The number was so big and the results beat Wall Street estimates by so much at a time when the credit crisis was wreaking havoc on so many other sectors that Oppenheimer & Sons (NYSE: OPY) oil analyst Fadel Gheit couldn’t help but quip that he didn’t think Exxon “will be lining up for any TARP money or government handout anytime soon.”

Exxon wasn’t the only heavyweight reaping the benefit of a zooming energy market that had seen crude oil climb to an all-time record of $147 a barrel in July. The combined revenue for Exxon and Chevron Corp. (NYSE: CVX) for all of last year actually exceeded the gross domestic product (GDP) of all but 16 of the world’s nations, Bloomberg News reported.

What a difference a few months can make.

If the name of the game is corporate profits, the global economic slowdown has transformed some of the world’s biggest oil companies from leaders to laggards.

Global-energy heavyweights Exxon and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) yesterday (Thursday) became the latest players to feel the one-two punch of dwindling demand and rising supplies, reporting profit drops of 66% and 67%, respectively.

Exxon’s net income fell to $3.95 billion, or 81 cents a share, compared to $11.68 billion, or $2.22 a share, in the same quarter a year ago. The results were well below Wall Street estimates for earnings of $1.02 a share. Shell’s bottom line fell to $3.82 billion, or 62 cents a share for the second quarter, compared to $1.87 per share in the same period last year.

“Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and reduced demand for products,” said Exxon Chairman and Chief Executive Officer Rex Tillerson.

With consumers and companies alike slashing costs in any way possible in an environment of spiraling unemployment and the looming possibility of inflation as a result of government stimulus efforts around the world, Exxon, Shell and other Big Oil companies are feeling the squeeze and are cutting back in almost every way possible.

“Our second quarter results were affected by the weak global economy,” Shell CEO Peter Voser when the results were released. “This weakness is creating a difficult environment both in upstream and downstream” oil production.

Shell, for instance, said it’s embarked on a cost-cutting program that will pare billions of dollars in operating expenses. In one bright spot, however, The Netherlands-based oil giant did say that it had increased its second-quarter dividend 5% to 42 cents a share, and Chief Financial Officer Simon Henry said Shell will be able to keep raising the dividend to keep pace with inflation.

Exxon’s shares fell about 1% yesterday to close at $70.72 each. They’re down about 14% from their 12-month high of $84.76. Royal Dutch Shell’s “A” shares edged up 0.13% to close at $52.53; they’re down 29% from their 52-week high of $73.97.

“There’s a lack of follow-through on production” at Exxon, Macquarie Research analyst Jason Gammel told Barron’s in an interview. “The Street rewards companies that grow production, not those who are flat.”

Exxon’s combined oil and gas production dropped 3% in the quarter, and the company blamed the year-over-year decline on restrictions imposed by the Organization of the Petroleum Exporting Countries (OPEC). Shell’s production suffered more, falling 5.3%, placing part of the blame on a politically unstable Nigeria.

The heft that gave Big Oil companies the huge advantage of global scale last year is now working against them; with their large size, and against the backdrop of a global economic downturn, finding new revenue to bump up profits – and, ultimately, their share prices – will be a major challenge, analysts say.

“I think it’s generally going to be difficult for the Big Oils to move the needle,” Howard Weil analyst Doug Leggate told Bloomberg News. “Those companies that can move the needle in terms of adding value through exploration or other methods of improving their portfolios, they’re the ones who are going to win out.”

Profit at Exxon’s production and exploration unit fell to $3.81 billion in the second quarter, down $6.2 billion compared with a year earlier. In its refining business, its profit fell to $512 million, down $1.05 billion from a year ago. Profit in the same category at Shell dropped 77%, to $1.33 billion, from $5.9 billion a year ago, mostly on lower oil prices.

The grim oil earnings news yesterday followed Wednesday’s report from the Energy Information Administration (EIA) that U.S. crude stocks rose by 5.1 million barrels to 347.8 million barrels for the week ended July 24. Estimates by market research firm Platts were calling for a gain of just 1.1 million barrels, MarketWatch.com reported.

U.S. crude stocks are 29.8 million barrels above the five-year average and 52.6 million barrels above year-ago levels, according to Platts.

“The data has been bearish for most of the year, and the market may be ready to acknowledge that we are awash in crude oil and products, and demand is lower than last year despite the fact that oil and product prices are much lower,” WTRG Economics analyst James L. Williams told MarketWatch. “We will be well into the recovery from the recession before there is any appreciable increase in demand.”

As of yesterday afternoon, crude oil for September delivery was trading at $66.80, up $3.45 a barrel. But that’s down $55 a barrel from this time last year – a 45.16% decrease.

Those hoping for a rally may find that they’ve only engaged in a bit of wishful thinking, since a number of analysts say there aren’t any catalysts for higher prices in sight.

Take James Cordier, president of Liberty Trading Group, who says that the rally to prices in excess of $70 earlier this year was “well overpriced.” He expects prices to continue to fall in the weeks and months to come, Cordier said in an interview with Yahoo Inc.’s (Nasdaq: YHOO) Tech Ticker.

