Increased losses in the investment portfolio and lower income from the variable annuity business will continue to hurt earnings. The Industry's statutory capital levels have fallen sharply in 2008, and some companies are trying to raise capital through the Troubled Assets Relief Program (TARP). We are not sure whether the lawmakers will allow the insurers access to TARP money. Further, many life insurers have substantial exposure to commercial-real-estate-backed securities, which will result in further losses during FY09.

Property & Casualty Insurers

Insurers' losses from natural disasters surged in 2008, with maximum losses resulting from Hurricane Ike (insured losses of approximately $15 billion). Six named storms -- Dolly, Edouard, Fay, Gustav, Hanna and Ike hit the U.S. coast last year, after two years of benign activity.

Significant catastrophe losses of 2008, coupled with decline in the investment income and sizable investment losses resulting from the ongoing turmoil in credit and equity markets, will continue to affect earnings in the coming quarters. Also, losses in the investment portfolios since the beginning of 2008 have significantly reduced the capital adequacy of most insurers. The only positive trend visible as of now is slight improvement in the insurance pricing after continued deterioration during the last couple of years.

Reinsurers

Losses from the investment portfolio of the reinsurance companies have surged during FY08. Further, during 2H08, the underwriting profits were severely hurt by the Hurricanes Ike and Gustav. However, the pricing has improved recently, which will have benefited these companies during renewals.

Also, one of the reasons to hit profits was the increased tendency by the clients for risk retention. With insurers' balance sheets constrained and reduced financial flexibility in the current capital markets, risk retention by primary insurers is less likely to impact growth in FY09. Reinsurers could benefit from improved pricing while losses from the investment portfolio will continue to hurt the earnings.

OPPORTUNITIES

We remain positive on reinsurer PartnerRe Ltd. (PRE) due to its excellent underwriting abilities, strong capitalization, solid ratings and reputation in the market -- which will enable it to take advantage of the stronger demand -- and better pricing being witnessed currently.

WEAKNESSES

We have Sell recommendations on mortgage insurer PMI Group (PMI), which will remain exposed to further losses from the decline in housing values, though the demand and new business quality have improved in recent months.

Primus Guaranty (PRS), a seller of credit default swaps, will face increased losses from its exposure to some of the failed/troubled institutions.

We are also bearish on Hartford Financial Services Group (HIG), as we suspect that the company will face higher losses on the investment portfolio and its variable annuity business. Zacks Investment Research

Increased losses in the investment portfolio and lower income from the variable annuity business will continue to hurt earnings. The Industry's statutory capital levels have fallen sharply in 2008 and some companies are trying to raise capital through the Troubled Assets Relief Program (TARP). We are not sure whether the lawmakers will allow the insurers access to TARP money. Further, many life insurers have substantial exposure to commercial-real-estate-backed securities, which will result in further losses during FY09.

Property & Casualty Insurers

Insurers' losses from natural disasters surged in 2008, with maximum losses resulting from Hurricane Ike (insured losses of approximately $15 billion). Six named storms -- Dolly, Edouard, Fay, Gustav, Hanna and Ike hit the U.S. coast this year, after two years of benign activity.

Significant catastrophe losses of 2008, coupled with decline in the investment income and sizable investment losses resulting from the ongoing turmoil in credit and equity markets, will continue to affect earnings in the coming quarters. Also, losses in the investment portfolios since the beginning of 2008 have significantly reduced the capital adequacy of most insurers. The only positive trend visible as of now is slight improvement in the insurance pricing after continued deterioration during the last couple of years.

Reinsurers

Losses from the investment portfolio of the reinsurance companies have surged during FY08. Further, during 2H08, the underwriting profits were severely hurt by the Hurricanes Ike and Gustav. However, the pricing has improved recently, which will benefit these companies during the January renewals.

Also, one of the reasons to hit profits was the increased tendency by the clients for risk retention. With insurers' balance sheets constrained and reduced financial flexibility in the current capital markets, risk retention by primary insurers is less likely to impact growth in FY09. Reinsurers could benefit from improved pricing while losses from the investment portfolio will continue to hurt the earnings.

OPPORTUNITIES

We recently initiated coverage on Amerisafe, Inc. (AMSF) a specialist in providing workers compensation insurance. Since our initiation, the stock has already appreciated by about 42.5%, and we expect it to continue to outperform the market due to its sound capital position, solid investment portfolio and strong financial strength rating. We also cite its addition to S&P SmallCap 600 index after the close of trading on December 31, 2008.

We are also positive on reinsurer PartnerRe Ltd. (PRE) due to its excellent underwriting abilities, strong capitalization, solid ratings and reputation in the market, which will enable it to take advantage of the stronger demand and better pricing being witnessed currently.

WEAKNESSES

We have Sell recommendations on mortgage insurer PMI Group (PMI), which will remain exposed to further losses from the decline in housing values, though the demand and new business quality have improved in recent months.

