This from Investor’s Daily Edge:

Economists say this recession will last till June 2009 at least. Conventional wisdom says it’s time to buy defensive stocks—utilities, consumer staples, booze, healthy banks, drug companies, and defense contractors.

I’ve been walking around with my eyes open, and I don’t think so.

Last week, Andy and I went to the bank then stopped at Starbucks. There were no lines in the bank. We had to wait 10 minutes to get to the counter in Starbucks (NYSE:SBUX).

The legendary Howard Schultz is back, and so is Starbucks.

Schultz was the person who convinced the original coffee-roasting partners to expand in the 1980s when he visited them to find out why they were buying so many of the Hammerplast Swedish drip coffee makers he sold. They hired him for marketing help. But when Schultz’s best new idea was to open a coffee bar, they wouldn’t do it. Schultz quit, started his own coffee bar, and within a few years, bought the roasters out for $3.8 million and called it Starbucks.

He’s the genius who took Starbucks from one very cool Seattle store to 10,000 around the world.

If you missed that wave, catch its revival now.

This stock may be 76% off its 2006 high of $40, but it’s on the way back with Schultz at the helm.

Starbucks has been one of those growth stories that kept fooling people. At first, it was so hot everyone agreed it was going places. Cities were complaining if they didn’t have a Starbucks yet. Then it appeared to be in every town it could conquer.

So much for hot growth, though it was still a fine business, the analysts thought.

Except Starbucks’ Schultz knew better. Under Schultz’ guidance, Starbucks started putting two, three, four stores in a town…

And that seemed likely to end when the analysts noted there were corners with Starbucks stores facing each other.  Growth would slow.

Wrong again. Starbucks began sidling into the crevices, into grocery stores, bookstores, airports and little kiosks within other businesses. Growth kept rolling.

And it began going international.

Schultz, who founded Starbucks and embodied everything it stood for, retired as CEO in 2005.

But eventually growth did slow. Starbucks seemed to be courting trouble. Some of the stores weren’t selling well. In the meantime, Green Mountain (GMCR) had moved into similar niche locations and done much better at cornering the convenience store/gas station market. Dunkin’ Donuts expanded its coffee offerings. Peet’s started taking equal shares of grocery store shelf space.

Last January, Schultz un-retired. The first thing he set out to do was to restore the company’s feel. To him, Starbucks is not about coffee, it’s about the feeling of having coffee. It bothered him that when you walk into a Starbucks today, it no longer smells good. Schultz moved quickly to shut down stores that weren’t selling enough. He set out to ramp up international sales.

And he vowed to make Starbucks a real coffee place again. Grinding beans in the stores is to make a comeback. And now there’s Clover…

Clover is a special brewing system. The Clover choice costs even more than regular high-priced Starbucks. Another new system will improve on the espresso, grinding the beans for each cup, as they should be.

I expect Starbucks to recover its momentum this year. The international expansion is particularly promising. Even Starbucks-besotted Americans are pikers among international coffee drinkers.

Americans consume just over 4 kilograms (8.8 pounds) of coffee beans per person a year. The Scandinavians drink two to nearly three times as much, with Finland leading the way. The Swiss, Germans, Dutch, French, Austrians, Belgians and Italians drink 5 to 6 kilograms to our 4. Plus, Europe is like the U.S. pre-Starbucks. Coffee is sold locally, in restaurants and independent cafes.

Source: Wikipedia, consumption in kilograms per capita

So, yes, there’s a global recession on. Yes, premium coffee is a luxury compared to the can of Folgers in the supermarket. But think booze…

Spirits and beer sales usually hold up well in bad economies because they are modest luxuries. It’s not that everyone is suddenly a drunk (though some are to be sure). Rather, most drinkers consider that cold beer an affordable treat. A cup of Starbucks fills the same role in the non-alcoholic beverage world.

Will Starbucks really be the absolute best stock of 2009? Nah. Probably not. That one will probably be an out of the blue surprise. But Starbucks will be one of the great ones. I’m expecting the shares to rise 100% or more in the next year and triple in two years.

Source: A Cheap Luxury for a Dreary Economy

The “next big thing” our friends at The Daily Reckoning recently predicted, “will be downsizing, cutting back, making do. Barely on the radar screen now, thrift is coming into focus more clearly day by day. So far, people are a bit embarrassed about it…a bit ashamed that they have had to cut back. But soon, it will be popular…fashionable…and, finally, almost obligatory.”

This new austerity craze — if/as/when it arrives — will impose hardships on many American companies. But a select few might actually benefit.

The cause(s) of downsizing are pretty clear. Home values are falling so sharply that very few homeowners can still pull equity out of their houses. Stock prices are also drifting lower, more or less. Meanwhile, inflation is ramping up.

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Prices are rising in Europe as in America. Bread is up 12 percent in Germany over the last 12 months. Butter has gone up 45 percent. Milk, 25 percent.

Higher prices often stem from printing more dollars. “Force-feeding the rest of the world $2 billion per day (more consumption),” Warren Buffett reminded us last week, “is inconsistent with a stable dollar (more inflation).”