Cordier points to the speculative demand driven by government stimulus packages, notably the liquid commodities in China, a nation whose economy looks “a little bit like a bubble to us.”

Cordier’s firm, which trades commodity-based options, is “selling calls with both hands.”

If there’s an upside to any of this, Cordier says it will be lower gas prices, which he expects to fall 15-to-20 cents per gallon around August or September, a welcome relief for consumers.

The low demand and rising supply of oil is catching the eye of regulators worldwide, who are applying the heat to speculators who are believed to be behind the main force behind wild swings in the futures markets over the past two years.

Here in the United States, the Commodity Futures Trading Commission (CFTC) this week held the second of three hearings on energy trading. In the United Kingdom, the Financial Services Authority (FSA) will hold a special meeting on Aug. 5 with oil companies, banks, hedge funds and oil brokers to review regulation in the market.

“A lot of what we’ve seen in recent years has nothing to do with the underlying fundamentals of the market,” Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. (OTC ADR: BNPQY), told Bloomberg. “Something has to be done to reduce some of the speculation, no doubt about it.”

Indeed, the supply-and-demand fundamentals taught in high school and college have actually come under fire just because of how speculators have allegedly distorted the oil-price market in recent years.

This year’s volatility in the market defy the “accepted rules of economics,” French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown said in an opinion column published earlier this month in The Wall Street Journal.

“The surge in prices last year gravely damaged the global economy and contributed to the downturn,” the two statesmen said. “The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery. Governments can no longer stand idle. Volatility damages both consumers and producers.”

Big Oil executives said it is doubtful the looming U.K.-based meeting would result in any substantial new initiatives, but added that it would discuss “whether the current arrangements [in the oil market] remain appropriate,” The Financial Times reported. “The question of position limits does not seem to have the same level of priority (in Europe) as it does in the United States,” Deutsche Bank AG (NYSE: DB) Chief Energy Economist Adam Sieminski told the FT.

Source: Global Slowdown and Plunging Profits Have ‘Big Oil’ Companies Searching for Ways to Rebound

This from Money Morning:

U.S. consumers are already losing their jobs at an accelerating rate.

The same thing is now set to happen to their credit lines.

But with so many Americans already losing their main source of income – their jobs – at an ever-spiraling rate, will an economy that derives two-thirds of its power from consumer spending end up mired in its worst funk in decades because those same consumers are now losing their charge accounts?

Before you dismiss the possibility, consider this: The U.S. economy weakened across all regions since the middle of October as it became tougher to get loans and demand for credit shrank, the U.S. Federal Reserve said in its regional economic survey report yesterday (Wednesday). The so-called “Beige Book” report – published just two weeks before central bank policymakers are to meet and consider interest-rate changes – said that retail sales, tourism spending and manufacturing declined in most places, labeled housing markets as “weak” and concluded that the commercial real estate sector “weakened broadly,” Bloomberg News reported.

“We are looking at an economy that is not only in a recession, but a recession that is deepening rapidly,” former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co.,
told Bloomberg Television. “It certainly is a gloomy report, but not, I guess, worse than what you would expect given the data [we’ve seen] coming in.”

The United States has already been in a recession for a year, the National Bureau of Economic Research (NBER) reported this week. This economic one-two punch could generate a much-bigger financial crisis “aftershock” than many experts realize. Only two of the last 10 recessions to take place since the Great Depression have lasted a full year. But this one could last well into 2010.

$2 Trillion in Credit Lines on the Chopping Block

More than $2 trillion in consumer credit could be cut in the next 18 months, as credit-card companies pull back credit lines in anticipation of credit funding problems and regulatory changes, said Meredith Whitney, an Oppenheimer Holdings Inc. (OPY) banking analyst who’s well-known for her gutsy and prescient (and ultimately correct) market calls.

Throughout the week, Whitney has warned that the entire mortgage market will contract for the first time ever in the months ahead. More importantly, however, Whitney says the credit card market will be 18 months behind, as credit-card companies pull back more than $2 trillion in credit lines, taking away consumers’ second major source of liquidity, following jobs.

“What you haven’t seen yet digested by the market is banks pulling lines from consumers,” Whitney said in an interview with CNBC. “And across the board you saw the big banks that command so much of the market share of key products like mortgages and credit cards start to pull lines in the third quarter and that’s going to continue in the fourth quarter. And that’s going to continue into 2009.”

Although some experts note that consumers reduce their spending during recessionary periods — and, needless to say, after they lose their jobs — it’s important to not confuse spending and credit. During dire times, many consumers can boost their use of credit even as they cut overall spending, using the credit cards, home-equity lines and other forms of borrowing as a lifeline to tide them over. For those consumers, a credit line cut can be disastrous personally, and can aggregate into an even-steeper downturn in spending.

