It has been a tough week if you have anything to do with the world of retail. Just about every company that opened its books to the Street this week got punished for the act.

The list of “disappointing” reports is getting longer by the day.

Lowes (NYSE:LOW) kicked off the week with scary-low figures. Home Depot (NYSE:HD) beat the Street but still got punished after a slew of less-than-stellar economic reports.

Outside of the home-centric sector, shares of Liz Claiborne (NYSE:LIZ) plummeted on Monday after the Standard and Poor’s cut its rating on the unprofitable retailer to B, a two-notch downgrade. The company’s rating now stands five levels below investment grade.

High-end retailer Abercrombie & Fitch (NYSE:ANF) is also deep in negative territory for the week after succumbing to industry pressure and a downgrade from Susquehanna.

Obviously, the market believes a business model that focuses on trendy, expensive clothing is not a place to be during a deep, protracted recession.

And of course, there is Eddie Lampert and his Sears Holding (NYSE:SHLD). While the store may be the hideout of choice for any enslaved husband while his wife shops for new bed linens, fewer of us our purchasing the store’s products.

Shares of the company are down by double-digit proportions today after Sears announced it lost $94 million over the past three months. It is tough to make a profit when revenues are plunging by 10% (12.5 for comparable-store sales).

Essentials only investing

If consumers are not spending their money at the high-end stores or paying to fix up their house, where are they spending it? After all, there is no choice but to spend money on the essentials at the very least.

The key is understanding which retailers are stocked up on the essentials. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are the first to come to mind.

And guess what… shares of Target are up on the week and Wal-Mart is just slightly in negative territory.

One of the most appealing sectors of the retail market is the ultra-cheap (in price and quality) “dollar store” segment. As the market breaks out its magnifying glass in an attempt to find any signs of so-called green shoots, shares of company’s like Family Dollar (NYSE:FDO) and 99 Cents Only (NYSE:NDN) have dropped from their recent highs.

The discounting is a mistake. Today’s unexpected surge in first-time jobless claims (a jump of 15,000 claims) proves tens of thousands of American consumers are still at risk of losing their jobs. That means they won’t be shelling out their reserves any time soon.

Instead, they will continue their spendthrift shopping.

While there are sectors much more likely to hand you sizeable profits in the near future, no portfolio is healthy unless it is properly diversified.

If you need exposure to the nation’s retail market, look at the big guys like Wal-Mart and Target or the small discount retailers where a buck will buy you just about anything… but a share of the company.

Finally, if you have been playing this sector or have your eye on any big movers, your fellow readers would love to hear about it. Drop us a line and let us know your thoughts.

Source: Dangerous Retail: The Sector That Refuses to Recover

Take Fred’s, Inc. (NASDAQ:FRED), for instance, a deep-discount retailer with 600 stores in 15 southeastern states. Investors have punished the stock, sending it to levels that value it less than half of its competitors.

It’s differentiator is serving low-income customers in rural and inner-city neighborhoods, far from Target and Walmart stores. Many customers prefer the ease of access to Fred’s stores, as opposed to having to drive to the nearest big box retailer.

With annual sales of $1.8 billion, its merchandise and business model is similar to that of its two biggest competitors: Dollar Tree (NASDAQ:DLTR) and Family Dollar Stores, Inc.(NYSE:FDO).

But that’s where the similarities end. In the past year, Fred’s shares have fallen nearly 15% while its competitors have each risen over 20%. The reason? The company was just plodding along, languishing under an anemic, lethargic management.

Back in February, Fred’s Board of Directors decided to make a change, and it brought in a new CEO, who’s been generating quite a lot of buzz since his arrival.

Bruce Efrid – an industry veteran – hasn’t wasted any time: he’s closed stores that were underperforming, gave the remaining ones a new look and feel, and remade company inventory procedures.

Efrid was just what the doctor ordered: Fred’s has strongly outperformed its peers since his appointment. Even so, the stock still looks like a relative bargain. Shares trade at 1.4 times book value, while Dollar Tree and Family Dollar Stores are both twice that, suggesting Fred’s shares are undervalued by 50% compared to its peers.

Fred’s has very little debt and a nice cash pile of $46 million. Efrid’s confident his changes can increase top line sales by 10%. He also is gunning for a corresponding increase in margins from their current 1.8% to 3%.

If he’s successful, Fred’s shares could easily pop by 50-75% in the coming months, handing investors who take a position now a nice Christmas present.