Primus Guaranty (PRS), a seller of credit default swaps, will face increased losses from its exposure to some of the failed/troubles institutions.

We are also bearish on Hartford Financial Services Group (HIG), as we suspect that the company will face higher losses on the investment portfolio and its variable annuity business.

Neena Mishra is a senior analyst covering the U.S. insurance industry for Zacks Equity Research.
"PRS" Free Stock Analysis: Buy? Sell? Hold?
"AMSF" Free Stock Analysis: Buy? Sell? Hold?
"PRE" Free Stock Analysis: Buy? Sell? Hold?
"PMI" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Company Description

ONEOK Partners Limited (OKS) is one of the largest natural gas limited partnerships in the U.S. The partnerships owns the natural gas liquid (NGL) system that connects the natural gas and NGL supply in the Mid-Continent with key markets.

The general partner is a wholly owned subsidiary of ONEOK, Inc. (OKE), an energy company which owns 47.7% of the partnership.

Net Income Jumped 63% in the Second Quarter

On Aug 5, ONEOK Partners reported second quarter earnings that surprised on Wall Street estimates by 39.05%, or 41 cents per share, as commodity prices remained high in the quarter. Net income surged 63% to $154.5 million, or $1.46 per share, from $94.6 million, or 97 cents, in the second quarter of 2007.

For the first two quarters, net income rose 57% to $299.5 million from $190.4 million from the first-half of 2007.

The partnership saw gains in all four of its business segments primarily due to higher commodity prices in the natural gas gathering and processing segment. ONEOK also continues to see benefits from the natural gas liquids and refined petroleum products pipeline system it acquired last year.

2008 Guidance Raised

ONEOK Partners is bullish about the rest of 2008. On Aug 5, it raised 2008 guidance to the range of $5.20 to $5.60 from $4.10 to $4.60. The partnership attributed the increased forecast to strong results in the first half of the year and current commodity prices and hedges that are in place.

In its updated guidance, the partnership used 2008 average unhedged prices of $120 per barrel for crude oil, $1.65 per gallon for composite natural gas liquids and $9.20 per MMBtu for natural gas.

On Sep 17, ONEOK announced that it had no exposure to the Lehman Brothers bankruptcy nor did it expect any impact on the earnings guidance range from Hurricane Ike. ONEOK was not a participant in the partnership's revolving credit facility.

Consensus Estimates Rise

In response to the partnership's guidance, covering analysts have been raising estimates for the third quarter and the full year in the last 60 days. Third quarter consensus estimates are up 21 cents to $1.25 per unit. Full year estimates jumped 15% to $5.33 from $4.64 in that same period, matching the partnership's forecast range.

Value Fundamentals

ONEOK Partners is a Zacks #1 Rank (Strong Buy) stock. It has a forward P/E of 9.87. OKS price-to-book is 1.76. The partnership has a stellar five year average return on equity (ROE) of 18.68%.

ONEOK raised its dividend in July to $1.06 per unit from $1.04, effective in the second quarter payout which was distributed on Aug 14. The increase will result in an annualized cash distribution of $4.24.

With the latest increase, the partnership has raised the distribution 10 consecutive quarters.

ONEOK reports third quarter earnings on Nov 5.

"NBP" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Company Description

ENGlobal Corporation provides engineering, automation systems, field inspection, and land management and regulatory services principally to the petroleum refining, petrochemical, pipeline, production, and process industries throughout the United States and internationally.

From its roots as a small, local engineering and design company to its current position as an international organization, ENGlobal has always focused on providing innovative, cost-effective solutions. The company is headquartered in Houston, Texas, with approximately 2,900 employees, and a market cap of $340 million.

Record Second Quarter

ENGlobal reported revenue of $136 million, which is a 52% year-over-year increase. The record mark for revenue was announced on Aug 7. Organic growth drove the increase in revenue since last quarter.

The company earned 24 cents per share during the second quarter, 41% higher than the consensus estimate of 17 cents. ENGlobal's profit margin is now 8.5%, up from 7.7% on year ago, easily surpassing the target of 8%.

Recovering from Hurricane Ike

On Sep 22 ENGlobal announced that 85% of its 900 employees affected by Ike were back to work. The hurricane forced closures to 8 facilities represent about one third of the company's locations. While major damage was avoided, commercial power has been restored to 7 locations and the 8th is running on generators.

Estimates Are Up

The consensus estimate for the current year is 84 cents per share, up 87% from 2007. Analysts are expecting 25 cents per share for the current quarter and 21 cent next quarter. These estimates represent a 79% and 320% year-over-year increase, respectively.

With a PEG ratio of .8, ENGlobal is right in line with the industry. However, the company is well above the average return on equity, currently 27% compared to the industry average of 10%.

ENGlobal currently has 2 consecutive earnings surprises heading into its next announcement on Nov 5.