Roughly 70% of U.S. households have access to credit cards, and 90% of those people use those credit cards as a cash-flow management vehicle, or revolve payments at least once a year, Whitney says.

A surprisingly small number of national companies dominate the major lending arteries – including credit lines, mortgages and credit cards – that have sustained the U.S. consumer for so long, including mortgages and credit cards. Mortgages have already hit a wall with the collapse of the U.S. housing market and wave of subprime defaults. But credit cards could be next as companies raise interest rates, tighten lending standards, cut credit lines, and even close millions of accounts in an effort to insulate themselves from consumer defaults.

Bank of America Corp. (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM) – which controlled more than half of U.S. credit-card lines at the end of the third quarter – have all discussed reducing their credit-card exposure or scaling back growth, according to Whitney.

“You’re going to start to see the consumer get really strained on their credit card lines,” said Whitney. “People think the next shoe to drop is the credit card credit costs – the charges going up. No, it’s the credit card lines being pulled by bank lenders in anticipation of worsening credit funding problems, and then regulatory changes on the horizon.”

Whitney expects the credit-card market to begin to shrink by mid-2010, a time when the unemployment rate could be as high as 9.0%.

“Just when the consumer is losing their job that’s their first source of cash, their first source of liquidity, then they lose their second big source of liquidity, which is their credit card line,” she said.

Indeed, as unemployment rises, so too will credit-card delinquencies. David W. Nelms, chief executive of Discover Financial Services (DFS), told Reuters that card write-offs could be in the mid-5% range in the fourth quarter and near 6% in the first quarter of 2009.

Delinquencies “will tend to track with unemployment,” Nelms told Reuters after a speech to the Executives Club of Chicago. “Most agree that things will tend to get worse next year.”

Lenders, still reeling from losses tied to subprime mortgages, can’t afford another round of defaults on credit cards. So they’ve begun pulling lines of credit, leaving the consumer out in the cold. And it’s only going to get worse, Whitney says.

Crisis Expert Sees Change in Consumer Psychology

Investment expert R. Shah Gilani – a retired hedge fund manager who’s been chronicling the credit crisis as a Money Morning contributing editor – isn’t surprised by Whitney’s predictions.

“This is already happening in a big way,” Gilani said referring to Whitney’s assertion that credit lines have been put in jeopardy. “I have already talked to people who have had their credit lines reduced, even cut in half. So I wouldn’t be surprised if $2 trillion turns out to be an accurate figure.”

And according to Gilani, the evaporation of $2 trillion in credit could be the death knell for the American consumer.

“A number that high makes you gasp, just considering the quantitative effect on consumer spending,” Gilani said. “There’s a strong chance that the American consumer is not just down on the canvas, but has been knocked out of the ring.”

American consumers cut spending by 1% in October, the biggest drop since the last recession in 2001, the government said last week.

U.S. retail sales plunged 2.8% in October – the largest monthly drop since the Commerce Department began tallying monthly retail sales in 1992. The sales drop marked the fourth consecutive monthly decline and the first retrenchment since 1992. And few have any hope left for the Christmas season as consumer confidence is also waning. The Reuters/University of Michigan consumer sentiment index clocked in an ultra-low 55.3 for November, down from 57.6 the month before.

The reading fell well short of the projected 57.7, Reuters said, and – even worse – had deteriorated since the middle of the month, even though lower gasoline prices were seen as a bright spot for consumers. The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.

Once again, jobs, liquidity and confidence were the key issues, the survey report said.

“Consumer confidence fell in the last half of November due to mounting job losses, falling incomes and the evaporation of household wealth,” the report said. “Consumers were unanimous in their recognition that the economy was in recession, and nearly three-in-four expected the recession to deepen in the months ahead.”

However, Gilani, who is also editor of the Trigger Event Strategist – a trading service specifically designed to help investors maneuver through this economic malaise – also believes that what investors are witnessing is yet another “aftershock” of the ongoing global financial crisis.

“What is actually taking place is a shift in consumer psychology that has been driven by factors such as the socioeconomic climate – as well as the environment – and that’s now being compounded by credit conditions,” Gilani said. “This is about banks and credit companies de-leveraging and forcing the American consumer to do the same.”

The trouble is, he said, this can become a cycle that’s hard to stop once it takes hold.

“Whether Americans have lost confidence in the market or simply can’t afford to repay loans, money flows have simply dried up” Gilani said. “So banks have been forced to raise their lending standards to a point that many Americans are now unable to meet. It becomes a vicious cycle.”

PS. This is an excerpt from the latest installment in Money Morning series on the “financial aftershocks” of this crisis.

Source: Will the Loss of Consumer Credit Serve as the Next Economic Aftershock to Further Fuel the Financial Crisis?

American Express won the Fed’s approval unanimously and without the application’s standard 30-day waiting period because of “the unusual and exigent circumstances affecting the financial markets,” according to a Fed statement.

High unemployment and a severe drought of credit are plaguing the consumer market, causing them to spend less. Worse, it’s caused many to be unable to pay existing debts such as credit cards.