Source: Fred’s, Inc. (Nasdaq: FRED): Stock of the Day

But don’t expect that to last. A slump in consumer spending and soaring unemployment could both pose a significant threat to retailers going into the 2009 holiday season.

The U.S. unemployment rate hit 9.5% in June and could eclipse 10% by the end of the year, sending the economy into a “jobless recovery.”

In a speech to Congress on May 9, Federal Reserve Chairman Ben Bernanke cited a lack of consumer spending could serve as a constraint on hiring. This could create a paradoxical effect as employment obviously plays a key role in consumers’ spending habits.

Even for the employed, the lessons learned from the worst economic downturn since the Great Depression will resonate with consumers. That has already been evidenced by the U.S. savings rate, which has climbed above 4% for the first time in more than a decade.

In addition to taking money out of the hands of potential customers, soaring unemployment could lead to higher lending standards. As unemployment rises, so too will credit defaults and the cost of credit will increase accordingly.

In the past, consumers have counted on attractive financing promotions for the purchase of big-ticket items such as high-definition televisions and kitchen appliances. But that won’t be the case with tighter credit

“Consumers were also able to spend more because of the easy availability of credit, most notably through mortgage equity withdrawal and they responded by buying more items,” said Deloitte Strategic Advisor Richard Hyman.  “These conditions underpinned retail growth for the past 10 years but have now disappeared. However, it’s worse than that. They will clearly not return once the recession is over.”

Of course, tighter credit isn’t just a problem for consumers.

A Brick & Mortar Inventory Crunch for the Holidays?

The potential bankruptcy of commercial lender CIT Group Inc. (NYSE:CIT) could be a major tipping point for businesses that rely heavily on credit. Vendors for retail giants such as Wal-Mart Stores Inc. (NYSE:WMT) and Target Corp. (NYSE: TGT) rely on CIT for factoring – an old form of finance in which the lender pays the vendor for its accounts receivable. If the retailer fails to pay for the goods, the lender assumes the responsibility to pay the vendor.

“Right now our industry is preparing for the fall and winter season,” Kevin M. Burke, president and chief executive of the American Apparel and Footwear Association told The New York Times. “A lot of these orders are going to come to a grinding halt if there is no capital.”
A CIT bankruptcy would be a “double whammy” to stores whose suppliers have already cut the amount of merchandise they are making to better align inventory with the drop in consumer spending, said Burke. If those suppliers lose their sole source of capital, what little merchandise retailers originally ordered might never arrive.
The timing of CIT’s woes is “terrible,” Al Ferrara, a partner in retail and consumer products business of consulting firm BDO Seidman LLC said in a Reuters interview. “Retailers now are basically gearing up for the back-to-school and the fall season.”
An inventory crunch at brick & mortar retailers would give a competitive advantage to online retailers, which have more flexibility and already account for about a third of holiday retail sales.

For brick & mortar retail businesses, managing inventories during the holiday season is a delicate balancing act in which managers must walk a fine line between over- and under-ordering stock.

If retailers overstock, they will be forced to offer even steeper post-holiday discounts than they would like in a desperate bid to unload inventory. But if they don’t stock enough merchandise to meet demand they risk not only missing out on sales, but driving potential customers to online retailers, such as Amazon.com Inc. (Nasdaq: AMZN) whose warehouses are not restricted by the display racks and checkout counters found in brick & mortar stores.

This doesn’t mean brick & mortar retailers will sit idly by this holiday season as Amazon siphons off customers via the Internet. All of the nation’s biggest retail players have their own websites too, but the gap between Amazon and the No. 2 online retailer, Staples Inc. (Nasdaq:SPLS) is huge: Amazon generated $19.2 billion in online revenue in 2008, while Staples generated less than half of that in the same year: $7.7 billion.

While half of the top 10 online revenue generators came from traditional stores, notably absent were brick & mortar discount giants Wal-Mart and Target.

And even Best Buy Co. Inc. (NYSE: BBY), which displays in-store signage promoting an “expanded assortment” of products online for consumers who did not find what they were looking for in the store, came in at just No. 10 on the list.

Shopping for a Silver Lining

While a continued slump in consumer spending would benefit no one, certain retailers are better positioned than others, and could ultimately use adverse economic conditions to turn a profit.

