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AP - Here's a sign of how shaky the economy has become: Wal-Mart says its shoppers are redeeming their holiday gift cards for basic items pasta sauce, diapers, laundry detergent instead of iPods or DVDs.
Reuters - Stock index futures dropped on Friday
as investors worried about the economic outlook after a Federal
Reserve official said a recession might not be avoidable.
Reuters - A French inquiry into a record 4.9
billion euros ($7.17 billion) trading loss at Societe Generale
widened to a second broker on Friday as investigators
sought to establish whether rogue trader Jerome Kerviel acted
alone.
AP - The biggest winners in the economic rescue plan now awaiting President Bush's signature are likely to be Americans with more expensive homes who will be able to refinance their home loans at cheaper rates.
AP - The twin pressures of a looming recession and an election year combined to speed a $168 billion economic rescue plan through Congress, sweeping aside lawmakers' political differences in favor of rushing $600-$1,200 checks to their constituents.
Reuters - Exxon Mobil Corp has won court
orders freezing up to $12 billion in Venezuelan assets around
the world as it fights for compensation for operations lost to
President Hugo Chavez's nationalization drive.
Merck agreed Thursday to pay more than $650 million to settle claims that it overcharged Medicaid programs for four drugs, including Vioxx and Zocor, from 1997 to 2001. Merck was also accused of having paid illegal kickbacks to induce doctors to prescribe its drugs.
The settlement covers two cases, in Philadelphia and New Orleans, originally filed by whistleblowers and later joined by the Justice Department and 49 states as well as the District of Columbia.
In a statement, Attorney General Michael Mukasey called the settlement "one of the largest health-care fraud settlements ever achieved by the Justice Department."
Federal law requires drug companies to report their "best prices" and other cost information to the government to ensure that Medicaid enjoys the same discounts as other drug purchasers.
An exception allows manufacturers to exclude discounts that are "nominal" in amount. Merck improperly characterized the prices it offered to hospitals to boost sales as nominal discounts.
Merck said that the settlements "do not constitute an admission by Merck of any liability or wrongdoing" and added that the company's pricing and marketing practices were "consistent with all applicable regulations and contracts."
Merck is facing a litigation maelstrom of late: Last November, it agreed to pay $4.85 billion to settle thousands of product-liability lawsuits over its painkiller Vioxx. In December, Merck said it would take a $670 million charge in the fourth quarter of 2007 in anticipation of these settlements, which, with interest, comes to $671 million.
The company's fourth-quarter release flagged the congressional and state investigations it is facing over the sales and promotion of Vytorin and also said the drugmaker has been served with "approximately 50 class actions" over Vytorin and Zetia since mid-January 2008. (This gem was first uncovered by the Wall Street Journal's health blog.)
Today's settlement came about through a "first-ever" collaboration between federal prosecutors, the states, and the plaintiffs' lawyers representing the whistleblowers, according to Steven H. Cohen, a Chicago lawyer and co-founder of the Whistleblower Action Network.
Cohen's client, Dean Steinke, had worked in the pharmaceutical industry for 11 years before becoming a district sales manager for Merck in Michigan. Steinke's whistleblower case was filed under seal in Philadelphia in 2000.
"At that time, our theory on nominal price was an innovative theory that we were promoting," Cohen said.
With the federal government's cooperation, Steinke filed a whistleblower case under the Nevada whistleblower statute in April 2005, with state prosecutors eventually intervening.
"Merck challenged the underlying basis of the case, and we got a landmark decision from the federal judge in Nevada," Cohen says. "It changed the entire dynamics of the case."
Cohen and his co-counsel have created a website devoted to the case, calling it the new model for whistleblower litigation.
Merck paid $399 million plus interest to settle the Medicaid rebate claims and allegations that Merck made excessive payments to doctors, disguised as "training," "consultation," or "market research," to prescribe its products.
Steinke will receive $44.69 million from the federal share of the settlement and another $23.5 million from the states.
Merck paid another $250 million plus interest to settle the Louisiana case, originally filed by a New Orleans physician, which involved discounted prices for the heartburn drug Pepcid when it was available only by prescription.
When Wal-Mart Stores reported today that January sales were weaker than expected, the mega-retailer blamed gift cards and the weather for the shortfall.
Gift cards?
Retailers have traditionally loved gift cards because they have been considered a surefire way to commit shoppers to walking through store doors. The Wal-Mart announcement is worrisome, however, because of what it reveals about the state of consumer spending. The retailer said redemptions of its gift cards were below expectations—indicating that people are not going shopping even when they have money in hand in the form of gift cards. And Wal-Mart reported that when gift cards were being used, it was more often to buy food and necessities, and not for discretionary purchases.