October was the first month in 15 years that credit card companies weren’t able to sell bonds backed by customer payments, Bloomberg reported. And this upgrade to commercial bank status allows American Express – the fourth-largest U.S. credit card company – access to government funds.
American Express becomes the third major institution to switch over to a commercial bank in as many months, joining Goldman Sachs Group, Inc. (GS) and Morgan Stanley (MS).

In the past year, American Express has lost nearly half its market value as it posted four consecutive quarters of declining profit.

Mixed Analyst Reactions

Oppenheimer Holdings, Inc. (OPY) analyst Meredith Whitney said that the approval will give American Express a more stable mix of funding and allow it to cut borrowing costs.

“Whether institutions like it or not, the only prudent thing to do is assume a protracted worst-case funding scenario,” Whitney said in a note to investors, Reuters reported.

While she maintained her “perform” rating on American Express’ stock, she said that “concerns for American Express and other consumer lending-related stocks continue to be worse-than-expected credit losses.”

Scott Valentin of Friedman, Billings, Ramsey Group, Inc. (FBR) wasn’t as generous, the Associated Press reported. While maintaining his “underperform” rating and $22 target price for American Express stock, Valentin said the company’s earnings and model “are under severe stress in the current environment.”

Source:American Express Now a Commercial Bank

This from Money Morning:

Chevron Corp. (NYSE:CVX), the focus ofMoney Morning’s popular “Buy, Sell or Hold?” feature back in late July, said it is predicting a jump in its third-quarter results, despite a decline in oil-and-gas output.

Without offering actual financial details, the second-biggest US oil company said in its interim update that it “expects third-quarter earnings to exceed those of 2008’s second quarter.”

The San Ramon, Calif.-based Chevron attributed the improved results to higher energy prices and better refining margins — both factors that were predicted by Money Morning contributing editor Horacio Marquez.

“I am happy to see Chevron executing –- as we expected –- and slowly improving its refining margins back to historical [norms],” Marquez said in an interview late last week.

“The company’s vertical integration gives it a natural hedge against the gyrations in crude prices and its global reach gives it a huge advantage in capturing profits during unusual crude market movements.  This cash-rich company should be in great shape at a moment when cash is scarce.  At these levels, the stock is a steal with a full recession already priced into it.”

Chevron is slated to report its third-quarter results on Oct. 31. Analysts polled by FactSet expect the company to post earnings of $3.31 a share on revenue of $87.94 billion.

That compares with third-quarter 2007 net income of $1.75 a share on revenue of $53.55 billion. Excluding one-time items, the year-ago profit was $1.94 a share.

Shares of Chevron, caught in the massive market downturn seen over the past month, fell 12.5% as part of Thursday’s near-record market downdraft to close at $64. The stock has shed 31% of its value over the past 12 months, compared with a 41% drop by peers that make up the Amex Oil Index, Reuters reported.

The steep sell-off in such shares as Chevron and Exxon Mobil Corp. (NYSE:XOM) “is basically traders throwing everything overboard to prevent the whole ship from sinking,” Fadel Gheit, an oil-industry analyst at Oppenheimer Holdings Inc. (NYSE:OPY) in New York, told Reuters. Chevron’s stock closed Friday at $57.83, down $6.17, or 9.64%.

Upstream, Downstream

Chevron based its assessment on better profit margins from its “downstream” refining-and-marketing operations, which were able to benefit from a gradual decline in crude prices through the three-month period, MarketWatch said.

Like most of the world’s big vertically integrated oil companies, Chevron buys much of the crude oil it needs for its refineries on the global market, since it doesn’t itself produce enough to produce all the gasoline, fuels and lubricants that it refines, and then sells through its marketing operations, MarketWatch said.

Chevron predicted that its downstream businesses would rebound to post a profit for the third quarter – following a second-quarter loss — chiefly because the average price of a barrel of crude oil declined by $39 during the third quarter.

The company also said that quicker maintenance and repair work at its refineries paid off.

Whether those improved refining margins can be sustained as the economy continues to weaken from the pounding it is taking from the escalating global financial crisis remains to be seen.

In the face of the overall upbeat news from the downstream part of its business, Chevron warned that third-quarter earnings from exploration and production — its “upstream” operations — would likely decline, thanks to falling commodity prices and the production stoppages that resulted from hurricanes Gustav and Ike sweeping through the Gulf of Mexico and through the Gulf-region oil-and-gas fields last month.

While the actual damages weren’t reported, Chevron estimated that damages and write-offs from Gustav and Ike would excise about $400 million from its third-quarter results.

It said that its total U.S. oil-and-gas output fell about 1% from the second to the third quarter. Indeed, domestic production in September will likely be down about 150,000 barrels per day because of Gustav and Ike.

Compared with its results from a year ago, analysts say that Chevron was on track to earn a lot more from its U.S. upstream operations, especially since the average crude oil price soared to nearly $120 a barrel in the July-August period – up from $68.70 for the full third quarter last year.

