Research Zeitgeist: Oil over Troubled Financial Waters
Not sure if this is a sign that the credit crisis has touched bottom, but for the second straight week a non-financial post was the hot topic at Research Recap this week. Moody’s downgrade of the independent oil refining industry was the most-read post by far. Moody’s said a perfect storm of steeply falling demand and continued additions to refining capacity are hitting independent oil refiners’ profit margins, and the industry is expected to experience maximum stress through at least 2009. What’s more, the demand changes are structural and enduring.
Some of the same factors could mean that Exon Mobil’s (NYSE: XOM) record $14.8 billion quarterly profit will be the high water mark for profits for some time. Breakingviews notes in the New York Ties that the days of $145 a barrel are over, at least for the foreseeable future. “With oil now trading at around $65 a barrel, it will become harder to obscure the industry’s biggest challenge: declining reserves and increasingly inhospitable host nations.” Exxon Mobil must now consider buying a rival at home to protect itself from a worsening environment toward Big Oil abroad, breakingviews says.
Meanwhile, back on the credit crisis front, a consensus seems to be gathering around regulation of credit default swaps. Even though the demise of Lehman Brothers did not result in the feared unraveling of the CDS market, it remains clear that greater transparency and some sort of central clearing facility is needed. CreditSights thinks the ICE/TCC proposal has become the front runner over the CME/Citadel version. ICE got a further boost Thursday with its acquisition of The Clearing Corporation.
Worries about credit card debt continued to weight heavy, led by Moody’s prediction that writeoffs are likely to exceed the peak of previous recessions. Now Fitch Ratings notes that the recent jump in one-month LIBOR, combined with increasing chargeoffs and lower yields on credit cards, is creating a situation that will put U.S. credit card ABS transactions to the test over the next few months. “While spread compression due to the LIBOR jump alone is not a cause for rating action, the compounding effect of rising chargeoffs and higher funding costs could hasten rating actions going forward, particularly at the subordinate note level”.
Not to be outdone,corporate bonds continued to attract negative attention, with Fitch saying the junk bond default rate may reach a record level, and Standard & Poor’s predicting the rate may triple over the next year, reaching close to 10% under a pessimistic scenario.
Research Recap Quote of The Week:
…predictions of a third-wave of ‘liberalism’ — on the scale of the New Deal or Great Society-eras — is very premature. - Oxford Analytica
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