For instance, the aforementioned Amazon.com, which is the world’s largest online retailer, could see a sizeable boost in its web traffic as consumers comb the Internet for bargains.

Companies that have a consumer-friendly economical brand, such as Wal-Mart, will also benefit.

Wal-Mart’s “Save Money, Live Better” slogan is already resonating with consumers, and The No. 1 retailer in the world has gone to great lengths to cement its reputation as the affordable choice for shoppers.

The company has set up a “Save Money, Live Better” website (complete with testimonials of what people are doing with the money they save by shopping at Wal-Mart) and a “Live Better Index,” which includes an interactive map of the United States to show how much money people have saved in each state by shopping at Wal-Mart.

The result of Wal-Mart’s efforts? Holiday sales grew 7% last year, according to the Advertising Research Foundation.

Similarly, same-store sales are consistently rising at discount houses such as Family Dollar Stores Inc. (NYSE: FDO), and Ross Stores Inc. (Nasdaq: ROST), the latter of which has the “Dress for Less” sloganright under its name at every store. On the flip side, stores like Macy’s Inc. (NYSE: M) and Saks Inc. (NYSE: SKS) have reported consistent declines in same-store sales over the past few quarters.

“Needs-driven spending will gravitate towards retailers able to tick the most important consumer boxes like price and convenience,” said Deloitte’s Hyman. “Although it will remain the engine of retail growth, wants-driven spending will slow and consumers will be much more choosy.”

Source: Retail Sector Faces Uphill Climb in 2009

Source: Investment News Briefs Thursday, July 9, 2009

My day did not get off to a good start. After rolling out of bed, my first stop is always the coffee pot. Then, I grab the newspaper and flick on the TV.

As usual, my newspaper (at least I hoped it was my newspaper) was tossed on my neighbor’s driveway, but when I tried to tune into the local news, the screen was black. Instead of waking up to my favorite weather girl, I was forced to listen to the pre-dawn silence.

While my troubles were trivial and caused by an overnight ice storm, the problems throughout the cable that provides my morning media fix industry continue to brew. For proof, just look at the nation’s largest media conglomerate, Time Warner (NYSE:TWX). Its share price is down by over 6% today.

Thanks in part to a $15 billion write-down of its cable spin-off, Time Warner Cable (NYSE:TWC), the company is expected to post a loss for all of 2008. It is just the first of what is sure to be many signs of an ugly earnings season for the industry.

One of the company’s larger competitors took the opportunity to leak some of its own bad news in the hopes investors would be distracted by the news from Time Warner.

A Comcast (NYSE:CMCSA) insider said the company would have to cut its balance sheet to reflect the losses in its Clearwire stake, which is down by as much as 60% over the past 12 months. Fortunately, losing out on the wireless Internet venture is far from a surprise. But the information reinforces the notion the upcoming earnings season is going to hurt.

Trouble ahead

Of course, the media industry is not alone. Intel (NASDAQ:INTC) is also dragging on the equities market today as it tells investors to expect worse-than-expected fourth-quarter results. The chipmaker now expects revenues to show a 23% drop from this time last year, to about $8.2 billion.

The news from economic-bellwether Alcoa (NYSE:AA) is just as bleak, especially if you are one of the 15,000 employees about to get a pink slip. By cutting its capital spending in half, the company’s problems are certain to spread across the broad economy.

So why I am writing about this collection of bad news? I do it in hopes that you realize the switching of our calendar did not suddenly fix the nation’s dire economic situation.

The last few trading sessions have been filled with exuberant trades. Stocks that investors dumped like mad only two weeks ago were surging in value. The turnaround allowed smart traders to bag some sizeable gains, but I caution you to do your homework before entering new positions with the Dow above 9,000.

No stimulus big enough

Even when Obama dumps a trillion dollars of taxpayer money into the economy, all will not be grand. Hundreds of thousands of consumers have recently been fired from their jobs. Consumer spending will not rebound to its historic level anytime soon. Obama may be able to stabilize the system, but a rapid rebound is nothing but a pipe dream.

The equities market will remain range bound through the next earnings season. There will be opportunities to buy on dips and sell on surges, but miss the timing and you could be hurt.

As earnings season unravels, continue to look towards the safer, consumer favorites like McDonalds (NYSE:MCD) and Wal-Mart (NYSE:WMT). Remember, one of the few bright spots today was Family Dollar (NYSE:FDO).