While U.S. output dropped 1%, overseas oil production fell an even-larger 6% during the first two months of the third quarter, the most recent data the company had available. Chevron blamed that decline on “downtime” related to several big expansion projects and on annual maintenance at its massive Tengiz Oil Field in Kazakhstan, said.

The volume of crude Chevron loaded onto tankers in the international market is expected to show a decline in the third quarter, according to the company.

Given the spreading global downturn, which analysts are blaming for the plummeting demand for energy, and falling fuel prices, this is a figure that experts will likely scrutinize.

Source: Buy, Sell or Hold Update: Chevron Corp. Predicts Higher Profits, Despite Lower Output

But do not pity them; pity their clients. Imprudence rarely imperils a portfolio manager’s seven-figure livelihood, even though it imperils client net worth. Most portfolio managers have come to peace with this inconvenient moral tension.

Every portfolio manager in America understands that his paycheck is secure, as long as his performance does not stray from the herd. He can lose hundreds of millions – or even billions – of client dollars, as long as all of his peers are doing the exact same thing at the exact same time. In other words, “professional money management” is much more about the professionals than it is about the money management.

Consider this recent curiosity from within the halls of Oppenheimer Co.:

Fortune’s latest “cover girl,” Meredith Whitney, is an analyst for Oppenheimer Co. She won praise from the popular financial magazine as the “Woman who called Wall Street’s meltdown.” Too bad she didn’t also call her colleagues over in the investment management division and share her prescient observations with them. Or maybe she did call and her colleagues simply ignored her.

Whatever the case, a couple of Oppenheimer’s (OPY) marquee equity funds have maintained a hefty weighting to the financial sector for more than a year… and have paid a hefty price for doing so. This curious divergence between talking the talk and walking the walk begs the question: who benefited from Meredith Whitney’s brilliant call? If the Oppenheimer portfolio managers who attend the same corporate picnics as Ms. Whitney did not heed her call, who else would have?

We do not raise these questions to poke fun at Wall Street; we raise them to excoriate Wall Street.

“Whitney’s rise to prominence began last October,” Fortune Magazine relates, “when she dropped jaws from New York to London with her audacious (yet spot on) prediction that Citigroup (C) would be forced to cut its dividend to prop up its leaky balance sheet. She followed that call with forecasts of more losses and write-downs at the likes of Bank of America (BAC), Lehman Brothers (LEH) and UBS, as well as some insightful tangents on how the implosion of the bond insurers would threaten banks’ bottom lines.”

Bravo for Meredith! But wouldn’t Oppenheimer’s clients have been much happier to see Ms. Whitney make an incorrect BULLISH call on the financials, while the folks who actually managed their money made the correct bearish call?

Unfortunately, that’s not how the Wall Street money management game is played. Prudence is as welcome in the money management business as morality in a whorehouse.

Almost no fund manager on Wall Street would dare to steer clear of any obvious disaster-in-the-making, just to protect client assets. After all, the disaster-in-the-making might rally a bit before imploding, just like the financials did during the late September and early October rally of 2007.

“Risk,” in the perverse lexicon of Wall Street money management practices means simply: “divergent performance.” It does not mean: “willingly embracing a high probability of capital destruction.”

As faithful Rude readers will recall, your editors made the same “call” that Ms. Whitney made. But our call wasn’t really a call at all. It was a yellow-bellied retreat. We got scared and ran. In dozens of columns and/or speeches during the last 24 months, we urged investors to avoid financials… and also to avoid the temptation to bottom-fish in the sector. Not because we were so smart, but because we were so afraid…And because we had the luxury of ignoring benchmarks.

We care deeply about benchmarks, of course, just not the same ones that drive Wall Street’s wacky investment agenda. The benchmarks that concern us the most reside in the Beatitudes of the New Testament. But we also possess a recurring interest in the benchmarks established by Cosmopolitan Magazine’s periodic survey: “Rate your lover?”

On Wall Street, however, the “investment benchmark” is king. Or rather, it is the tail that wags the investment dog.

One particular anecdote tells the tale. About one year ago, an investment adviser known to your editor instructed one of the Wall Street portfolio managers overseeing his clients’ assets to “sell all financial stocks” in the portfolio. The portfolio manager agreed to do so, but not before insisting that the advisor’s client, a foundation, sign a waiver acknowledging the unique risks that this decision imparted. In other words, the portfolio manager didn’t want to assume any responsibility for the poor relative investment performance that “underweighting financials” might have caused.

The results of this “risky” asset allocation decision have been nothing short of breathtaking. During the 12 months ending June 2007, the portfolio manager delivered a loss of nearly 20% to all of its other clients. But over the identical time frame, the foundation’s portfolio lost only 1.3%, simply because it contained no financial stocks. That’s a difference of more than 18%… or what we call, “real money.”

So if you’re wondering why your mutual fund performed so poorly during the last 12 wants, wonder no more. The kids with your money are jumping off cliffs. Everyone’s doing it!