We share Mr. Buffett’s concern. Bernanke keeps printing. Politicians keep promising. Bridges keep crumbling. Wars keep spending.

With regret, we read last week that the projected total cost of medical care for U.S. veterans of the Iraq and Afghanistan wars will top $500 billion, a figure on par with the total military spending to wage these wars to date. And speaking of military might, Defense Secretary Robert Gates estimated in testimony before the Senate Armed Services Committee that the Pentagon will spend upward of $685 billion next year alone. That’s $170 billion more than the $515 billion the president proposed in his first-ever $3 trillion budget.

If that weren’t enough, Gates doesn’t even expect that number to stick. “I have no confidence in that figure,” he admitted. You can expect the estimate to rise in the near future.

A hundred billion here…a hundred billion there. Who’s counting?

Apparently, no one.

But that’s not to say the S&P can’t weather the storm. The companies representing the Standard & Poor’s 500 index now derive 49 percent of revenue from foreign markets, up from 30 percent in 2001. Meaning, those with money to burn (Southeast Asian consumers) should keep earnings reports strong. Stronger repatriated currencies should only bolster this trend.

Unfortunately, many Americans believe a strong S&P equals a strong American economy. We tend to see another American economy. We see an economy riddled with debt, more debt and even more debt. We see the American consumer eerily close to tapping out. Thirty-four percent of Americans now believe they are among the “have-nots.”

It serves to reason. More than 405,000 homeowners lost their homes to foreclosure last year.

Most middle-income Americans, the ones driving our buy-now, pay-later economy, have spent well beyond their means. Americans currently perpetuate a negative savings rate. That can’t last forever.

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Cheap oil and cheap credit have fueled this era of consumption…this gilded age of instant gratification.

Yesterday, Land of Leather, the sofa retailer, warned that sales had plunged by 32% in the 12 weeks to last Sunday compared to the same quarter in 2007. The chain is holding a 12-hour sale today, in the hope of building up some steam in the Bank Holiday weekend.

Now, the news that a sofa company is in trouble during a property sales slump doesn’t come as a surprise. Interestingly, kitchens group Howden Joinery is still doing well, with same-store sales up 5.9% year-on-year, though that may be down to desperate sellers attempting to update hard-to-shift properties.

But forget furniture. The really worrying thing is that we’ve all started cutting back on lattes…

Starbucks is no longer an affordable luxury for some people

Starbucks (NASDAQ:SBUX) has warned that UK sales are starting to turn down. Chief executive Howard Schultz, quoted in the Evening Standard, told analysts that he had seen “some early signs of softness in traffic in our UK stores… Starbucks coffee and premium coffee experience has, over time, been an affordable luxury. And at this time, it isn’t for some people.”

It looks like all those personal finance articles on budgeting – you know, the ones that point out that if you spend £2 each working day on coffee, that’s more than £40 a month – are taking their toll. And no wonder. £40 a month is just about enough to offset a decent chunk of your increased mortgage payments, if you’ve just come off a fixed rate.

Some analysts argue that the coffee industry is in some way immune to the slowdown. “When times are tough, people might stop buying designer shoes but they will still go to the shopping centre and buy a coffee,” said Jeffrey Young of market research group Allegra Strategy.

Why? Why will they still buy a coffee? There can be few things more easily substituted than a coffee from Starbucks, or Costa or wherever. For a start, you can drink coffee for pennies at home. Or you can do without it all together. People talk about the morning latte as being something almost indispensable these` days, but that’s just force of habit. It’s amazing what you can do without when your wallet makes you put your mind to it.

Coffee’s an obvious expendable item, but there are plenty of others. Fashion’s another victim. The last four weeks have been a “graveyard,” according to Bhs and Top Shop owner Sir Philip Green. As Evening Standard writer Gideon Spanier points out, those who are surviving best are the stores offering cheap and cheerful goods – Primark for example (owned by AB Foods) saw sales rise 25% in the 24 weeks to March 1st – and online retailers, such as ASOS, which recently reported sales up 80% year on year.

Even these might struggle in the coming months. As Anthony Hilton reports, the nation is “tightening its belt”. As he says, the recent hopes from bankers that they might be over the worst sound premature. But “ even if true… it looks increasingly likely that for the rest of the economy the troubles are only just beginning.”

Why markets are still too optimistic on the UK

What does this all mean? Well, as ever, I’d keep avoiding retailers and other consumer-facing stocks, even the ones that have already fallen substantially. Why? Because just as few people in the markets realised how quickly and devastatingly the property market would turn, most people are still just too optimistic on the UK economy at the moment.

It may not feel like that, with the government in turmoil and bad news headlines everywhere, but the market is still in ‘glass half-full’ mode. As the news on the economy continues to get worse, and more and more people realise this isn’t easily resolved, that attitude will gradually shift. But for just now, there are still too many ready to “buy on the dips” rather than “sell into the rallies.” So that means the most vulnerable stocks still have further to fall.

As for what you can buy in a downturn, we suggested some defensive stocks in a recent MoneyWeek cover story.