The discounter reported a 14% jump in quarterly earnings and boosted its fiscal-year forecast. Best of all, its shares rose by more than 10%. It is proof that there is still plenty of money to be made if you pay attention.

The next few weeks are going to be critical. Volatility will rise and earnings surprises are going to rule the market. Be prepared for the action and you will survive unscathed.

Source: Be prepared for horrid quarterly reports

• More than $48 billion was withdrawn from emerging market funds in 2008, with the largest chucks of change pulled from funds tracking Asia, according to EPFR Global. An emerging markets bellwether, the MSCI Emerging Markets Index, dropped 54% last year, its worst performance since it was created in 1987, Bloomberg reported.

• Bank of America Corp. (BAC) sold 5.62 billion of its China Construction Bank Corp. shares, raising $2.83 billion. Based on the Construction Bank’s IPO price, Bank of America realized a profit of about $1.13 billion, Reuters reported.

• Bargain retailer Family Dollar Stores Inc. (FDO) closed its fiscal fourth quarter with a 14% rise in profit and raised its annual forecast, Reuters reported. The compact expects to earn $1.63 to $1.81 a share, up from $1.58 to $1.78, in its fiscal year ending August 29. It also expects sales, same-store sales and total sales to rise as well.

• Orbitz Worldwide, Inc. (OWW), an online travel agency, announced a new president and chief executive, and that it would institute more measures to save an additional $20 to $25 million annually. Barney Harford will replace Steve Barhart as CEO, The Wall Street Journal reported.

• Russia cut off all gas supplies to Europe through Ukraine yesterday (Wednesday) leaving more than a dozen countries struggling with dwindling energy supplies in the depths of winter, The Associated Press reported. “It is unacceptable that the EU gas supply security is taken hostage to negotiations between Russia and Ukraine,” said European Union spokeswoman Pia Ahrenkilde Hansen.

• Monsanto Co. (MON), the world’s largest producer of genetically modified seeds, closed up more than 17% yesterday (Wednesday) after the company reported that first-quarter profit more than doubled. Revenue jumped 29% to $2.65 billion from $2.05 billion.

• India’s Sun Pharmaceuticals Industries Ltd. said yesterday (Wednesday) that it’s secured U.S. Food & Drug Administration approval to sell a generic tablet version of the painkiller Vicodin. The U.S. market for branded and generic versions of that drug is worth $540 million. Sun has also received approval for generic versions of cholesterol-fighting Lopid, for Aredia, which is used to treat high blood calcium, and for the anti-allergent drug Phenargen, in multiple strengths, Reuters reported.

• Light, sweet crude for February delivery yesterday (Wednesday) tumbled 12%, or $5.95, to settle at $42.63 a barrel on the New York Mercantile Exchange. The drop was the mainly the result of a report from the Energy Information Administration said U.S. inventories of commercial crude inventories rose by 6.7 million barrels.

Source: Global Investing Roundups Thursday, January 8th, 2009

This from Today’s Financial News:

It is tough for many investors to admit, but marketers rule Wall Street. On most days, it is not true fundamentals that rule the Dow. It is the change in the way we perceive a company’s valuation that makes a stock go up or do.

If marketers do their job, share price rises. If they fail, shareholders feel the pain.

Investors rarely weigh a company’s marketing talent in their decision-making process. It is a flaw that could cost them dearly. In many cases, a firm’s marketing team has more to do with moves in its valuation than do changes on its income statement.

A perfect example is Under Armour (NYSE:UA). The company has one of the best marketing strategies in all of business, but even the most talented salesman cannot sell something to a person with no money.

Blinded by the facts

Look around Wall Street. Best Buy (NYSE:BBY) told us yesterday it has witnessed a “seismic” shift in consumer spending. Macy’s (NYSE:M) posted a horrid third-quarter earnings report. And Linens ‘n Things is headed to the history books.

On the other hand, Goodwill Industries reports sales are up by 7%. Ultra-discount stores like 99 Cents Only (NYSE:NDN) and Family Dollar (NYSE:FDO) are seeing their share price soar. Wal-Mart (NYSE:WMT) is the only major retailer with even a semblance of good news.

The only places Americans are spending their money is at the cheapest store they can find.

So what in the world continues to make investors believe Under Armour and its expensive discretionary clothing lineup will maintain historic sales levels?

Let’s face it. The American economy is in a deep recession. The folks that were buying Under Armour’s over-priced and trendy gear are now the ones that have lost their jobs and cannot afford their homes.