The idea that people not using gift cards can hurt sales may seem confusing at first. After all, the money has already been shelled out for the card, so what's the rush?
But retailers don't get to book the cash spent on gift cards as revenue until the card is redeemed. At the time the card is bought, the revenue from that transaction gets recorded on the balance sheet as a liability.
Scott Krugman, a spokesman for the National Retail Federation, explains that states' unclaimed property laws require businesses to turn over revenue from gift cards if they are not redeemed within a certain number of years. (The number varies from state to state.)
In other words, until it is redeemed, that $50 Macy's gift card you bought your mother is nothing more than an interest-free loan for the retailer.
Sales of gift cards have been growing, rising 17 percent last year, to $97 billion, says research firm TowerGroup. A significant portion of purchased gift cards go unused every year—$7.8 million last year, down from $8 billion in 2006. Still, that's no small amount of potential revenue lingering in purgatory.
"Anecdotally, it seems that gift card redemptions are down so far for the year," says Krugman, who notes that the NRF does not officially track those redemptions. "They could be down for a variety of reasons: people might not like the merchandise, or they might not have their minds on shopping."
The second half of the gift card dilemma for retailers has to do with what people are using them for. Gift cards used to mean that high-margin discretionary items like apparel and seasonal items would be bought; indulgences that, especially in tight times, people wouldn't buy if they didn't consider them as essentially being freebies. But increasingly, cards are being bought and redeemed at places such as grocery stores and coffee shops rather than clothing and department stores.
"What we heard over the holiday season is gas-station gift cards are becoming more popular," says Krugman.
And if those cards are holiday gifts that are now being used for basics, what does that portend for the spring?
According to American Express spokesperson Robert Sherman, AmEx saw the sales of gift cards in 2006 exceed the total sales for all previous years since the cards were launched in 2002.
That's not necessarily good news for retailers, as AmEx gift cards can just as easily be used for gas and cell-phone bills as handbags and DVD players.
As big banks scramble to form rescue plans for bond insurers, a hedge fund manger is trying to send the ambulances away.
Bill Ackman, whose Pershing Square Capital Management has been betting on a collapse of the bond insurers for several years, has written to regulators, urging them not to support these efforts.
In a letter to Federal Reserve and Treasury officials obtained by Portfolio.com, Ackman criticizes the bank bailout efforts that have been prompted by regulators, saying that this strategy "appears to be aimed at propping up insolvent and falsely rated entities so that banks can defer judgment day to a time when they are better capitalized or their stock prices are higher."
The fear is that the bond insurers will not be able to meet their guarantees amid a wave of defaults. That could result in credit-rating downgrades or collapse, leaving the banks on the hook for tens of billions of dollars in losses on their holdings of collateralized debt obligations, or C.D.O.'s.
"While we understand that the banking industry counterparties to the bond insurers would prefer to avoid taking these C.D.O. risks back on balance sheets—particularly at a time when their balance sheets are strained by subprime and other losses that have not been hedged, there are no such free lunches in the capital markets," Ackman writes in the February 5 letter.
Ackman says that banks and bond insurers should be forced to disclose their C.D.O. exposures in detail, and that federal regulators should work with state officials to ensure that bond insurers "preserve as much of their capital as possible for the benefit of policyholders and bank counterparties."
The Wall Street Journal reports that consortiums of banks are trying to find ways to unwind the credit-default swaps that they took out with the bond insurers as ways to guarantee the banks' C.D.O.'s.
Banks would receive stakes in the bond insurers, Financial Guaranty Insurance and Ambac Financial, in exchange, the Journal says.
Bankers are afraid that a collapse of bond insurers could have painful repercussions throughout global credit markets.
"It could be a tsunami-like event comparable to subprime," Josef Ackermann, the chief executive of Deutsch Bank, said in an interview with Bloomberg Television.
While the leading industrial powers face a slowing global economy and emerging inflationary pressures on the back of rising commodity prices, the two big central banks in Europe took opposite tacks.
The European Central Bank left its benchmark interest rate unchanged at 4 percent. But the president of the central bank, Jean-Claude Trichet, in remarks after the rate decision, cited risks to growth in the economies of the 15 nations that share the euro, suggesting that the E.C.B. was leaving the door open to possible rate cuts in the coming months.
In recent months, even amid a credit crunch that was harming European economies, the central bank focus was on fighting inflation. Last month, data showed that inflation in the euro zone had risen to 3.2 percent, a 14-year high.