The Chart

Shares of ENG broke out of a bearish trend in mid September. The stock's volatility is due to its indirect energy exposure. Take a look at the chart below.

"ID2&" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

On September 23, 2008, Du Pont Titanium Technologies announced price increase for all Du Pont Ti-Pure titanium dioxide grades sold in Latin America. Effective October 1, Latin American prices for all Du Pont titanium dioxide grades will increase by $150 per metric ton. The company attributes the price hikes to rising demand for TiO2 and rising raw material prices.

On September 18, 2008, Du Pont declared a force majeure for its facility in Orange, Texas, after assessing the plant's damage from Hurricane Ike. This facility handles its ethylene copolymers business. It is unclear when operations here will be resumed.

Du Pont is currently valued at 12.2x our 2008 estimate of $3.59. We rate the stock a Hold with a target of $41.50. This is 11.6x our 2008 estimate.

Read the full analyst report on DD

Gasoline stockpiles fell 5.9 million barrels, for a total of 38.4 million barrels in nine weeks, and distillates were down 4.2 million barrels. And in the aftermath of Hurricane Ike, refinery utilization dropped to 66.7% of capacity, off from 77.4% a week earlier, and the lowest refinery-capacity utilization on record.

In addition the EIA said that total products supplied over the past four weeks, a good indication of demand, averaged 19.5 million barrels a day, down 5.3% from the same time a year ago. Of that, daily demand for motor gasoline averaged 9 million barrels, down 3.5% year over year.

Small wonder, then, that the “futures markets reacted in less than bullish fashion as demand readings trumped stock declines,” as Linda Rafield, senior oil analyst at Platts wrote.

Source: Crude falls - Inventories drop, but so does demand.

``Probably the max is an 8.5 million draw in gasoline because demand is down, and it could be as low as 6.5 million'' barrels, John Duff, survey manager for the Energy Department's weekly petroleum status report, said in an interview. The report will show ``the real impact of the hurricane on the refining sector,'' he said. Supplies will fall ``substantially.''

Hurricane Ike destroys 49 oil platforms in Gulf
The Interior Department said in the latest hurricane damage assessment that the platforms altogether accounted for 13,000 barrels of oil and 84 million cubic feet of natural gas a day. There are more than 3,800 production platforms in the Gulf producing 1.3 million barrels of oil and 7 billion cubic feet of gas each day. About 93 percent of the Gulf's crude oil production remains shut down as does 77.6 percent of its natural gas production, said the Minerals Management Service

``Probably the max is an 8.5 million draw in gasoline because demand is down, and it could be as low as 6.5 million'' barrels, John Duff, survey manager for the Energy Department's weekly petroleum status report, said in an interview. The report will show ``the real impact of the hurricane on the refining sector,'' he said. Supplies will fall ``substantially.''

Hurricane Ike destroys 49 oil platforms in Gulf
The Interior Department said in the latest hurricane damage assessment that the platforms altogether accounted for 13,000 barrels of oil and 84 million cubic feet of natural gas a day. There are more than 3,800 production platforms in the Gulf producing 1.3 million barrels of oil and 7 billion cubic feet of gas each day. About 93 percent of the Gulf's crude oil production remains shut down as does 77.6 percent of its natural gas production, said the Minerals Management Service

But they threw off their shackles on Friday. Dupont (DD), which fell 46 cents to $45.24 a day earlier, was up by 3.77% to $47.67. Keeping it company was Dow Chemical (DOW), the only one to have bucked the pullback on Thursday, with a surge of 4.16% to trade at $37.31.

But the stock to really watch out for is Olin Corp. (OLN) that climbed by 10.39% to $23.17 in spite of the announcement that caustic soda shipments from its plant in McIntosh, Ala., will be halted until further notice. Praxair, Inc. (PX) too scaled $85.98, up by 4.65%. Dow and Praxair are trading near their 200-Day Moving Average.

Also on the upswing were PPG Industries, Inc. (PPG), Ashland Inc. (ASH) and Air Products & Chemicals, Inc. (APD), all stocks that had tanked on Thursday. However, the biggest chemical maker, BASF (BASFY) was not so lucky, as it was down to $46.83 following a Bloomberg news that the company will cut down polystyrene production in Europe by 25% because of a fall in demand. Dow Chemical too had announced a 15% reduction in polystyrene production in Europe in June.

Both the bondholders and the stockholders of Lehman Brothers (LEH) were effectively wiped out. This led to the original money market fund, a fund with $63 billion in it, breaking the buck and suspending redemptions for a week. This is only the second time a money market fund has broken the buck, and the last time it was a very small fund that it happened to.