The last time I recommended betting against the company, we raked in gains of over 70% in just five days. With share price above $21 today, it is time to do it again.

Here are some facts to prove my point:

-    U.S. retailers recorded their worst October ever, with overall same-store sales dropping by 0.9%.
-    Consumer confidence is at its lowest levels ever.
-    Under Armour continues to operate with negative cash flow.
-    Maverick Capital, which owned over 7% of Under Armour, just unloaded its entire position.
-    The number of shares short has grown to 36.5%.

With figures like those, it is hard to believe investors are willing to maintain the company’s price-to-earnings ratio of 23. It is foolish to think the company will maintain a sales pace anywhere close to levels it has enjoyed lately.

Even the company’s executives know a rough road is ahead. They just lowered their operating income estimates to a range of $97.5 million to $104.5 million. They previously announced expectations of $104.5 million to $105.5 million.

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With consumers basically locking their wallets and throwing away the key, even the new estimates are far too high. With consumer spending at the retail level dropping by nearly one percent, investors should not believe Under Armour will grow its sales by 24%.

Under Armour’s brand is one of the strongest in the industry, but a brand can only take you so far. Once a company matures and enters its slow-growth phase, fundamentals take over and investors take a dramatic hit.

Under Armour’s overly loyal investors have had a tough time realizing this time-tested fact. They will suffer as share price drops towards $15 after the next earnings release.

Unless you take a short position, steer clear of this falling star.

Source: Under Armour (NYSE:UA) Cannot Hide From A Recession

Stores like Whole Foods (NASDAQ:WFMI) and Trader Joes are watching their customers head to low-cost competitors like Wal-Mart (NYSE:WMT) and Safeway (NYSE:SWY).

It is no surprise to see an ultra-cheap retailer like 99 Cents Only Stores (NYSE:NDN) climb its way to the sole spot on the list of companies reaching 52-week highs today. The global economic crisis has actually been the best thing to happen to the company’s share price in a long time.

The rationale behind the positive run is obvious. When the economy is in the gutter, consumers have less money to spend on the things they need. So they go to the cheapest retailer they can find.

A wino’s delight

When we need a toothbrush, why spend $4.99 on a fancy name-brand brush when you can get one for less than a buck?

Or how about cleaning supplies? Or stationary? 99 Cents Only even sells bottles of wine at its namesake prices.

Of course, 99 Cents Only is not the only ultra-cheap retailer doing well these days. Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) are both multi-billion dollar companies making their investors money over the past few months.

While these companies may appear as an oasis in a desert of losses, investors need to use caution. All three stocks have gotten a lot of attention lately and are becoming overpriced.

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—————-

For example, after more than doubling its share price since July, 99 Cents Only has a price-to-forecasted-earnings ratio of over 30. If the next earnings report misses expectations by only a small margin, shareholders could be in for a sizeable drop.

Granted, sales have increased over the past three months and are likely to surge even higher during this quarter, but the competition is catching up. Traditional retailers, which are often slow to react to economic waves, are finally making moves to target consumers during a recession.

Eye-catching sales and incentives are drawing cash-conscious consumers back into retail stores. Beyond that, ultra-discounters do not offer all the products consumers require. They will still head to the more-expensive “big box” stores for their needs.

Consumers are changing their habits, leading savvy investors to follow. Track the trends and invest appropriately and you could be one of the traders celebrating a 52-week high today.

Source: Cheap date: 99 Cents Only Store (NYSE:NDN) hits 52-week high

As I was doing my usual bout of “marathon weekend reading” I came across an interesting piece on Warren Buffett’s recent trip overseas. For those who don’t keep tabs on the “Oracle,” Buffett has been touring Europe for the last week or so in an effort to promote Berkshire Hathaway on the other side of the pond.

Reason being, Buffett’s looking to start buying up “family owned, privately held” businesses on the cheap overseas.

It’s difficult for him to find “Buffett-sized” deals in the U.S. anymore, so it only makes sense that he’d look for greener pastures elsewhere. However, Buffett also gave another reason for why he might want to start placing his bets in other parts of the world…

My friends and I have been debating the “recession” topic for a while now: Are we currently in one? Will we run into one this year or next? What will the effects be?

