Reuters - JC Penney tumbles on cut earnings forecast

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JC Penney tumbles on cut earnings forecast

Friday, Mar 28, 2008 3:38PM UTC

By Nicole Maestri

NEW YORK (Reuters) - Department store operator JC Penney Co Inc <JCP.N> on Friday cut its first-quarter earnings forecast and said it expects the environment to remain difficult throughout 2008, stoking fears that the second half of the year will not bring relief to struggling U.S. retailers.

"We believe that investors had generally anticipated weak performance from retailers in the first half" of 2008, wrote Sanford C. Bernstein analyst Uta Werner.

"However, we expect that JC Penney's commentary regarding its expectation of persistent weakness throughout the full year will be viewed as an incremental negative for the stock and the sector," she wrote in a research note.

Penney's shares were off more than 9 percent in early New York Stock Exchange trading. The warning also dragged down shares of competitors like Kohl's <KSS.N>, Macy's Inc <M.N> and Dillard's Inc <DDS.N>.

Department store operators like Penney that cater to middle-income Americans have been hit hard by the slowdown in consumer spending as these shoppers forgo purchases of clothes, jewelry and home furnishings amid fears of a U.S. recession.

But even upscale department store chains like Nordstrom <JWN.N> and Neiman Marcus Inc are starting to feel the strain of the spending slowdown, and investors are losing hope that the later part of the year, marked by the holiday shopping season, will offer much reprieve from current struggles.

"I'm hearing more and more that people are just assuming that things are going to stay pretty much difficult for the whole year," said Jason Asaeda, a retail analyst with Standard & Poor's Equity Research. "In doing so, they're planning a lot more conservatively."

CONFIDENCE AT A MULTI-YEAR LOW

Penney now expects first-quarter earnings of approximately 50 cents per share, down from its previous view of 75 to 80 cents per share.

It also expects a low-double-digit decline in March sales at stores open at least a year, known as comparable store sales, and a high-single-digit decline in comparable-store sales for the first quarter. Its previous view was for comparable store sales in March and the first quarter to decline in the low single digits.

"Consumer confidence is at a multi-year low," Myron "Mike" Ullman, chairman and chief executive officer, said in a statement.

"JC Penney counts half of American families as its customers, and they are feeling macro-economic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets," he said.

In February, Penney reported a nearly 10 percent decline in quarterly profit and said there was no clear indication the consumer environment would improve in 2008.

It also posted a 6.7 percent drop in February sales at stores open at least a year while analysts, on average, were expecting a decline of just 1.9 percent.

Those disappointing February sales figures prompted JP Morgan analyst Charles Grom to downgrade his rating on the retailer's shares to "neutral" from "overweight," and he said at the time that the company's outlook for its March sales was "too aggressive."

Shares of Penney were down $3.86, or 9.5 percent, at $36.66.

(Additional reporting by Aarthi Sivaraman)

(Reporting by Nicole Maestri, editing by Mark Porter and Gerald E. McCormick)

Bear dips

We suck

Reuters - Bear Stearns shares fall after chairman sells stock

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Bear Stearns shares fall after chairman sells stock

Friday, Mar 28, 2008 3:20PM UTC

NEW YORK (Reuters) - Bear Stearns Cos <BSC.N> shares fell nearly 5 percent on Friday after Chairman James Cayne, who was seen as opposing JPMorgan Chase & Co's <JPM.N> acquisition of the investment bank, sold his stock.

"It is symbolic that he's selling," said David Dreman, chief investment officer of Dreman Value Management LLC, a New Jersey based fund manager that has over $18 billion under management. "It lessens the potential enormously for a long drawn out battle."

"I think he knows that they're not going to get much more," said Dreman, whose firm owns JPMorgan shares.

In a filing on Thursday, Cayne, who stepped down as chief executive of Bear in January after nearly 15 years at the helm, disclosed that he sold all of the 5.6 million Bear shares he directly held. His wife also sold all of her nearly 46,000 shares.

The sale of the shares, which were worth about $1 billion last year when the stock peaked at over $170 a share, were sold for $61 million.

Last week, the New York Post reported that Cayne, together with Bear's biggest shareholder Joe Lewis, was quietly searching for a bidder to top JPMorgan.

But on Monday, JPMorgan agreed to raise its bid and said that board members agreed to vote their shares in favor of the deal. With a stake of about 5 percent, Cayne had by far the largest holding among Bear board members.

JPMorgan plans to lock up about 39.5 percent of the vote, when it closes a deal to buy 95 million new Bear shares around April 8.