Fear rules the Street, and banks are afraid to lend to anyone, even each other. In a bid to find a safe place to park money, the interest rate on the three month T-Bill actually went negative briefly. I guess it is hard to find a mattress big enough to hold billions of dollars, but effectively that is what a zero rate on a T-Bill is. That is the first time that has ever happened -- the closest parallel was in January of 1940. Think about it, this is a bigger flight to safety than before the U.S. had engaged in World War II!

If that's not enough, Merrill Lynch (MER) was forced into a shotgun wedding with Bank of America (BAC), a $50 billion deal (all stock and based on the prices at the announcement) that was reached with as much due diligence as most people use when buying some candy at the checkout lane at the grocery store.

Three of the top five investment banks at the start of the year are either gone or
subsumed by large commercial banks, and it looks like the remaining two, Goldman Sachs (GS) and Morgan Stanley (MS), are desperately looking for dance partners. Meanwhile, the largest S&L, Washington Mutual (WM), is hanging by a thread. If (when) it goes under, it will use up most of the existing FDIC insurance fund. Either Congress of the Fed will have to replenish it, most likely to the tune of over $100 billion.

By any honest accounting of the moves already taken, the budget deficit is rapidly approaching the $1 trillion (with a "t") mark. Whoever wins the White House is going to face a mess on his hands greater than any faced by an incoming president since FDR. Oh, and in the middle of it all, Hurricane Ike shut down 20% of the nations refining capacity for a few weeks and left millions with out electricity for at least as long. Talk about taking a few shocks to the system.

But heck, things could have been much, much worse; if Bush and McCain had had their way a few years back, a big chunk of Social Security would have been in the hands of Lehman Brothers and Bear Sterns. The New Deal programs were put in place for a reason in response to the Great Depression, as ways of preventing its reoccurrence. We have spent much of the past decade dismantling those programs, but some of them still survive and should help to slow the decline.

But the damage from the unraveling of the FDR-era reforms has been great. The primary cause of this mess is a lack of regulation. The first great step in this direction was the unwinding of Glass Stiegel in 1999. To what I am sure is his great shame Bill Clinton signed this legislation (although given the margins it passed through the GOP-controlled Congress it would not mattered if he had vetoed it or not). The main provision of Glass Stiegel was the separation of Commercial Banks from Investment Banks. This helped insulate the Commercial Banks from the volatility of Wall Street.

That egg can no longer be unscrambled, as each move to shore up this teetering financial system has moved us farther and farther away from it. J.P. Morgan (JPM) has bought Bear Stearns, Bank of America is buying Merrill Lynch and quite probably by the time this is published Morgan Stanley and Wachovia (WB) will be married. Barclays of England (BCS) picked up the carcass of Lehman Brothers. Citigroup (C), of course, long ago picked up Smith Barney.

We are in the middle of a massive deleveraging, in effect those bad or close-to-worst-case-scenarios I have been writing about for the last few months are coming to pass. By and large Bernanke and Paulson are trying to do the right things, and has shown incredible creativity in fighting this fire. I have to say on legal and constitutional grounds I am not all that crazy about the appropriation and spending of hundreds of billions of dollars without Congressional approval, but this is a real emergency and I suspect that Congress will approve of it ex post facto.

A massive deleveraging means that lots and lots of dollars are going to money heaven. The Fed is trying to offset that by creating as much money as it can as fast as it can. The metaphorical printing presses are working overtime in an attempt to keep up. The Fed is using a fire hose of liquidity to try to put out this fire, but more and more it is not looking like a simple house fire, but a raging wildfire driven by hot winds and heading right for an Oil refinery. It is a seven-alarm fire and other fire departments like the European Central Bank, the Bank of England, the Bank of Japan, etc. have been called in to help out.

Once upon a time, many moons ago (actually, about six) the Federal Reserve would only lend to Commercial Banks, which were under its direct supervision, in its role as lender of last resort. It would only take Treasury paper as collateral. Then along came the Bear Sterns situation and they started to open the window to Primary Dealers, also known as the big Wall Street Investment Banks, and started to take Agency paper (i.e. Fannie and Freddie debt) as collateral.

With its latest moves, the Fed will take any "investment grade" debt and even equities as collateral. We know the rating agencies have been right on top of things with their determinations of who is investment grade, right? Seriously, the collateral at the pawn shop on the wrong side of the tracks is now better than what the Fed is taking onto its balance sheet. That balance sheet is what backs all those "Federal Reserve Notes" in your wallet. Now the window is so wide open I don't think it is fair to call it a window anymore. A window implied something that can be open and shut, with some sort of cashier sitting at it. This is not a window, it is a gaping hole in the side of a building.

I still do not think this is the time to try to bottom-fish in the financials. Yes, there may be tradable rally's as governments force short sellers to cover and directly inject liquidity into these firms, but for many of them the question is not liquidity, it is solvency.