Source: Cliff-Jumping

Filing for bankruptcy could mean a quick sale of the stocks, bonds and derivatives in Lehman’s portfolio, according to Oppenheimer (NYSE:OPY) analyst Meredith Whitney, Bloomberg reported.

“Due to the liquidation of unprecedented scale, we expect a broad-based decline in marks on asset values,” Whitney wrote in a report. That “will force the other brokers to mark down their assets accordingly, and therefore pressure all capital ratios.”

Flooding the market with billions of dollars in securities for sale when the market is already feeling immense pressure in the financial sector is going to put even more downward pressure on share prices.

“Bankruptcy severs all counterparty contracts, and therein lies the systemic risk,” David Kotok, chief investment officer of Vineland, N.J.-based Cumberland Advisors Inc., which manages $1 billion, told Bloomberg. “This would be the first time we’ve tested how much damage will be done by a bankruptcy.”

According to Bloomberg data, Lehman owes more than $157 billion to its 10 largest unsecured creditors, which includes $155 billion in bondholders’ assets.

Lehman’s top creditors include several Asian banks. Tokyo-based Aozora Bank Ltd. (PINK:AOZOF) is the largest single creditor listed in the bankruptcy filing and is owed $463 million for a bank loan, Bloomberg reported. Mizuho Corporate Bank Ltd. (ADR:MFG) is owed $382 million, while a Hong Kong-based Citigroup Inc. (NYSE:C) unit is owed an estimated $275 million, according to the filing.

As the fallout from Lehman’s bankruptcy continues to unfold, global financial firms, which have already taken more than $510 billion in credit-related losses and writedowns to date, have to prepare for an even bumpier ride.

“No one, currently working on Wall Street, has ever experienced a credit event like the one we are currently facing,” Bernstein Research analyst Brad Hintz, a former Lehman chief financial officer, wrote in a note to investors earlier this month, MarketWatch reported. “The credit events the market has lived through since 1980 … appear like ripples in a pond compared to the plunge we are currently experiencing.”

Source: Buyout of Merrill and Bankruptcy of Lehman Heightens Worry of U.S. Credit Crisis Pain Still to Come

Oil dropped over 11% during a volatile week of trading, as reduced consumer demand put downward pressure on the once hot commodity. Crude oil for August delivery ended the week at $128.88, its lowest level since June 5 and well off its July 11 peak of over $147 a barrel.

“If this is not the [crude oil] bubble’s implosion, than it’s a reasonable facsimile,” analyst and trader Stephen Schork said in his daily market commentary, the Associated Press reported. “Perhaps all we have witnessed was a replay of last August’s subprime induced sell-off. Time will tell. Nevertheless, for the time being we no longer care to hold a bullish view.”

Mid-week, the Energy Information Administration reported that U.S. consumer demand for gasoline had fallen 2.1% from the same period last year due to high oil prices. And while that certainly had an effect on the price of crude, some unusual buying from Mexico might also be to blame.

A handful of analysts told CNNMoney.com that Mexico’s state-owned Petroleos Mexicanos, or PEMEX, the fifth largest global oil producer, was signing contracts at current prices for years into the future. Some say it’s a sign that Mexico is betting oil prices have peaked.

“This is a smart move,” Phil Flynn, senior market analyst at Alaron Trading in Chicago, who also thinks there’s a good chance prices have peaked, told CNN. “If I were an oil producer, I’d want to lock in these prices.”

Others have written the contracts off as just an attempt by the Mexican government to do some long-term budget planning. And while that could be true, if other large oil producers follow Mexico’s lead and start to put similar long-term future contracts in place, it’s going to push down the price of oil.

“I don’t know who else is doing it,” said Nauman Barakat, an energy trader at Macquarie Futures, and one of the traders who mentioned the Mexico news in a research note. “There’s been a lot of talk, but it’s kept very confidential.”

When asked if such moves could cause oil prices to sink lower, Neal Dingmann, senior energy analyst at Dahlman Rose & Co., didn’t equivocate.

“Absolutely,” Neal Dingmann. “It could create a top in [oil prices] in the near term.” Analyst Olivier Jakob of Petromatrix in Switzerland told the AP that Nymex futures were “getting into deeper trouble,” based on his technical analysis of how oil prices were developing.

“Buying here is an opportunity if you are a deep believer in $200 (a barrel), otherwise we think that caution would be better applied,” Jakob said in a research note.

But not everyone is trying to lock in today’s prices for tomorrow’s sales. Industry giants like Exxon Mobil Corp. (XOM) don’t even play the futures game according to Fadel Gheit, a senior energy analyst at Oppenheimer & Co. (OPY).

“Exxon produces 1.2 billion barrels of oil a year,” Gheit told CNN. If Exxon Mobil locked in all that production for five years out at today’s prices, and crude fell 20%, “it would be a disaster,” he said.

And you won’t see a member of the Organization of Petroleum Exporting Countries doing deals similar to Mexico’s. OPEC members like to have the flexibility to produce less to drive up oil prices. Those nations won’t give up any potential price control by locking themselves into contracts too far out into the future.