Bear shares fell 55 cents to $10.68 in morning trade on the New York Stock Exchange. Despite the fall, they are still trading above JPMorgan's all-stock offer of about $9.35 a share at current prices.

Bear, which until recently ranked as the fifth-largest U.S. investment bank, suffered a liquidity crisis as declining confidence prompted a run on the bank.

(Reporting by Chris Reiter)

Alan Greenspan on The Economy

Financial Times FT.com
COMMENT & ANALYSIS
Comment

We will never have a perfect model of risk

By Alan Greenspan

Published: March 16 2008 18:25 | Last updated: March 16 2008 18:25

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Home price stabilisation will restore much-needed clarity to the marketplace because losses will be realised rather than prospective. The major source of contagion will be removed. Financial institutions will then recapitalise or go out of business. Trust in the solvency of remaining counterparties will be gradually restored and issuance of loans and securities will slowly return to normal. Although inventories of vacant single-family homes – those belonging to builders and investors – have recently peaked, until liquidation of these inventories proceeds in earnest, the level at which home prices will stabilise remains problematic.

The American housing bubble peaked in early 2006, followed by an abrupt and rapid retreat over the past two years. Since summer 2006, hundreds of thousands of homeowners, many forced by foreclosure, have moved out of single-family homes into rental housing, creating an excess of approximately 600,000 vacant, largely investor-owned single-family units for sale. Homebuilders caught by the market’s rapid contraction have involuntarily added an additional 200,000 newly built homes to the “empty-house-for-sale” market.

Home prices have been receding rapidly under the weight of this inventory overhang. Single-family housing starts have declined by 60 per cent since early 2006, but have only recently fallen below single-family home demand. Indeed, this sharply lower level of pending housing additions, together with the expected 1m increase in the number of US households this year as well as underlying demand for second homes and replacement homes, together imply a decline in the stock of vacant single-family homes for sale of approximately 400,000 over the course of 2008.

The pace of liquidation is likely to pick up even more as new-home construction falls further. The level of home prices will probably stabilise as soon as the rate of inventory liquidation reaches its maximum, well before the ultimate elimination of inventory excess. That point, however, is still an indeterminate number of months in the future.

The crisis will leave many casualties. Particularly hard hit will be much of today’s financial risk-valuation system, significant parts of which failed under stress. Those of us who look to the self-interest of lending institutions to protect shareholder equity have to be in a state of shocked disbelief. But I hope that one of the casualties will not be reliance on counterparty surveillance, and more generally financial self-regulation, as the fundamental balance mechanism for global finance.

The problems, at least in the early stages of this crisis, were most pronounced among banks whose regulatory oversight has been elaborate for years. To be sure, the systems of setting bank capital requirements, both economic and regulatory, which have developed over the past two decades will be overhauled substantially in light of recent experience. Indeed, private investors are already demanding larger capital buffers and collateral, and the mavens convened under the auspices of the Bank for International Settlements will surely amend the newly minted Basel II international regulatory accord. Also being questioned, tangentially, are the mathematically elegant economic forecasting models that once again have been unable to anticipate a financial crisis or the onset of recession.

Credit market systems and their degree of leverage and liquidity are rooted in trust in the solvency of counterparties. That trust was badly shaken on August 9 2007 when BNP Paribas revealed large unanticipated losses on US subprime securities. Risk management systems – and the models at their core – were supposed to guard against outsized losses. How did we go so wrong?

The essential problem is that our models – both risk models and econometric models – as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality. A model, of necessity, is an abstraction from the full detail of the real world. In line with the time-honoured observation that diversification lowers risk, computers crunched reams of historical data in quest of negative correlations between prices of tradeable assets; correlations that could help insulate investment portfolios from the broad swings in an economy. When such asset prices, rather than offsetting each other’s movements, fell in unison on and following August 9 last year, huge losses across virtually all risk-asset classes ensued.

The most credible explanation of why risk management based on state-of-the-art statistical models can perform so poorly is that the underlying data used to estimate a model’s structure are drawn generally from both periods of euphoria and periods of fear, that is, from regimes with importantly different dynamics.

The contraction phase of credit and business cycles, driven by fear, have historically been far shorter and far more abrupt than the expansion phase, which is driven by a slow but cumulative build-up of euphoria. Over the past half-century, the American economy was in contraction only one-seventh of the time. But it is the onset of that one-seventh for which risk management must be most prepared. Negative correlations among asset classes, so evident during an expansion, can collapse as all asset prices fall together, undermining the strategy of improving risk/reward trade-offs through diversification.