But when I read that Buffett thinks the U.S. is already in a recession and it will be “longer” and “deeper” than any we’ve seen for quite some time, I definitely began to think less about “what if we go into a recession” and more along the lines of “What should I do with my money now?”

There are dozens of questions (and even more answers) on TickerHound about which sectors hold up the best during a bear market, but a recent question is what inspired me to write today’s article:

“Will certain retailers do well during a recession?”

Traditionally, retailers don’t do well at all during a downturn — consumers start to curtail their discretionary spending as times get tougher, and items like clothes, cars and all the other little “extras” aren’t ranked very high on the “purchasing priority list.” However, if you really think about it, there are some retailers that “should” do rather well during a protracted downturn.

The fact of the matter is, people aren’t going to completely stop buying the little extras, they’ll just be more selective about where they buy them.

While I’ve come a long way since my childhood, I still remember what it was like when times were tough around my house. We were a blue collar household, three kids, my parents were always hustling at the end of each month to make ends meet — so when one of us needed new clothes, school supplies, etc, we’d take a trip to the closest discount store and bargain hunt.

Without doing a survey of every household in the U.S., I’d bet that when times are tough and a recession is imminent, most of America behaves the same way. In fact, if you take a look at a 10-year chart for some of the discount retailers, you’ll immediately see that their stocks do better when the market is doing worse!

So here are a few discount retailers that I think are worth digging into if you’re looking for some “Retailers for a Recession”:

1. Dollar Tree (DLTR: NASDAQ)

• Market Cap: $2.99 Billion
• P/E: 15.67
• Dividend: N/A
• 12 Month Price Gain (Loss)%: (19%)

2. Family Dollar Stores (FDO: NYSE)

• Market Cap: $2.76 Billion
• P/E: 13.5
• Dividend: 2.5%
• 12 Month Price Gain (Loss)%: (40%)

3. Fred’s (FRED: NASDAQ)

• Market Cap: $438.65 million
• P/E: 41.13
• Dividend: 0.7%
• 12 Month Price Gain (Loss)%: (25%)

4. 99 Cents Only Stores (NDN: NYSE)

• Market Cap: $538 million
• P/E: 85
• Dividend: N/A
• 12 Month Price Gain (Loss)%: (46%)
  ]]> http://www.contrarianprofits.com/articles/as-buffett-places-bets-abroad-your-profits-may-still-be-in-the-us/2672/feed 0 http://www.contrarianprofits.com/articles/credit-where-credit-is-due/1408 http://www.contrarianprofits.com/articles/credit-where-credit-is-due/1408#comments Fri, 18 Apr 2008 20:33:14 +0000 Ann Sosnowski http://www.contrarianprofits.com/articles/credit-where-credit-is-due/ “The rise in consumer credit delinquencies is consistent with a rapidly slowing economy. Stress in the housing market still dominates the story, but it’s a broader tale.” James Chessen, ABA Chief Economist.

  Wachovia Corp. (WB:NYSE), one of the largest banks in America, reported a large “unexpected loss” recently. And the main problem? Bad California home loans.

  I hope they were joking when they used the word “unexpected.” Unless you’ve been living under a rock, you know that the housing earthquake is still sending out pockets of seismic activity.

  As Soon As Possible

  Like a post-modern movie plot, America’s economic big picture is deeper and darker than most realize. It’s only going to get worse.

  The IMF (International Monetary Fund) thinks the credit crisis could cost…

  ]]> “The rise in consumer credit delinquencies is consistent with a rapidly slowing economy. Stress in the housing market still dominates the story, but it’s a broader tale.” James Chessen, ABA Chief Economist.

  Wachovia Corp. (WB:NYSE), one of the largest banks in America, reported a large “unexpected loss” recently. And the main problem? Bad California home loans.

  I hope they were joking when they used the word “unexpected.” Unless you’ve been living under a rock, you know that the housing earthquake is still sending out pockets of seismic activity.

  As Soon As Possible

  Like a post-modern movie plot, America’s economic big picture is deeper and darker than most realize. It’s only going to get worse.

  The IMF (International Monetary Fund) thinks the credit crisis could cost up to $1 trillion. Banks have already written down nearly $250 billion in assets to date.

  The IMF bluntly cautions banks to keep taking write-downs “as soon as reasonable estimates of their size can be established.”

  In other words: Nip it in the bud ASAP.