Do not be tempted to by firms like Citigroup, Wachovia, Bank of America or Morgan Stanley. If you have to be in the market, look for either stable demand firms with rock solid balance sheets -- along the lines of Proctor and Gamble (PG) or PepsiCo (PEP) or some of the Energy names that have been beaten down with the recent decline in oil prices. Offshore drillers like Transocean (RIG) and Diamond Offshore (DO) look particularly attractive to me in here. Big Integrated Oils like Exxon (XOM), Conoco (COP) and Chevron (CVX) all have fortress balance sheets and are a very good place to hide.

Read the analyst note on FRE

Read the analyst note on AIG

Read the analyst note on WM

Read the analyst note on JPM

Read the analyst note on WB

Read the analyst note on BCS

Read the analyst note on PG

Read the analyst note on PEP

Read the analyst note on RIG

Read the analyst note on DO

Read the analyst note on XOM

Read the analyst note on COP

Read the analyst note on CVX

With the hurricane throwing most of the refineries off gear till early this week, Chevron cashed in when its Mississippi refinery sputtered back to life first. The lack of supply meant that the company could pump in oil into the market with a wider margin. 

The stock has a Buy recommendation from Zacks with a P/E ratio of 8.3, which is at a premium to S&P’s 14.1. Chevron’s PEG [price-to-earnings-growth] too looks healthy at 0.9, ahead of the industry by 0.3. S&P has also given the stock a very positive 5 STAR Strong Buy rating. This comes as little surprise as Chevron’s strong pipeline -- projected to add more than 1 MMBOE/d [million barrels of oil equivalent per day] by 2011 -- and recent exploration success have improved its long-term upstream growth prospects.

Zacks analyst Sheraz Mian had this to write in his latest report on Chevron: "We believe that the company is capable of generating above peer group average production and reserve growth in the long run."

Chevron has a very strong balance sheet and a growing dividend that currently yields an attractive 3.01%. Following the trend, analysts have raised the stock’s EPS forecast for the year by 57 cents to $12.21 over the last three months.

CRUDE OIL

Oil at 7-month low on Wall Street woes
Oil prices settled at a seven-month low Tuesday as the meltdown on Wall Street pulled the oil market's focus to the economic slowdown that has already been cutting away at demand for energy.

XX Sean’s note – I think oil is due for a bounce, but just in case, I’ve taken protective action in the RGS and RCE portfolios. Once these sell-offs get started, they can go further, faster, than might seem logical or even possible.

Saudi Arabia Will Probably Cut Oil Supply, Riyadh Banker Says
Saudi Arabia, the world's biggest crude oil exporter, will probably reduce supplies before the next OPEC meeting in December after the group pledged to respect output quotas, a Riyadh-based banker said.

XX It’s like we’re buying oil from a split personality. Will the Saudis cut production? They’ve muddled the waters so much that it’s impossible to tell. Maybe that was their aim all along.

By the way, The new OPEC Monthly Oil Market Report came out this morning. OPEC cut its 2008 forecast oil demand growth. OPEC now expects that Oil demand will rise by 880,000 barrels per day (bpd) this year, 120,000 bpd less than the previous forecast.

Nigerian militants say Shell pipeline destroyed
LAGOS (AFP) - A Nigerian rebel group said Tuesday it had blown up and destroyed a Royal Dutch Shell pipeline in the latest attack in its "oil war" on western firms.

Weak oil and debt markets may bedevil oil sands plans
CALGARY, Alberta (Reuters) - A double whammy of tumbling crude prices and shaky credit markets could force some companies to delay multibillion-dollar Canadian oil sands projects, cutting the country's overall output forecast.

XX Sean’s note – this applies to oil sands companies that use bucket loaders to move tons of sand, not SAGD companies like the one in the RCS portfolio – that has a much lower cost structure.

US ECONOMY

U.S. Stocks Climb on Speculation Fed Will Rescue Insurer AIG From Collapse U.S. stocks rose, helping the Standard & Poor's 500 Index rebound from its steepest drop in seven years, as expectations grew the Federal Reserve may rescue American International Group Inc. from collapse.

Consumer Prices in U.S. Fall First Time in Almost Two Years as Fuel Drops U.S. consumer prices fell in August for the first time in almost two years as fuel costs declined from record levels.

Texas Struggles to Prevent Health Crisis After Ike Cuts Off Water, Power Three days after Hurricane Ike delivered a less-powerful punch than predicted, coastal Texas is struggling to fend off a health-care crisis.

CHINA

China May Cut Rates Again, Increase Lending, Spend More to Boost Economy China may cut interest rates again, ease limits on bank lending and boost spending to spur economic growth after lowering borrowing costs for the first time in six years.

CANADA

Canada July Factory Sales Gain More-Than-Expected 2.7% on Metals, Vehicles Canadian factory shipments rose 2.7 percent in July, almost three times as much as economists anticipated, on higher sales of metals and motor vehicles.

read more

Source: Chart of the Day/Bloomberg

“Despite all the rhetoric, with the rally in the dollar index, OPEC is still saying `thank you very much,''' Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Switzerland, said. “For OPEC, $80 now is the same as $100 two months ago.''