If we could adequately model each phase of the cycle separately and divine the signals that tell us when the shift in regimes is about to occur, risk management systems would be improved significantly. One difficult problem is that much of the dubious financial-market behaviour that chronically emerges during the expansion phase is the result not of ignorance of badly underpriced risk, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share.

Risk management seeks to maximise risk-adjusted rates of return on equity; often, in the process, underused capital is considered “waste”. Gone are the days when banks prided themselves on triple-A ratings and sometimes hinted at hidden balance-sheet reserves (often true) that conveyed an aura of invulnerability. Today, or at least prior to August 9 2007, the assets and capital that define triple-A status, or seemed to, entailed too high a competitive cost.

I do not say that the current systems of risk management or econometric forecasting are not in large measure soundly rooted in the real world. The exploration of the benefits of diversification in risk-management models is unquestionably sound and the use of an elaborate macroeconometric model does enforce forecasting discipline. It requires, for example, that saving equal investment, that the marginal propensity to consume be positive, and that inventories be non-negative. These restraints, among others, eliminated most of the distressing inconsistencies of the unsophisticated forecasting world of a half century ago.

But these models do not fully capture what I believe has been, to date, only a peripheral addendum to business-cycle and financial modelling – the innate human responses that result in swings between euphoria and fear that repeat themselves generation after generation with little evidence of a learning curve. Asset-price bubbles build and burst today as they have since the early 18th century, when modern competitive markets evolved. To be sure, we tend to label such behavioural responses as non-rational. But forecasters’ concerns should be not whether human response is rational or irrational, only that it is observable and systematic.

This, to me, is the large missing “explanatory variable” in both risk-management and macroeconometric models. Current practice is to introduce notions of “animal spirits”, as John Maynard Keynes put it, through “add factors”. That is, we arbitrarily change the outcome of our model’s equations. Add-factoring, however, is an implicit recognition that models, as we currently employ them, are structurally deficient; it does not sufficiently address the problem of the missing variable.

We will never be able to anticipate all discontinuities in financial markets. Discontinuities are, of necessity, a surprise. Anticipated events are arbitraged away. But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria. But risk management can never reach perfection. It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response.

In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons. But we cannot hope to anticipate the specifics of future crises with any degree of confidence. Thus it is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition.

The writer is former chairman of the US Federal Reserve and author of The Age of Turbulence: Adventures in a New World

Copyright The Financial Times Limited 2008

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Bear Stearns to Cash Out

Bear Stearns, JPMorgan Strive for Sale, People Say (Update2)

By Yalman Onaran and Elizabeth Hester

March 16 (Bloomberg) -- Bear Stearns Cos. executives were striving today to strike an agreement to sell the crippled securities firm to JPMorgan Chase & Co. before financial markets open in Asia, people with knowledge of the talks said.

The companies may announce an agreement in principle as soon as this evening in New York, giving a range of potential sale prices and leaving details of the transaction unresolved, said the people, who declined to be identified because the talks are private. Negotiations were ongoing, including with other potential bidders, and it was unclear whether a deal would be completed, they said.

The Wall Street Journal reported that the sale price may be about $2.2 billion, less than $20 a share and about half of the firm's $4.08 billion stock market value. Bear Stearns, led by Chief Executive Officer Alan Schwartz, was also preparing to file for bankruptcy protection if no deal is reached, the newspaper reported, citing a person familiar with the situation.

JPMorgan, backed by the Federal Reserve, provided emergency funding to Bear Stearns on March 14 when the fifth-largest U.S. securities firm ran out of cash after speculation about its financial soundness prompted customers and creditors to withdraw $17 billion of assets. Bear Stearns plummeted a record 47 percent to $30 in New York trading, pulling down financial stocks and sparking concern that other Wall Street firms could be affected.

`Do What It Takes'

``Right now it's a very potent short-term problem,'' said Brian Barish, who manages about $8 billion as president of Denver-based Cambiar Investors LLC. ``If Bear fails you're going to augment this liquidity problem materially because all kinds of trades are going to fail and people are going to be stuck with Bear as a counterparty. So it's better to find a way to handle Bear.''

Russell Sherman, a spokesman for Bear Stearns, declined to comment. JPMorgan spokeswoman Kristin Lemkau didn't return phone calls seeking comment.

``None of these things is done until they're done,'' Treasury Department spokeswoman Michele Davis said today, adding that Treasury Secretary Henry Paulson was involved in the discussions.

