerous job for the Sunni Muslim Saudis, who have no great affection for Shiite Iran.

"Saudi Arabia is playing ball with the U.S.," said Gheit. "It is going to punish Venezuela. It is going to punish Russia. It is also going to curtail Iran."

AP Business Writer Adam Schreck contributed to this report.

Copyright 2008 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

Citigroup's Uneasy Victory

The federal bailout calmed the market and seems to fence off Citi's toxic assets. But some investors wonder what it says about the state of other banks

It's been a difficult first year for Citigroup CEO Vikram Pandit. Jin Lee/Bloomberg News /Landov

Federal regulators got a fresh inside look at Citigroup's (C) books over the weekend—and it wasn't pretty.

The result: a new $306 billion federal bailout for the bank. On the one hand, it provides more clarity as to the lengths the government will now go to shore up the U.S. financial system. On the other hand, investors continue to be wary about whether Citi was worth saving from oblivion. Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who's next?

"You had a tremendous amount of people looking inside at Citi in the last few days to figure out how bad it was, and they came away thinking that the capital markets can't handle this," says David Ellison, manager of the $185 million FBR Small Cap Financial Fund (FBRSX). "So, Citigroup wasn't a going concern. What does it tell you about the industry and everybody else all around the world that has the same assets?"

On Monday, at least, the market chose to view the bright side of the Citi deal. Citi's shares jumped 2.18, or 58%, to close at 5.95 on Nov. 24. And the prospect of stability for financial stocks lifted the broader market, as the Dow Jones industrial average gained 397 points, or 4.9%, to 8,443.39. The Standard & Poor's 500-stock index gained 52 points, or 6.5%, to 851.78.

Bailout Terms

Citigroup agreed to the unprecedented series of steps with the U.S. Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corp. to strengthen the bank's capital ratios, reduce risk, and increase its liquidity. Under the program, announced on Nov. 24, the Treasury will invest an additional $20 billion in Citi preferred stock under the Troubled Asset Relief Program (TARP), on top of $25 billion the bank received about a month ago.

Also, Citi will issue an incremental $7 billion in preferred stock to both the Treasury and the FDIC as payment for a government guarantee on $306 billion of securities, loans, and commitments backed by residential and commercial real estate and other assets. The bailout agreement also means that Citi must submit any executive compensation plans to the government for approval.

Under the guarantee, Citi will assume any losses on the $306 billion portfolio up to $29 billion on a pretax basis—meaning the government will assume 90% of any losses.

According to people familiar with the negotiations, the government struck a plan to "ring-fence" around about $300 billion in questionable assets, which will remain on Citigroup's books. That was the only group of assets for which the feds and Citi could agree on a potential value, sources say. That amounts to just 15% of Citi's total assets, which are a shade over $2 trillion.

The plan is not only good for the system, say those sources, but it provides cheap insurance for the government compared with the costs of a financial system in meltdown mode.

Sources also say that the calculations on the value of the portfolio were made on the "very unlikely event" that the U.S. economy has a downturn as severe as the Great Depression. The values of the assets in that $300 billion pool were based on projected cash flows for the life of the assets and not on their current and fluctuating distressed prices.

As U.S. stocks hit new 11-year lows on Nov. 20, many investors say they just don't know what's ahead.

There's a general lack of clarity on a wide range of issues—the state of the U.S. and global economies, problems in the credit markets, the plans of the federal government, and the fate of hedge funds that are being forced to sell off assets. Unfortunately, much of the fog of the financial crisis will not be cleared up anytime soon.

However, there are several key signals that traders, strategists, and fund managers typically watch closely in times of uncertainty. Given the unprecedented environment, it's not clear if any will be a reliable guide this time, but these signals do give investors something to monitor for clues to the road ahead.

Here's a review of five of those signals and what they're saying now:

1. Technical Signals

Technical strategists analyze and predict market activity based on previous market moves. This week, the stock market failed a key test: The broad Standard & Poor's 500-stock index not only fell below its October 2008 lows, but the big-cap benchmark also blasted below its lows during the nasty bear market of 2002.

On the morning of Nov. 20, the S&P 500 briefly tested these 2002 lows in the morning but then rebounded. But late in the day, stocks sank and the S&P 500 closed at 752.44. That's below the index's October 2002 low of 768.63 and the lowest level for the index since April 1997.

The 2002 lows are "a major support level," says Dave Rovelli, equity trader at Canaccord Adams.