Loss of Merrill, Lehman Signals `Tectonic' Shift in Wall Street Landscape In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed toward extinction.

Chance of Rate Cut at Fed Meeting Now Set at 88%

Fed funds futures contracts attached an 88 percent chance the Fed will lower rates by 25 basis points at or before Tuesday's Federal Open Market Committee meeting.

URANIUM

Western Australia Set for Uranium Mines as Liberals Win State Government Western Australia's uranium-related companies are set for a boost after the Liberal Party, which favors ending a ban on mining the nuclear fuel, yesterday won the backing of the Nationals to form government.

Toro, Energy Rise on Optimism Western Australia Will Open Uranium Mining Toro Energy Ltd. and Energy & Minerals Australia Ltd. led gains in shares of Western Australian uranium explorers as the Liberal Party, which has indicated it will allow mining of the fuel in the state, won the right to govern.

CRUDE OIL

Crude Oil Falls Below $97 as Ike Spares Texas Refineries, Lehman Collapses Crude oil fell below $97 a barrel to the lowest in seven months as refineries along the Gulf of Mexico coast escaped major damage from Hurricane Ike and Lehman Brothers Holdings Inc. filed for bankruptcy.

Emerging-Market `Panic' Masks Record Profits, May End With 20% Stock Rally Emerging-market companies, earning more for shareholders than ever before, are getting no respect just as their stocks drop to levels that preceded rallies.

Hurricane Ike on Sept. 12. Source: Drudge.

Essentially all of the 1.3 million barrels per day of U.S. crude oil production from the Gulf of Mexico (which accounts for about a quarter of total U.S. production) has been shut in as a result of the storm. When the same thing happened 3 years ago with Hurricane Katrina, the effects turned out to be surprisingly long-lived. Damage to offshore rigs proved costly to repair, and in some cases due to field depletion the platforms were abandoned rather than repaired. We will have to wait for an assessment of how extensive the damage will be this time around. The absence of a significant spike up in oil prices at the end of last week suggests that many market participants were not so worried this time.

Monthly crude oil production from federal offshore leases for Petroleum Administration for Defense District 3 in thousand barrels per day, Jan 2005 to Jan 2007. Data source: EIA.

The other concern is refining capacity. Texas and Louisiana do about half of the nation's refining, and Bloomberg reports that 20% of the nation's refining capacity was shut down by the storm. That again is comparable to what we saw 3 years ago with Katrina, in which again several of the damaged refineries took some time to repair. Damage to refineries this time may be less serious than originally feared. But even if there is no damage, it could still take a week or two to restart the refineries, and before Ike gasoline inventories were quite low.

Monthly crude oil inputs to Gulf Coast refineries in thousand barrels per day, Jan 2005 to Jan 2007. Data source: EIA.

But there's another factor in the mix this time as well. Governors and attorneys general in Tennessee, Florida, Missouri, North Carolina and doubtless many other states announced plans to crack down on "price gouging." In the current political and legal environment, fears of prosecution for this "crime" will surely prevent the price from rising to the point at which supply equals demand. That means we should expect to see shortages.

Instapundit's evidence that the price of gasoline did not rise sufficiently high.

But shortages and fears of a return to higher prices are additional motivations for people to buy gas when and where they can. If the governor orders prices to stay put, that provides a powerful reason for everyone to fill up their tanks now. And the surge in demand from that source can be an even bigger shock to the system than the supply outages themselves. Via Instapundit, Knoxnews.com reports:

As for fuel availability, Pilot hasn't run out at any of its stores, but is struggling to make sure supplies remain constant. A fuel shipment from Colonial Pipeline's main trunk into Knoxville that was originally slated to arrive Saturday, then was postponed until Tuesday, has now been pushed back to Thursday, [Pilot's vice president for supply and distribution Alan] Wright said.

The problem now is not just less fuel coming from the refineries, but a run on the pumps by drivers, he said.

"The fuel situation for Pilot really hasn't changed a whole lot since yesterday. We have fuel right now and we continue to deliver fuel to our stores; the problem we have is we are selling about twice as much fuel as we normally would," he said.

Wright said he anticipated there will be more spikes in fuel prices and short supplies over the next two to three weeks after Ike hits.

Pilot isn't the only local gasoline retailer watching the fuel situation deteriorate.

"I've been in this business 50 years and this has never happened before," said Bill Weigel, head of the Weigel's chain of convenience stores in Knox, Blount, Sevier, Loudon, Anderson and Monroe counties.

Weigel, who said Thursday that about a half-dozen Weigel's stores had run out of gas, declined to say how many more stores had run dry Friday.

Gee, and I had been all ready to share the good news that the drop in gasoline prices prior to Ike seemed to produce a remarkable bump back up in consumer sentiment.