``The government is prepared to do what it takes to maintain the stability of our financial system,'' Paulson told the ``Fox News Sunday'' television program in Washington today. ``Our focus, our No. 1 priority, is the stability of our financial system.''

Teams of Bankers

J.C. Flowers & Co., the New York-based private equity firm, is among the other potential bidders that have been in contact with Bear Stearns since its cash shortage surfaced, according to people familiar with the matter. Ed Grebow, a spokesman for J.C. Flowers, didn't return a call seeking comment. Kohlberg Kravis Roberts & Co. was also involved alongside Flowers, the Journal reported today on its Web site, citing a person familiar with the discussions.

Hundreds of Bear Stearns employees worked yesterday to help with the process along with teams of bankers from JPMorgan who descended on Bear Stearns's 45-story headquarters on Madison Avenue in midtown Manhattan, people with knowledge of the matter said.

A sale for $2.2 billion, or less than $20 per share, would mean that Bear Stearns's value has fallen more than 88 percent from its peak of $171.51 in January 2007. The 85 year-old firm paid employees $3.43 billion last year.

Prime Asset

Bear Stearns's prime brokerage, which provides loans and processes trades for hedge funds, is a potentially desirable asset for JPMorgan, which has said it wants to buy such a business. The Bear Stearns unit generated $1.2 billion in revenue last year. Talks between the two New York-based firms have moved beyond that business and an outright acquisition of Bear Stearns is under discussion, the people familiar with the talks said.

JPMorgan and rival banks and securities firms are trying to find additional revenue streams after the collapse of the subprime mortgage market forced them to absorb more than $195 billion of writedowns and losses since the start of last year.

Bear Stearns's prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. analyst Bradley Hintz.

``Prime brokerage is a fee-based business that has a fairly steady revenue and income through all market cycles,'' said Glen Dailey, head of Jefferies Group Inc.'s prime brokerage in New York. ``As long as people buy or sell it makes money.'' Dailey ran Bank of America Corp.'s prime brokerage from 1997 until 2006.

`Too Late'

JPMorgan, led by Chief Executive Officer Jamie Dimon, was tapped March 14 for the bailout, after Bear Stearns's cash position had ``significantly deteriorated'' the previous day, company officials said. JPMorgan agreed to help the New York Fed provide financing for up to 28 days.

Steven Black, co-CEO of JPMorgan's investment bank, said Feb. 27 that the firm was considering an opportunity to buy a prime brokerage from an unnamed seller. Bank of America, based in Charlotte, North Carolina, said on Jan. 15 that it planned to sell its prime brokerage.

Dimon said three years ago that he didn't see the point of trying to compete with the likes of Morgan Stanley or Goldman in prime brokerage for stock trades. It's ``just too late,'' he said on a January 2005 conference call. Instead, he said he would focus on serving hedge funds in debt trading.

Customer Defections

Buying a business with a damaged reputation carries its own risks. Prime brokerage customers have been leaving Bear Stearns since last summer, said Bob Sloan, managing partner of S3 Partners, a New York-based company that serves as an outside financing desk for hedge funds.

There's little incentive to return once they've departed, said Sloan, whose clients have withdrawn a total of $25 billion from Bear Stearns.

``When Bear passed around a circular in July saying everything was safe and secure and funding was not a problem, we recommended to all our clients to pull,'' said Sloan, who ran Credit Suisse First Boston's prime brokerage for six years until 2002.

Bear Stearns, which first sold shares to the public in 1985, helped trigger a crash in the market for home loans to borrowers with blemished credit histories after two of its hedge funds collapsed in July. The failure of the funds, which invested in securities linked to subprime mortgages, prompted a sell-off of the assets, which led investors to shun other high- yield debt.

Hintz, the Sanford Bernstein analyst, said a takeover by JPMorgan may not revive the securities firm.

``Unfortunately it's easy to concoct a scenario that says this becomes a run-off strategy,'' Bernstein's Hintz said. ``It doesn't mean the assets aren't worth anything, it doesn't mean the franchise isn't worth anything, but I'm not at all certain how you put the defibrillators on and jumpstart the company again.''

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net;
Last Updated: March 16, 2008 18:00 EDT

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Paulson Ready for 'rough patch' in economy

Paulson Says He'll `Do What It Takes' to Calm Markets (Update4)

By Brendan Murray

March 16 (Bloomberg) -- Treasury Secretary Henry Paulson, defending the bailout of Bear Stearns Cos., said policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy.