  The Consumer’s Movie Role

  The bank write-downs include lots of consumer debt gone bad. You can blame the banks for giving out frivolous loans, or you can blame individuals for biting off more than they can chew. But regardless of who’s to blame, the American Bankers Association reports that the bad consumer debt problem is the worst it’s been since 1992.

  Overdue bank-card accounts have increased 20 basis points to 4.38% in the recent quarter. Late payments for car loans (which count for two-thirds of fixed balance consumer loans) are on the top of the list. And exposed firms, like American Express Company (AXP:NYSE) and Capital One Financial Corp. (COF:NYSE), have doubled their cash reserves for bad debt.

  Paying credit card bills is taking a back seat to necessities like gas and food and heat. While wages have increased 3.6%, prices have jumped more than 4% over the past year.

  Unemployment isn’t helping, either. In March, 80,000 jobs were cut, continuing a trend of consecutive job losses.

  According to Merrill Lynch, U.S. families now spend more on debt service than they spend on food (even as food is getting more expensive).

  Unemployment, credit crunch, housing crisis, inflation, high gas prices… These all lead to one dirty little word: recession. The evidence is hard to dispute.

  Resisting Temptation

  Consumers are now faced with the challenge of saving as much as possible and spending more frugally. As a result, they are visiting thrift and discount stores more often, and generally looking for ways to cut back.

  Starbucks, for example, is aware that people won’t keep paying $4 for a specialty cup of joe. Instead they are switching to lower cost competitors like McDonald’s and Dunkin Donuts. So Starbucks is focusing on making its regular brew better, and has even talked about bringing out a $1 cup of coffee to compete.

  Meanwhile, discount store Family Dollar (FDO:NYSE) is “adjusting to its shoppers’ greater reliance on basics during an economic downturn” by focusing on foodstuffs and getting rid of some of its fashion merchandise.

  *** Visa’s $18 Billion Market Will Launch IPO Returns to New HighsVisa finally went public… and now is the perfect time to attack the IPO market! The long-awaited Visa debut is quietly, spawning a MASSIVE profit opportunity for select investors. In fact, right now, there is a Secret IPO Fund quietly making one tiny group of investors into millionaires. For a limited time you could get in on this IPO action and potentially make at least 267% gains in the next 12 months. Read about the Secret IPO Fund here and find out how it made millionaires out of investors with MasterCard’s IPO.

  The bottom line is, monetary constraint is here to stay, at least for a while… including resisting the temptation to make frivolous purchases.

  Building a Recession-Proof Portfolio

  At Diligent Investor, we’re well aware of the perils of the current market. Many investors’ hopes have been dashed. And some even think it might be worth just pulling out all their money and waiting.

  In our opinion, the downturn is far from over. All these factors are affecting the market. The credit crunch and the dollar crisis have yet to reach their apex.

  At Diligent, our top strategy is to build a recession-proof portfolio — one full of companies that have solutions to the country’s economic woes. For instance, last month we looked at a low-priced discount retailer that made it through the last recession with triple-digit gains, even as the rest of the market tanked.

  Holding a position in a rainy-day retailer is one way we’re combating the credit and cash flow crunch. Now I’d like to tell you about another…

  From Consumers to Banks

  Individual credit defaults add up to countless billions. If consumers can’t pay back the loans, the banks lose money. So who is going to help the banks?

  When banks announce write-downs, they are admitting they don’t plan on receiving any payment for the loans gone bad. Banks are shrugging their shoulders, claiming the losses on taxes and getting them out of sight.

  So where do all those writed-owns go? What happens to all that bad debt?

  A big chunk of it goes straight into the hands of a company I’ve profiled in the latest Diligent Investor issue.

  This company is a sort of life preserver for the banks. The company buys debt portfolios at a serious discount — often pennies on the dollar — to take them off the banks’ hands. Then they use an elite force of call centers to try to collect full or partial payments on the debts over the course of seven years. The company often earns up to three times what it paid for the defaulted debt. (Not a bad rate of return.)

  Saving the Banks’ Hides

  With this recommendation, we’re giving credit where credit is truly due: to a company that will safely and quietly absorb the banks’ big problems, and profit nicely while doing so.

  This debt company is an integral building block for a recession-proof portfolio… and will end up a very good long-term investment. It will carve more and more profits from more and more bad debt over time.

  I just released this new recommendation to Diligent Investor subscribers. So if you choose to join us now, you’ll be on the road to having your own recession-proof portfolio with this rock-solid debt solutions company.

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