Richard Sparks of Schaeffer's Investment Research says "you could see a cascade of selling" if stocks stay way below those prior lows. Before stocks fell to this level, people could "feel comfortable that that is a basement that the market might not go below."

2. Reports from Washington

Michael Yoshikami of YCMNET Advisors criticizes "a general lack of clarity from the Administration [and] federal agencies on what's happening and what the path out is."

On Nov. 20, Democratic congressional leaders said they would delay a vote on a bill to help the U.S. auto industry—efforts some Republicans have opposed—until December. U.S. Treasury Secretary Henry Paulson has raised eyebrows by changing the focus of the financial package a few times. Bush Administration officials are on their way out of office, but President-elect Barack Obama hasn't yet chosen his economic team, whose members would have no real power until Jan. 20 even if they were in place.

This flow of news from Washington is rattling investors, many market watchers say. "No one really has a good idea what the plan really is," says Bruce Bittles, chief investment strategist at R.W. Baird.

Chad Deakins, portfolio manager at RidgeWorth International Equity Fund (SCIIX), says he doesn't expect any clear signals from Washington until Obama takes office. "Until the new Administration comes to the White House and sets a tone and direction, it's hard to see strong upside in the equity markets," Deakins says.

Citigroup Shares Keep Sinking

The bank's board meets as Wall Street wonders whether CEO Pandit can withstand the pressure, or if he'll be forced into a deal or U.S. rescue

By Mara Der Hovanesian

Citigroup's shares continued their breathtaking decline on Friday, Nov. 21, despite a broader market rally, indicating that time is quickly running out for Chief Executive Officer Vikram Pandit.

Pandit continues to fight mightily to restore confidence in the market. He pronounced that he has no intention to break up the global bank and that he has enough capital to withstand a tough consumer recession. But with the stock finishing down another 20%, to 3.77, from its 4.71 close on Nov. 20, speculation continued to mount that he will have little choice but to cede the bank to government control.

A dwindling market cap means Citi (C) faces extreme difficulty in either its ability to raise capital or to market itself in a sale. "When you have a decline in the share prices of this magnitude and depth, it is a signal that the company is going under," says Martin Weiss, founder of Weiss Research. "The share price is providing the clearest canary in the coal mine."

Weiss says it is now up to the Treasury Dept. and the Federal Reserve to figure out if they want to nationalize Citigroup, à la Fannie Mae and Freddie Mac. "Someone is going to have to step up and say 'enough.'"

If Citi were to require a government rescue, it would be by far the largest bank failure in history. Citi has $2 trillion in assets, or approximately six times more than Washington Mutual's and three times more than Wachovia's.

Derivatives Drama

Moreover, the prospect of a failure by Citi poses far greater challenges to regulators, due to its massive derivatives holdings. Those derivatives are essentially side bets on interest rates, currencies, and other markets, as well as bets on the probability of defaults by other large corporations (credit default swaps). At midyear—June 30, 2008—the Office of the Comptroller of the Currency says, Citi's primary banking unit, Citibank NA, held $37.1 trillion in total notional value derivatives, including $3.6 trillion in credit default swaps. Those swaps in recent months have proven to be the most dangerous category. In contrast, Wachovia bank, bought out by JPMorgan Chase (JPM) in a deal brokered by the regulators, had only $4.4 trillion in total notional value derivatives, among which $404 billion were in credit default swaps.

Although the notional value overstates the true market risk of derivatives, another oft-underestimated risk is a bank's exposure to the possibility that some of its trading partners might default on their side of the transaction. For each dollar of risk-based capital, Citibank was exposed to $2.58 in such credit risk on June 30, according to the OCC. In contrast, Wachovia's exposure was 52.7¢ on the dollar, or only about one-fifth of Citi's in proportion to capital.

Not everyone has given up hope. Mike Mayo, bank analyst at Deutsche Bank (DB), issued a note early on Nov. 21 saying there is still fundamental value at Citigroup that justifies a $9 price target. He estimates that Citi has $100 billion of cushion to cover an estimated $50 billion on losses.

In a town hall meeting on Nov. 17, Pandit warned the market that losses in the bank's consumer loan portfolio could rise between $1 billion and $2 billion each quarter from now through the first half of next year—far less than Mayo's figure. But the market was struck more by what Pandit did not say: The bank classified some $80 billion of distressed assets into "held for investment," a subjective accounting category that allows the bank to set aside risky and hard-to-value assets in hopes for a recovery.

Eleventh-Hour Partner?