Yesterday the FTSE 100 closed unchanged on the day at 6,087.3. Housebuilders were hammered as downbeat broker comments, suggesting that Spring sales reservations have collapsed compared with last year, prompted further selling. Retailers were also under pressure on consumer spending fears. In contrast British Airways soared 7% in response to potential co-operation talks with US rivals.Euroland stock markets were closed to celebrate 1st May. Wall Street enjoyed a 1.7% rally following the previous day’s Fed rate cut, rising 190 points and breaching the 13000 barrier for the first time since early January. The broader S&P 500 also put on 1.7%, gaining almost 24 points to end the day at 1,409, while the tech-heavy Nasdaq fared even better, adding 2.8% to close at 2,481.

In Asia this morning, Japanese stocks followed the US lead, with the Nikkei 225 climbing 2% to close at 14049. In Hong Kong, the Hang Seng improved 1.9% to 26241.

Brent spot was trading this morning at $110.46, while spot gold stood at around $856. Silver was trading at $16.31.

Turning to forex, this morning sterling was trading broadly unchanged at 1.9748 against the dollar, but was appreciating against the euro, rising above 1.28 for the first time since late March. The dollar was last trading at 0.6456 against the euro and 104.75 against the Japanese yen.

Until Monday,

John Stepek

Deputy Editor, MoneyWeek

http://www.moneyweek.com/file/46443/things-are-getting-really-bad–latte-sales-are-down.html

In my blog I said that misses the main point. Factories make things. They add to the material wealth of the country. Hospitals don’t. You visit a hospital. You get better (or you don’t). The GDP goes up by $50,000 to $150,000, which is nice for politicians to point to. But the economy doesn’t have anything tangible to show for it.

True, hospitals are hard assets. But you need to understand this important fact: Operators that invest their own cash in hospital real estate never generate revenue from the investment. The hospital gets nothing out of owning it. No rental fee. No usage fee. They make money from using that space to offer additional services…

But, at a fraction of the cost, they could have rented out that empty building on Main Street and offer those same additional services. Hospitals are the very definition of a non-earning asset.

But now I’m having second thoughts. If hospitals are just so much deadweight on the economy, then what about other entities that cater to health? What about spas? They’re like new-age hospitals, aren’t they? If we’re including spas, then are hotels that much different? And aren’t hotels just big restaurants with beds?

Really, it comes down to the fact that hospitals are in the service industry. Should we condemn them for that? At least they try to improve or prolong valuable earning assets … namely, us. Doesn’t that count for something?

I think I owe the Wall Street Journal an apology. Hospitals popping up all over the country are no better or worse than Starbucks appearing on every other corner. Starbucks already had their run when they made investors a ton of money. It’s hospitals’ turn now.

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.

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.

For a company known as a purveyor of fine (if not overpriced) coffee, this is a huge step outside their core competency. And, in my opinion, it’s a big mistake. With the company stock price down 50 percent in the last 16 months, now is not the time to be breaking into unfamiliar markets. For one thing, branching out costs money. For another, Starbucks risks losing brand identity as it expands its product line away from coffee.

The company is already facing shrinking margins due to increased costs of sales (up 1.1 percent versus last year) and increased operating expenses (up .90 percent). It is closing 100 under-performing stores, and reducing the number of store openings this year. Taking on the additional costs to expand into another market just doesn’t seem like a wise decision. Not to mention that the expansion would be into the highly fragmented energy drink market.

With Starbucks’ stock already down dramatically from its peak, it may appear that the opportunity to profit from these missteps is past. But I believe there is still more room for the stock to fall. And I don’t think the slide will stop until the share price is in the single digits. So taking a short position against the coffee king can add some diversity to your portfolio… and be a profit opportunity in a falling market.

Meanwhile, if you hold Starbucks stock, it might be time to dump it.

[Ed. Note: Rick Pendergraft is a professional trader and market analyst. In Rick’s new investment service, he gives easy-to-follow, step-by-step advice that you can use to create a consistent, automated income. Learn more about how he can help you produce explosive gains - no matter which way the market is trading - here.]

Concerns about the impact of the credit crisis and the weak economy will come into sharp focus next week, with investors set for a flood of earnings from ailing financials as well as the technology sector.

Earnings results in focus include financials Merrill Lynch, JPMorgan Chase, Citigroup and Washington Mutual and tech bellwethers Intel and Google.

Investors, so far, have managed considerable optimism in the face of the credit crisis and its effects.

“Hope springs eternal on Wall Street,” says Justice Litle.

“But… the consumer effects of the housing bust are still in early days. Bankruptcies jumped 30% in March, with the sharpest rise in uber-bubble states like California, Nevada and Florida.

“In Orange Country, as many as six out of ten new buyers could be ‘upside down,’ meaning the size of the mortgage exceeds the value of the house. Time magazine talks of the first ‘Starbucks recession,’ in which belts are being tightened enough to pass up that $4 cup of joe. Starbucks CEO Howard Schultz reports that, ‘For the first time in our history as a company, we have negative traffic this year vs. last.’”