Reuters/Michigan index of consumer sentiment. Data source: FRED and Bloomberg.

Technorati Tags: oil, oil prices, gas prices Hurricane Ike, Ike, gasoline, economics, macroeconomics

The Fed will hold a one-day meeting on Tuesday. Friday brings quadruple witching. And 12 S&P 500 members will report quarterly results. (Read Earnings Preview to see which S&P 500 member could surprise.)

Regarding the other two events that could impact market direction this week, Hurricane Ike and Lehman  Brothers, see my post on our Analyst Blog.

read more

Adding to the gloomy macro-level economic picture was the Commerce Department's report that the national trade deficit grew to its highest level in 16 months in July, climbing 5.7% to $62.2 billion. The reading was worse than analyst projections of $58 billion, driving the deficit between imports and exports to its highest level since March of 2007.

The gap was fueled by higher oil prices, which accounted for $51.4 billion of the $230.3 billion of total imports, a clear indication that our domestic energy policy is a serious threat to the financial prosperity of this country.

Hurricane Ike unexpectedly strengthened and tripled in size as it spiraled through the Gulf of Mexico, pushing wholesale gasoline prices higher to between $4 and $5 per gallon, up from the previous range between $3 and $3.30. Ike is now on a direct path towards major coastal installations in Texas, where residents are being evacuated in anticipation of 100 mph winds and major storm surges.

And finally, the dollar advanced to a one-year high against the Euro as investors positioned themselves in anticipation of a slowdown in global growth.

The Focus List

The Focus List ended Thursday’s session 0.86% higher.

Accenture Ltd. (ACN) kept the Focus List from advancing further today as it logged in a loss of 4%, making it the biggest portfolio decliner for the day. It is uncertain why the stock sold off as it did.

The company made an announcement today that, if anything, should have helped ACN trade higher. The company announced that it signed a 10-year contract, worth $550 million, to provide finance, accounting and application development services for Bristol-Myers Squibb Co., a pharmaceutical name. Accenture added that the deal provides dedicated global IT and financial support services to Bristol-Myers Squibb to help achieve operational cost savings and flexibility.

We are watching ACN, looking for a reversal from recent declines. The stock remains in positive territory since being added to the Focus List.

One of today’s stronger Focus List performers was Praxair Inc. (PX), which gained 2.5% for the day.

The company said that its Praxair Electronics division announced a 15% price increase on tantalum products. Praxair explained that this action was implemented as a response to rapidly escalating raw material costs related to the mining and recycling of tantalum and tantalum ore. The company added that, in some circumstances, price adjustments may be higher or lower and that PX will be working with worldwide customers to expand tantalum recycling programs and other productivity measures in order to mitigate the effect of the price increase.

Thursday’s Focus List biggest gainers were Columbus Mckinnon Corp. (CMCO) and Fomento Economico Mexicano (FMX), each of which picked up 4% for the day.

CMCO is in the red since being added to the Focus List. We are watching it closely, looking for a reversal into positive territory.

FMX is trading higher since being added to the portfolio. We are expecting this one to keep climbing, especially considering the recent boost in the consensus estimate for this year and next. During the past week, analysts upped earnings estimates from $2.39 per share to $2.41 for the 2008 year and from $2.68 per share to $2.71 for 2009.

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The downtrend in the overall market and financial sector was hastened by American Insurance Group, Inc (AIG), as investors speculated that the world's largest insurer would also need to raise more capital to protect itself from exposure to mortgage related assets. AIG has already posted $20 billion in losses over the last three quarters and raised $20 billion in new capital.

On a more upbeat note, oil prices retreated below $104 for the first time since April as Hurricane Ike's trajectory veered away from sensitive, energy infrastructure in the Gulf. Also helping drive prices lower were comments from OPEC President Chakib Khelil, who insinuated that the organization will hold production at current levels. Crude dropped $3.08 on the day to close at $103.26 a barrel.

And finally, the dollar ended a solid 2-week run against the Euro in today's session, as financial sector weakness eroded confidence in the Greenback.

The Focus List

The Focus List portfolio saw declines in today’s bearish market, averaging a loss of 4.43% for the day.

The commodities sell off environment has weighed on commodities related Focus List holdings. While many of these stocks continue to offer great fundamentals, falling commodity prices has caused us to execute a few deletions from the portfolio today.

The indiscriminate selling in the commodity sector has hit CF Industries Holdings (CF). Given the current backdrop and a recent trimming of Q3 estimates, we locking in a gain on CF in the Focus List. We hope to add the stock back at a later date.

Earnings estimates have been cut by 3 out of the 10 covering analysts recently on ConocoPhillips (COP). We continue to like the valuation, but cannot justify holding onto COP given the current anti-commodity sentiment.