“You get stuck with this extra production that’s out there,” John Kilduff, an energy analyst at MF Global Ltd. (MF) in New York, told CNN. “Then OPEC has to reduce market share just to maintain price.”

Source: Oil’s Double-Digit Slide Shouts “Sell!” to Some

Whitney slashed her rating on Wachovia to ‘underperform’ from perform in a research note, as she predicts a $1.35 per share loss this year and a 35 cent per share loss in 2009. She also noted that the bank likely reduced its mortgage portfolio by $50 billion in the second quarter.

“We are hard pressed to find examples of financial companies that have successfully shrunk their businesses,” Whitney said, speaking of Wachovia’s asset reduction, Reuters reported.

Wachovia shares dropped after Whitney’s prediction, and were trading at $9.60 at 12:30 p.m. in New York.

Wachovia shares are down nearly 75% year-to-date as the struggling commercial bank has already raised $8 billion in additional capital and cut its dividend in an attempt to help offset the $13.7 billion in losses the bank has taken since the current financial crisis started to unfurl. Wachovia has also ousted its chief financial officer, replacing Ken Thompson with Robert Steel, a former undersecretary of the U.S. Treasury Department.

Whitney: One to Watch

Whitney’s Wachovia call is big news, in part because the Oppenheimer analyst has made quite a name for herself with her bearish, but highly accurate, calls on the global financial sector. Previous Whitney predictions that have come to pass include her accurate claim that Citigroup Inc. (C) would be forced to slash its quarterly dividend, despite repeated management promises, prior to installing Vikram Pandit as CEO, that Citi’s dividend was safe.

Even with $416 billion in losses and write-downs tied to mortgage-backed assets in the global financial industry thus far, Whitney sees more trouble ahead for the beleaguered financial sector.

“We believe the credit crisis is far from over,” Whitney wrote in a research report in late May as Money Morning reported. “In fact, we believe what lies ahead will be worse than what is behind us.”

Investors barely had time to recover from the devastating failure of The Bear Stearns Cos. Inc. (BSC), at the time the fifth largest Wall Street investment bank before witnessing the plunging market capitalizations of twin mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).

It seems Whitney’s call of a deepening banking crisis has indeed to come to pass, but it’s still unclear how much further we have to go as national and regional domestic banks alike struggle to keep afloat. Other analysts and industry insiders have started to echo Whitney’s earlier prediction.

“We have seen a ‘too big, too important to fail’ instance,” William Gross, the chief investment officer of PIMCO’s bond fund, told The International Herald Tribune, referring to the government bailout of Bear Stearns and the recent plan to save Fannie and Freddie.

“The market wonders: which institution is too small to bail out? Where is the dividing line? They seem to have picked on the regional banks as potential candidates to be the ones too small to bail out,” Gross added.

Current analyst predictions say as many as 150 out of the 7,500 domestic U.S. banks could fail over the next year to 18 months, IHT reported.

Customers are already clamoring to withdraw money from regulated thrift IndyMac Bancorp. Inc. (IMB), which was seized by federal regulators prior to the weekend. Meanwhile, Ohio’s National City Corp. (NCC) is doing its best to keep from being the next failed financial intuition as it works to dispel rumors of a run on its own deposits.

“It’s about to start getting real bad,” Christopher Whalen, managing director at Institutional Risk Analytics, told IHT. The Federal Deposit Insurance Corporation should just move on with the process and “close not just one but a half dozen institutions at the same time.”

Source: Whitney Slashes Wachovia Rating on “Bleak” Shareholder Prospects Highlighting Ongoing Banking Crisis

There are about 12,000 gas stations with the Exxon sign at the entrance, though the company owns about 2,220 of them. And Exxon plans to sell those over the next few years, Reuters reported.

Texas leads the states with the most company-owned gas stations with 190. Florida has 170, the Associated Press reported.

“We are in a very, very challenging market. Margins are reduced,” Exxon spokeswoman Prem Nair said in a statement. “We feel the best way for us to grow and compete is through our distributor network.”

Exxon stations may be everywhere but retail gasoline sales are only a small portion of the company’s revenues. And with gasoline costing 31% more than a year ago and crude oil prices at record levels, it’s also one of the most unprofitable.

This doesn’t mean we’ll stop seeing the ubiquitous blue signage across the country. Exxon will continue selling fuel to station owners who pay to use the company’s brand name.

Oppenheimer & Co. (OPY) analyst Fadel Gheit estimated the stations’ profit margin was between 10% and 15% (the company doesn’t release margins for its retail division), which is about one-third of its margin for crude oil production.

“I think the decision came that it’s more of a headache than it’s worth,” Gheit said.

Gas stations can’t pass higher prices onto consumers as easily as oil companies pass prices onto them. On top of that, car owners nationwide are taking serious steps to curb gasoline and energy usage, doing everything from using other forms of transportation to buying more fuel-efficient vehicles such as hybrids.