But the Bank of England saw the slowdown as the greater risk, cutting its benchmark rate by a quarter point, to 5.25 percent.
The bank said that "the prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued."
The Chancellor of the Exchequer, Alistair Darling, said in a speech in London on Wednesday night, "The global economy is facing its biggest test in more than a decade," the Times of London reported.
The newspaper also noted that the Bank of England was prevented from taking more aggressive action on interest rates, as the Federal Reserve in the United States has done, because of signs of growing inflation in Britain.
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A sweeping consolidation of the airline industry—long sought by Wall Street and aviation chieftains for an industry that operates on razor-thin margins even in the best of times—may be about to begin.
Delta Air Lines and Northwest Airlines have made significant progress in merger talks and could announce a deal within the next two weeks, according to several reports. A merger would create the largest passenger airline in the world, vaulting over American Airlines.
And that could step up a mating dance within the rest of the industry, with United Airlines and Continental expected to combine as well.
For years, investors and industry officials have pointed to a need for airlines, with their high cost structures, to combine in order to cut expenses, eliminate overlapping routes, and take seats away, enabling them to raise fares.
The sharp climb in crude oil and jet fuel prices has lent the merger talks greater urgency. High jet fuel prices were largely responsible for Delta's $70 million loss in the fourth quarter. Even UAL, parent of United, which through a trading alliance with Morgan Stanley had strong gains from hedging energy prices in the fourth quarter, said that its jet fuel costs had risen 26 percent from the quarter a year earlier.
At the same, a number of airline labor contracts are coming up for negotiations.
Pardus Capital Management, an investment firm that is being advised by Gordon Bethune, a former chief executive of Continental Airlines, estimated that a merger of Delta and Northwest could result in annual cost savings of $1.5 billion a year, according to the New York Times. Pardus owns stakes in both Delta and UAL.
But nearly as important as the economic issues are the political ones. And it is not just the politics of soothing corporate egos. Where an airline's hub is based, where its planes fly, and how many jobs will be lost in a cost-cutting effort will receive intense scrutiny from lawmakers.
And that is why the airlines need to reach deals now—while the merger-friendly Bush administration is still in office.
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If there are any bright spots on the horizon for consumer spending, they will not be found in January's retail sales numbers.
Wal-Mart Stores, the world’s biggest retailer, said sales excluding gasoline at its stores open at least a year eked out just a 0.5 percent increase for the month. The gain fell well short of the company’s very modest forecast of growth of 2 percent. Including fuel, sales rose 0.9 percent in January.
The retailer cited unfavorable weather and lower-than-expected redemptions from gift cards. "Gift card redemptions were below expectations, and customers appear to be holding gift cards longer and using them more often for food and consumables rather than discretionary purchases," Wal-Mart said.
Macy's announcement on Wednesday that same-store sales were down 7.1 percent for January set the tone for today's monthly sales reports from the nation's retail chains.
The parent of Macy's and Bloomingdale's stores and the country's largest department store operator also said that it was eliminating 2,550 jobs, or about 1.4 percent of its workforce, as it consolidates its divisional central office organizations.
January is always a low-volume month for sales, but high food and fuel prices, a weak housing market, and recession fears sweeping the country will have provided extra reasons for consumers to keep their wallets closed this year.
Department stores and women's apparel for the most the part underperformed even their gloomy forecasts, though J.C. Penney reported a smaller-than-anticipated 1.9 percent decline thanks to a strong performance in its apparel categories.
Abercrombie & Fitch posted no change in same-store sales, while sales at American Eagle Outfitters slipped 7 percent. Limited Brands underperformed with an 8 percent decrease. Pacific Sunwear—which was expected to show a 1.2 percent rise in same-store sales—was off 7.4 percent for the month.
Gap, which was expected to decline 6.5 percent, saw stronger sales in the company's Banana Republic chain lead to a mere slip of 2 percent.
Saks' upmarket clientele do not seem to be curtailing their spending just yet, as the department store exceeded expectations with a 4.1 percent increase in same store sales; but Nordstrom's sales stumbled a full 6.6 percent as recession fears continue to climb into higher tax brackets.
As consumers look for ways to cut spending, discounters will continue to be the biggest winners. The overall category is expecting to have posted a 2.3 percent gain in January, according to Thomson Financial. Costco reported a 7 percent gain in same-store sales, surpassing the 6.6 percent estimate, while Target sales fell 1.1 percent
Poor January sales will serve as yet another reminder, alongside recent housing and job data, that the economy is slowing and perhaps sliding into a recession.
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