The indiscriminate selling that is occurring in commodity-related stocks is leading us to initiate a quick stop-loss on Fluor Corporation (FLR). The market is clearly ignoring the company s positive fundamentals right now. We hope to add FLR back at a later date.

Though we continue to like the fundamentals on Genco Shipping &Trading Ltd. (GNK), the indiscriminate selling in commodity-related stocks and a recent trimming of 2008 earnings estimates is causing us to close our position.

The indiscriminate selling that is occurring in commodity-related stocks is leading us to initiate a quick stop-loss on Metalico Inc. (MEA). The market is clearly ignoring the company’s positive fundamentals right now. We hope to add MEA back at a later date.

In order to maintain sound diversification, we did not completely close off exposure to commodities and held on to such names as Bunge (BG). Though, this pick was one of Tuesday’s bigger Focus List decliners, analysts remain bullish on the farm and fertilizer stock as evidenced by the higher forecasts for this year and next.

It was not all doom and gloom today. McDonald’s Corp. (MCD) was up 1.2% for the day as the fast food giant reported worldwide same-store sales surging 8.5% in August.

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Upcoming economic data will include August retail sales and preliminary September consumer confidence numbers. Given the lackluster August numbers recently given by retailers, I'm not expecting either report to be particularly optimistic.

The week's economic schedule includes:

• Monday: July consumer credit
• Tuesday: July pending home sales, July wholesale inventories
• Wednesday: Weekly crude inventories
• Thursday: July trade deficit, August import and export prices, weekly initial jobless claims
• Friday: August Producer Price Index, August retail sales, preliminary September University of Michigan consumer sentiment, July business inventories

The Federal Reserve's website does not list any upcoming speeches.

The weather remains a wildcard with Hurricane Ike heading towards the Bahamas. If the storm should pass into the Gulf of Mexico, oil futures could be volatile.

Barring an unscheduled event, volume should be modest as traders await the third week of September. Goldman Sachs (GS) will announce earnings on the morning of Sep 16. Fellow brokerage firms Lehman Brothers (LEH) and Morgan Stanley (MS) should also report, though we have not confirmed dates for either of them.

The Fed will hold a one-day meeting on Tuesday, Sep 16; no changes in rates are expected.

Friday, Sep 19 is a quadruple-witching day, meaning the expiration of options and futures contracts. Quadruple-witching day can bring added volatility.

Companies That Could Issue Positive Earnings Surprises during the Week of Sep 8 - 12

Earnings estimate revisions are not signaling a probability of positive, or negative, surprises from any of the companies scheduled to report.

Charles Rotblut, CFA is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.

Earnings Calendar

Here is a list of companies that we have confirmed will report during the week of Sep 8 - 12¹.

Company	Ticker	Zacks Consensus Estimate	Year Ago Actual	Last Qtr Surprise	Report Date	Report Time
K12 Inc	LRN	($0.05)	N/A	50.0%	9/8/2008	AMC
Aerovironment	AVAV	$0.18	$0.18	11.1%	9/9/2008	AMC
Animal Hlth Int	AHII	$0.14	$0.07	(55.6%)	9/9/2008	BTO
Arcsight Inc	ARST	($0.03)	N/A	(50.0%)	9/9/2008	BTO
Barry R G Corp	DFZ	($0.07)	($0.08)	175.0%	9/9/2008	N/A
Finisar Corp	FNSR	$0.02	($0.02)	200.0%	9/9/2008	AMC
Investors Rl Es	IRET	$0.23	$0.23	(8.7%)	9/9/2008	AMC
Korn/Ferry Intl	KFY	$0.30	$0.36	0.0%	9/9/2008	BTO
Lakeland Inds	LAKE	$0.23	$0.14	(20.0%)	9/9/2008	BTO
Mitcham Inds	MIND	$0.22	$0.17	(4.7%)	9/9/2008	AMC
Ocean Power Tec	OPTT	($0.40)	($0.24)	(21.9%)	9/9/2008	BTO
Oxford Inds Inc	OXM	$0.33	$0.27	5.4%	9/9/2008	AMC
Pep Boys M M &J	PBY	$0.07	$0.08	100.00%	9/9/2008	BTO
Hooker Furnitur	HOFT	$0.23	$0.41	(46.5%)	9/10/2008	N/A
Campbell Soup	CPB	$0.25	$0.14	(2.3%)	9/11/2008	BTO
Krispy Kreme	KKD	($0.01)	($0.08)	(100.0%)	9/11/2008	N/A
Lantronix Inc	LTRX	($0.01)	$0.00	0.0%	9/11/2008	AMC
Lululemon Athlt	LULU	$0.14	$0.07	(7.7%)	9/11/2008	BTO
Methode Elect-A	MEI	$0.27	$0.22	61.5%	9/11/2008	BTO

BMO = Before The Market Open, AMC = After Market Close

¹Some of the companies listed in the earnings calendar may not be in the Zacks Rank universe.

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