What's Important in the Financial World (7/11/2012)

Spain has decided the only way to tackle its budget deficit is via extremely sharp expense cuts coupled with a more modest move to increase taxes. Prime Minister Mariano Rajoy says his government will reduce spending by 65 billion euros over two years. That is an extraordinary number, given the size of the nation’s economy and the need for social services to support the 25% of the working age population that is unemployed. Rajoy also will ask parliament to increase the nation’s VAT from 18% to 21%. That will put a tremendous strain on consumer, and later business, spending. It will drive the people in Spain who can afford to consume and lift the economy to reconsider what they buy and pay.

JCPenney Forecast

JCPenny’s (NYSE: JCP) problems get worse and worse. The retailer said it would cut 350 people at its headquarters, which barely scratches the surface of its cost problems, nor altars a trend that caused its sales to drop 20% in the most recently reported quarter. Credit Suisse issued a report that forecasts another sharp drop in the current quarter. According to MarketWatch, Credit Suisse analyst Michael Exstein “doubled his adjusted second-quarter loss estimate on Penney to 38 cents a share from his original loss estimate of 19 cents a share. For the year, his estimate excluding charges fell to profit of $1.07 a share from $1.16.” Presumably, JCPenney customers have taken their business to other retailers — most likely Macy’s (NYSE: M) and Sears (NASDAQ: SHLD), which offer similar merchandise.

An Amazon Smartphone

There are more rumors — or news, based on the credibility of the reports — that Amazon.com (NASDAQ: AMZN) has signed up suppliers in Asia to build a smartphone. The device would compete with the Apple (NASDAQ: AAPL) iPhone and an army of Google (NASDAQ: GOOG) Android-powered devices, led by the new Galaxy S III from Samsung. Ongoing speculation is that Google and Microsoft (NASDAQ: MSFT) eventually will launch their own smartphones too. Amazon has the leverage of its presence in the tablet PC market because of its Kindle Fire. It also has one of the world’s best marketing platforms, due to the tremendous traffic to its site. But, given the crowded market, none of those advantages may be sufficient.

Douglas A. McIntyre