What's Important in the Financial World (7/5/2012)

Costco’s (NASDAQ: COST) results for June showed that one of the most successful retailers in the United States stumbled. Costco tends to cater to high-end shoppers, so its same-store sales could indicate that the well-to-do have cut back their consumer spending. Same-stores sales were up only 3%.

The big-box retailer issued its numbers:

Costco Wholesale Corporation today reported net sales of $9.18 billion for the month of June, the five weeks ended July 1, 2012, an increase of six percent from $8.69 billion during the similar period last year.

There have been concerns that the purchasing patterns of relatively well-off consumers could be undermined by worry about tax increases in 2013. People in the upper strata of earners will be hurt most by the new taxes. The sales trend bodes poorly for the important year-end holiday season, which is now barely three months away. If Costco’s weak sales results persist until September, the three months that make or break most retailers could be rough.

Spain’s Cost of Borrowing

What the Spanish government needs to pay to raise money continues to rise. Soon its borrowing costs will become financially untenable, or they may have already. The nation raised three billion euros today. Spain had to pay an average yield of 6.43% at auction, based on figures for 10-year bonds. That number has risen in less than a month. The rising borrowing costs and estimated price Europe and the International Monetary Fund would have to pay to loan Spain tens of billions of dollars for both its national and bank debt requirements makes the debt problem in the eurozone more dire. The debate about bailouts was partially settled at a recent summit of the region’s leaders. But the solutions were expressed broadly and have not been worked out in detail. Those details may become less generous to nations like Spain if its fortunes continue to disintegrate.

Moody’s on Barclays

Moody’s threw another hurdle in the path of Barclays (NYSE: BCS), which continues to deal with a Libor scandal that has cost it $450 billion in fines, as well as the job of its chief executive, Bob Diamond. The credit rating agency issued a report about the risk of the lender’s debt:

Moody’s Investors Service has today changed the outlook on the C-/ baa2 standalone bank financial strength rating (BFSR) of Barclays Bank plc to negative from stable.

The report also said:

Moody’s decision to change the outlook on Barclays’s C-/ baa2 standalone rating to negative from stable reflects the rating agency’s concerns that the senior resignations at the bank and the consequent uncertainty surrounding the firm’s direction are negative for bondholders. Specifically, the shareholder and political pressures on Barclays, which resulted in the resignation of the bank’s CEO, COO (previously the head of the investment bank) and the stated intention of the Chairman to resign, could lead to broader pressure on the bank to shift its business model away from investment banking and reform perceived failures in its business culture.

The business model is not the most serious threat to the UK bank. Investigations into Libor manipulation, which continue to spread to other banks, could cost Barclays billions more in fines and the jobs of many senior bankers.

Douglas A. McIntyre