Exxon’s decision follows that of competitors Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) and BP PLC (ADR: BP), who are also moving away from station ownership.

“They can actually point their attention to some other area where you can make money,” Jeff Lenard, a spokesman for the National Association of Convenience Stores, told The AP. “Retail is incredibly volatile. This way, they can (sell gasoline) wholesale and count on a fairly predictable income.”

Source: Exxon Plans to Sell 2,220 Profit-Squeezed Gas Stations

Now she’s back. And her outlook for the financial sector is actually worse. Whitney is now predicting that the banking-sector’s financial crisis will extend well into next year. If not beyond.

And that’s not even the bad news.

Whitney now says the worst may be yet to come. The banking-sector financial crisis will last at least until the end of next year, and may actually stretch well past that. And that could lead to a major U.S. downturn.

“We believe the credit crisis is far from over,” Whitney wrote in a research report last week. “In fact, we believe what lies ahead will be worse than what is behind us.”

The so-called “first wave” of the credit crisis hit banks’ trading books. But the second lightning strike will hit lenders where it hurts the most – right in their lending businesses. If she’s right, the impact on the economy will be devastating.

Here’s why. The banking system’s “originate-to-distribute” model changed the rules of the game. No longer did banks make loans that were based on very careful risk-of-loss analyses. Under the new system, banks make loans – such as subprime mortgages – which are then “securitized,” or packaged together, into debt instruments that the trading operations of banks, investment banks or institutional investors might then purchase, believing it was a way of achieving higher returns.

Initially, this led to higher profits. Which induced banks to boost lending so that they could boost securitizations. But here’s the problem. First, since the banks were no longer going to keep the loans, they relaxed lending standards. In fact, they actually had to since, second, they wanted to boost those volumes.

When the underlying loans unraveled as the subprime-mortgage crisis spiraled deeper and deeper out of control, companies such as The Bear Stearns Cos. Inc. (BSC) took losses that just kept growing. Bear Stearns is now being taken over by JPMorgan Chase & Co. (JPM), with the help of the U.S. Federal Reserve.

The sins weren’t limited to banks, however. Consumers stoked this credit inferno – and, in doing so, unknowingly created their own funeral pyre.

Consumers grew accustomed to the “rolling loan gathers no loss” mindset, Whitney says. Housing values were soaring, and as long as those values continued to rise, homeowners could continue to roll over their loans into new borrowings – often packing in a lot of ancillary consumer debt from credit cards or car payments long the way.

When the housing market collapsed, however, homes were no longer a real-estate-version of an automated teller machine (ATM) that consumers could turn to each time they needed to eradicate debt from car loans, home loans or even credit-card debt.

When banks stopped lending, consumers had nowhere to turn to roll over their loans. Making matters worse were two other factors:

• First, many of their loans had so-called “re-set” provisions that permitted the loans to reset at much higher interest rates – a fact that caused the overall monthly mortgage payments to increase, sometimes by as much as 40% or more. And since their incomes weren’t rising in kind, many consumers could no longer make these payments, and defaulted on their mortgages.
• Second, the downturn in the housing market sent home prices into a severe tailspin, in some cases leaving homeowners with mortgage balances that were much larger than the new (lower) market value of their home. And if the mortgage loan also reset, that homeowner was hit with a double-whammy blow – a boosted mortgage payment on a house whose value had plunged.

Those resets have caused foreclosures to soar, the news is going to get lots worse, real estate data firm RealtyTrac Inc. said last month. Indeed, U.S. home foreclosures likely won’t peak until the fourth quarter, Money Morning reported last month.

“What we’re really looking at is ongoing fallout from people overextending themselves to buy homes they couldn’t afford and using highly toxic loan products to get into the houses in the first place,” Rick Sharga, RealtyTrac’s vice president of marketing, told The Associated Press. “We’re going to see quite possibly a record amount of foreclosure activity in the third or fourth quarter,” reflecting the spike in monthly payments because of the re-sets on adjustable-rate subprime mortgages that will take place in May and June.

And that brings us back to Whitney.

The banking sector’s lending pullback will fuel these losses and foreclosures, for many of the reasons we’ve detailed here. Already, banks will likely have to set aside an additional $170 billion in reserves through the end of 2008 – just to keep up with mounting loan losses.

To do that, banks will have to further rein in lending – to the tune of about $2 trillion worth of available credit lines, BusinessWeek.com reported.
For some context, the annual gross domestic product (GDP) of the entire U.S. economy is approaching $14 trillion. Two-thirds of that is driven by consumer spending.

That’s why the lending pullback is going to have a massive contractionary effect on the U.S. economy.

“New and unforeseen strains on consumer liquidity will push more consumers into precarious credit positions and cause consumer credit losses to be far worse than what is currently estimated, even by the most-draconian of investors,” Whitney wrote.

Source: Major Lending Pullback Predicted by Maverick Wall Street Analyst Could Have Dire Implications for U.S. Economy