Kohl’s Swaps Jump After Retailer Cuts Forecast for 2012 Profit

The cost to guard against losses on the debt of Kohl’s Corp. rose the most in four weeks after the third-largest U.S. department-store company cut its fiscal 2012 profit forecast and said second-quarter sales fell.

Credit-default swaps tied to Menomonee Falls, Wisconsin-based Kohl’s rose 6.8 basis points to a mid-price of 181.6 basis points, the biggest increase since July 12, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Slowing economic growth has eroded U.S. corporate profits as the unemployment rate held above 8 percent for a 42nd month in July. While 72 percent of the 449 companies in the Standard & Poor’s 500 index that have reported earnings beat analysts’ profit estimates, only 41 percent topped on sales.

“Our overall economy is definitely in a slowing mode,” Robert Grimm, a trader at broker-dealer Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. Firms are “squeezing the last nickel out of everything, which doesn’t really bode well over the long run for our economy because we’re hiring fewer people. We’re not in an expansion mode.”

Kohl’s said today that profit excluding certain items will be as much as $4.65 a share in the year ending in January, down from a previous projection of $4.75, according to a statement from the company. Second-quarter sales dropped 1 percent to $4.21 billion, the company said. The company’s sales trail Sears Holdings Corp. and Macy’s Inc. among U.S. department store chains, Bloomberg Industries data shows.

Swaps Index

A gauge of U.S. corporate debt risk was little changed as U.S. jobless claims unexpectedly dropped last week, with the Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, increasing 0.2 basis point to a mid-price of 103 basis points, according to prices compiled by Bloomberg.

The measure, which hasn’t shifted more than 1 basis point in either direction any day this week, is hovering at about a three-month low. Credit swaps typically rise as investor confidence deteriorates and fall as it improves.

“Things are trading in what I call a no-news vacuum, which is actually good because most of the news you could get right now is bad news -- Europe blowing up, something bad out of China, Italy, France, Spain, Germany, Greece,” Marc Gross, a money manager at RS Investments in New York, said in a telephone interview. “The market’s natural movement in the absence of bad news is to go a little tighter, and that’s what it’s been doing.”

Unemployment Claims

Labor Department data today showed U.S. applications for unemployment benefits dropped by 6,000 in the week ended Aug. 4 to 361,000. Economists had called for an increase to 370,000 jobless claims last week, according to the median estimate in a Bloomberg News survey.

The jobless claims data probably will not sway the Fed’s decision on new stimulus measures, according to Gross.

“The Fed has been holding off at this point,” he said. The central bank will pursue growth-boosting measures if “they feel like they need to step in and really stimulate the U.S. economy to make sure it doesn’t fall prey to the contagion” from Europe.

Contracts tied to Windstream Corp., a telecommunications provider, also jumped, rising 14.6 basis points to 523.2, Bloomberg prices show. Second-quarter net income fell 44 percent to $54.2 million as capital spending rose to $276 million, the Little Rock, Arkansas-based company said today in a statement.

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, climbed 3.7 basis points to a mid-price of 551.7 basis points.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 1.4 to 147.5.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.


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