Many doubt those assets will recover and assume they will eventually be another hit to the bank's balance sheet. Stuart Plesser, an equity analyst with Standard & Poor's, says investors "looked suspiciously at those assets [and figured] they were not priced sufficiently."

Some Wall Street analysts are still floating the idea that Citi may find an 11th-hour business partner. Goldman Sachs (GS), Morgan Stanley (MS), and even American Express (AXP)—Citi founder Sanford Weill's dream acquisition in the old days—have been raised as potential suitors. Still others are circumspect about the timing: "I don't believe there is any other financial institution in the world today that has the capital or is crazy enough to take on Citigroup," says Weiss.

Pandit, the board, and other Citi executives were huddled in meetings since early Friday morning. But with the headwinds of the market, their choices are dwindling.

"This is a different ball game we're in; this is moving into a lack-of-confidence game," says Plesser. "We're talking about the fear of institutional trading partners taking deposits and wealth management clients fleeing, which would remove the value of that business. If that is occurring, we have to have a plan to sell before it loses its value. At these levels, it's out of their hands."

Finance guru Bodie (left), swaps ideas with Vanguard founder Bogle Illustration by Sean McCabe; (Bodie) Robert Spencer; (Bogle) Bill Cramer/Wonderful Machine

As of Oct. 7 retirement plans had lost as much as $2 trillion over 15 months, or some 20% of their value, according to the Congressional Budget Office. That has many workers wondering how they'll be able to retire and whether everything they thought they knew about investing has been turned on its head. Diversification across sectors and countries, for example, was supposed to protect investments, but few areas of the market have been spared. And what future returns can be expected from stocks and bonds? Have all of our rules of thumb gone out the window? We asked Jack Bogle, founder of fund giant Vanguard Group and a pioneer in the investment indexing business; and Zvi Bodie, a finance professor at Boston University School of Management, co-author of the leading finance textbook Investments and an expert on retirement security, to discuss issues facing savers and investors today. Christopher Farrell launched a discussion between the market veterans by asking if diversification remains a bedrock strategy. The conversation has been edited and condensed.

Jack Bogle: I am a believer in diversification. You buy index funds for stocks, and your bond portion should equal your age. This is how I invest, so I know how little it's hurt me to have a substantial position in U.S. bonds. I'm in half Treasuries, half corporates.

The most common diversification talked about is international. What's wrong is that as soon as people start really talking about it and believing in it, international stocks are overpriced. About 80% of money going into equity funds last year was going into international. If that isn't a warning sign! Here we are: The U.S. is one of the better-performing world markets. From the market peak in 2007, the S&P 500 is off 42.5%, international [measured by the MSCI EAFE Index of developed countries] is down 49.4%, and emerging markets [measured by the MSCI Emerging Markets Index] by 55.8%.

In recent years, international investing has had a higher correlation with the U.S. market than was traditional. If you invest internationally, you have to invest in foreign companies not as diversifiers but wealth producers. If you like international, get in gradually, maybe with 20% of your portfolio, half in developing markets and half in emerging markets. Europe looks a lot like us, so it's at least possible you might get a better return out of emerging markets. I don't invest internationally myself.

Zvi Bodie: I want to add something that strengthens your case. In markets like China, retail investors can invest only in the tiny fraction of equity investments traded on a stock exchange. So compared with the equity investments there that aren't traded on the exchange, those investments are way overpriced. A much better way to invest is to buy U.S. companies doing direct foreign investment in China.

I distinguish between diversification and hedging or insuring. When I use the term diversification, I use it in the sense that you have a bunch of risky assets, and instead of putting your money in one of them, you spread it across them by paying attention to whether those assets move in lockstep. Because if two risky assets are perfectly correlated, you're kidding yourself if you think you're diversifying.

And then there is insuring or hedging. That's when you've got a safe asset and to my mind that is Treasury Inflation-Protected Securities, or TIPS. One way to protect yourself is to combine a diversified portfolio of risky assets with the safe asset. We teach students that you only need two mutual funds—the risky assets and the safe asset—to generate the entire set of risk-and-reward trade-offs.

Bogle: Amen.

Bodie: And that could be provided at minimal cost. But then a lot of smart people working on Wall Street would be deprived of their high income. So they put all sorts of bells and whistles on these things, none of which has to do with improving the welfare of clients.

Bogle: If people would look at not just a percentage point in costs, but what 1% to 2% in lower returns costs you over a lifetime.