``The government is prepared to do what it takes to maintain the stability of our financial system,'' Paulson told the ``Fox News Sunday'' television program in Washington today. ``Our focus, our No. 1 priority, is the stability of our financial system.''

Paulson, 61, spoke two days after the Federal Reserve rescued Bear Stearns, the fifth-largest U.S. securities firm, with an emergency loan. The move failed to avert a crisis of confidence among Bear Stearns customers and shareholders, who drove the stock down a record 47 percent.

In three appearances today, the former chairman of Goldman Sachs Group Inc. several times said the Fed made ``the right decision'' and expressed ``great confidence'' in its chairman, Ben S. Bernanke. Paulson said that in the case of Bear Stearns, the risk to financial stability outweighed his concern about so- called moral hazard, in which investors come to expect government rescues.

``I'm as aware as anyone is of moral hazard,'' he said in a CNN interview. ``I'm also aware of the importance of keeping our economy strong, of orderly capital markets, of the stability of the financial system doing things that promote orderliness and minimize the disruption.''

Weekend Talks

Paulson said ``conversations are going on over the weekend'' about Bear Stearns. ``I'm very involved in those conversations.'' He declined to be specific about the future of the 85-year-old firm, the second-biggest underwriter of U.S. mortgage bonds, or to say whether any additional government steps are planned.

``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said. ``I think we made the right decision.''

The Treasury chief refused to say what a growing number of economists have concluded -- that the economy has entered a recession.

Economic Debate

``Economists are going to be debating that for months and months,'' he said. ``It's much less important what you call it than what you're doing about it.''

The Standard & Poor's 500 Index is down 12.3 percent this year, while the dollar is down 5 percent against a basket of currencies of major U.S. trading partners. Home foreclosures in January and February were up 58 percent from the first two months of 2007.

``I've got great confidence in our financial markets and our financial institutions,'' Paulson said. ``Our markets are resilient, are flexible. Our institutions -- our banks and investment banks -- are strong.''

Paulson repeated his support for a ``strong dollar,'' and said the long-term strength of the U.S. economy would be reflected in the country's currency.

President George W. Bush is scheduled to meet tomorrow with his Working Group on Financial Markets. Paulson chairs the group, which includes Bernanke and Securities and Exchange Commission Chairman Christopher Cox.

The Bush administration has resisted the use of government funds or guarantees to stem the surge in foreclosures. Paulson has brokered a series of voluntary accords among lenders to freeze interest rates on subprime loans and negotiated a one- month moratorium on foreclosures.

Plans in Congress

A credit crisis that began in August has left markets ``more fragile than we would like right now,'' Paulson said in a separate interview on ABC News's ``This Week'' program. ``My concern is to minimize the impact on the broader economy.''

Paulson said the administration doesn't support measures in Congress to help struggling homeowners.

House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd offered a plan last week to let the Federal Housing Administration insure refinanced mortgages after lenders reduce principal to help struggling borrowers.

The two lawmakers are leading congressional efforts to tackle the surge in foreclosures, which reached record levels in the fourth quarter of 2007. Their plan goes beyond the Bush administration's approach that relies on voluntary agreements between lenders and loan servicers to modify mortgages for borrowers who can't make their monthly payments.

Weighing Response

``I'm looking very carefully at any proposal, but all the ones I've seen call for much more government intervention, raise more problems, do more harm than do good,'' Paulson said in the ABC interview.

In an interview on CNN, Paulson said there's ``no silver bullet'' to prevent home prices from falling and foreclosures from rising.

Paulson last week proposed that U.S. regulators heighten their scrutiny of lenders, mortgage brokers and debt-rating firms to prevent a reoccurrence of the credit crisis roiling capital markets. Writedowns from subprime securities will probably rise to $285 billion, Standard & Poor's said in a report March 13.

Schumer Attacks

``This has become the Bush recession,'' Senator Charles Schumer, a New York Democrat, said on the Fox News program. ``The president's hands-off attitude is reminiscent of Herbert Hoover,'' who led the country from 1929 to 1933.

Bush yesterday said he won't be stampeded into ``bad policy decisions'' that might harm the economy.

``The market now is in the process of correcting itself, and delaying that correction would only prolong the problem,'' he said in his weekly radio address. ``I believe the government can take sensible, focused action to help responsible homeowners weather this rough patch.''

To contact the reporter on this story: Brendan Murray at brmurray@bloomberg.net
Last Updated: March 16, 2008 13:08 EDT





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