New York Post ran an article alleging CIT ( CIT) began restricting credit to vendors selling to J.C. Penney. CIT offers J.C. Penney vendors credit through a process called "factoring." Factoring works this way: A vendor sells to J.C. Penney and instead of billing J.C. Penney and waiting 30 or more days to get paid, it receives maybe 98% of the invoiced amount from CIT right away. CIT invoices J.C. Penney for the merchandise, waits (and hopes) to get paid and profits from the difference. If CIT believes J.C. Penney may not pay its bills, CIT will inform vendors they will not receive immediate payment and vendors will stop shipping merchandise. J.C. Penney can't sell from an empty apple cart, and the situation can spiral into a fast self-feeding panic among vendors. J.C. Penney was quick to deny the rumor and stated "that a news report which appeared yesterday is untrue and that it has been told so directly by CIT, the subject of that report." It's standard procedure for companies to "deny, deny, deny" problems; otherwise, the wheels can quickly fall off the cart. In J.C. Penney's case, it's more than reasonable to believe the company's rebuttal because unless it is burning through cash at a much greater rate than anyone would guess possible, it has more than enough credit lines available to pay the bills.
The financials may look ugly, but I don't believe the New York Post's sources have a lot of credibility. Unfortunately for investors, J.C. Penney has bigger problems than short-term liquidity issues. Failing companies have a hard time recruiting quality leaders. After long delays in finding a marketing executive, J.C. Penney finally just announced Debra Berman is the new chief marketing officer. Berman comes from Kraft Foods ( KRFT), and Tuesday's stock price drop is Wall Street announcing its displeasure with J.C. Penney's hire. Recently, shares fell nearly 5% to around $13. Investors are concerned J.C. Penney's financial troubles may be more dire than previously known. The reasoning is that Berman "isn't the right person for the job, but no one more qualified would take the job." Berman will have her chance to prove skeptics wrong but for now, the market is betting her marketing skill set won't transfer over well. What can you do to protect your portfolio? As I mentioned above, expect further share price pressure in the near term, but if you held this long it's probably not the best time to throw in the towel. Once the market figures out vendor credits are not turned off and merchandise is flowing, we can expect the shares to stabilize. Shareholders can also use the increased volatility to receive greater premiums from selling covered calls. For example, the $20 strike November calls are trading for about 30 cents. If you're going to hold your shares regardless, you might as well sell premium and get paid to wait it out. You will lower your overall risk, and if the shares do climb above the strike, simply buy the options back with your stock gains. At the time of publication the author had no position in any of the stocks mentioned. Follow @RobertWeinstein This article was written by an independent contributor, separate from TheStreet's regular news coverage.