My good pal Roger Lipton recently wrote this prescient analysis of Starbucks (SBUX) (filled with original analysis) in early June (that he is permitting me to reprint):

STARBUCKS (SBUX) - IT'S NOT JUST ABOUT HOWARD SCHULTZ LEAVING

Starbucks, and Howard Schultz, are all over the news recently, most notably the incident in Baltimore that resulted in closure of 8,000 stores for an afternoon, and the founder stepping down after an extraordinary career building one of the most prominent worldwide consumer brands, in our mind "writing the book" in hospitality among QSR operators. Our concerns, and expectations for Starbucks' future are more long term in nature, than the result of the bias training, or management transition.

We reprint below several of our most recent articles, the most relevant of which was done in March of this year. As of the moment, I would only add to the discussion below that Howard Schultz's political leaning will not maximize the appeal of the Starbucks brand, which has already shown less momentum than in the past. I've spoken to golfers who won't play a Trump golf course or stay at a Trump hotel, and consumers who won't go to Norstrom's after they took Ivanka Trump products out of the store. While Howard Schultz makes an articulate argument that a company cannot ignore social issues, but there are no doubt a number of coffee drinkers who will go elsewhere.

March 12, 2018

We have written a number of articles over the last two year, with excerpts provided below. We have consistently expressed our admiration for this worldwide brand, at the same time pointing out that the "easy money" has been made. We think it is no accident that the stock has done nothing since late 2015,in a trading range from the low 50s to the low 60s. While adjusted EPS increased from $1.58 in the year ending 9/30/2015 to $1.91 in fiscal 2016 and $2.06 in '17. It is timely to re-examine our thesis, as the stock trades toward the high end of its two year trading range, during which it has underperformed the market, we believe with good reason.

On August 2, 2017, I wrote an article describing the changing business model at Starbucks, including the possibility of unintended consequences.

THE TIMES THEY ARE A'CHANGIN'

BARRON'S MAGAZINE this morning has a front cover entitled THE FUTURE OF COFFEE (AND RETAIL). The subtitle reads "Starbucks has succeeded where Silicon Valley hasn't: changing the way consumers pay. The behavioral shift holds big promise for the coffee giant and its stock".

Not exactly, in my opinion. It is not just about "the law of large numbers", and the difficulty of satisfying investors by building on profit margins that are well above peers. The business model has changed, and the question becomes whether the new model will match the original. It's well known that a new loyalty program bothered some customers and also that an increasing number of customers are ordering and paying online, often in advance of entering the store. In the most recent quarter, 30% of US transactions were paid using the smartphone app, up from 25% a year earlier and 20% two years ago. More important, to my view, is that 9% of US orders were ordered and paid for in advance. The company has been discussing the store level congestion for several quarters now, as mobile orders slow down service for customers going through the line. Perhaps it's just me, but I am put off somewhat when the line at the register (where I like the human contact) is short, but I have to wait while eight or ten orders are pumped out ahead of my own.

MILLENNIALS, WHO ARE THE SPENDERS, DON'T VALUE HUMAN CONTACT (AS MUCH)

It's not so long ago that pundits dismissed the internet as a retail venue. The public was not expected to give out their credit card information, and certainly was not going to buy "touchy, feely" products like apparel or shoes through online channels. The public is not only ordering "everything" through Amazon and others, but relationships are maintained through Facebook and other social channels. As a corollary, customers are increasingly seeking "experiential" retail situations, rather than visit the malls, with their undifferentiated stores and restaurants, most often staffed with poorly trained employees.

WHAT'S IT ALL MEAN TO EMPLOYEES, AND CUSTOMERS?

Relative to Starbucks, their leadership with mobile order and pay, increasingly in advance of the store visit, may well be appropriate and necessary, but the business model has changed. It's become a production challenge, not a relationship driven enterprise. The employed "people person" who was the star of the previous model, is not going to be as easily satisfied, because most of the employees, for most of their time, are busy pumping out product. It's going to be harder to find someone as described above who says that Starbucks "is making me a better person". From the customer side, there are 27,000 stores already existing that are already tightly configured and can't be reconfigured too much to handle a lot more production. From a customer standpoint, some, like myself (perhaps in the minority these days), who value the human contact, may decide that the local independent shop, or even the home or office kitchen, can provide an adequate cup of coffee at a competitive price without the "tumult".

CONCLUSION

I remember when Howard Schultz said that food will never be a material part of Starbucks' sales. Today, it represents 30% of revenues. Schultz originally envisioned his coffee shops as a "third place", to hang out other than home or office. That's a little hard today, in a small busy shop, but we can call this an "unintended consequence" of building one of the still growing premier worldwide brands. Comps and traffic have slowed in recent years, due to the "law of large numbers", the natural limitations of small stores that were not originally built to handle today's volumes, and the evolving environment that every successful retailer must adjust to. Starbucks is one of the most successful retailers ever created, and we don't doubt that they will continue to succeed in a major way. We caution however, that the rate of progress demonstrated in the past, already slowing, will be increasingly difficult to replicate. The business model has evolved. Starbucks was a retail "disrupter" but their previous approach may not be quite as successful. Accordingly, valuation parameters that have applied to SBUX equity in the past may not apply in the future. The stock chart that has languished over the last couple of years may well be reflecting the most likely future business model; still good, just not quite as great.

The widely touted defense stocks continue to be in a world of pain.

In my view it could be a growing feeling that Trump has gone off the policy rails and that a Blue Wave in November (see below) could develop.

Sarge likes them and so do the "flow traders" and those that have identified some unusual call activity (which is often quite usual).

Here is why I took a pass recently:

Why I Have Taken a Pass on Defense Stocks

May 22, 2018 ' 2:45 PM EDT

Stock quotes in this article:

LMT, RTN, NOC, GD

* Peak defense budget growth seems likely
* I continue to pass on defense hardware stocks

I am aware that several contributors on our site (and numerous elsewhere in the business media) are attracted to defense contractor equities - in large measure because of a realization that the long term interests between the U.S., Russia and China are not aligned.

Two weekends ago I did some research on the defense group after the stocks got hit and decided to pass on going long the space despite the observation that we live in an uncertain world (from a geopolitical standpoint):

* Valuations are elevated.
* The sector is "overowned" with heavy and growing institutional ownership (over the last 12 months) and a steady diet of Wall Street "buy side" recommendations over the last year
* The growing likelihood of a November "Blue Wave" in which Democrats potentially regain the majority of the Senate and/or the House.
* If the Democrats make inroads we are clearly at or near a peak in defense appropriations and a peak in product margins.

This morning, observing many of the same issues (above), Credit Suisse downgraded the outlook from overweight to neutral - and the group is broadly lower.

The brokerage reduced price targets on Lockheed Martin (LMT) (by $45 to $335), Raytheon (RTN) (by $31 to $219), Northrop Grumman (NOC) (by $16 to $326), General Dynamics (GD) (by $29 to $234) as well as some other, smaller players.

Bottom Line

Given the above uncertainties - and the near term absence of catalysts - I am continuing to pass on the defense space.

I plan to revisit the space after the November elections.

Starbucks (SBUX)  lowers U.S. comp expectations (from +3% to +1%) -- as I have been expecting.

The shares are -3% on the news.

I have been adding to this short recently.

My thesis. 

Eighteen months ago I put Goldman Sachs (GS) on my Best Ideas List (short) at $242 based on this thesis.

At that time, the stock was a consensus long.

Over the last several trading days nearly every trader in the business media has bought GS for a trade.

It is still a consensus long.

Today GS is down another -$3.25 (to $328), and (while I have covered for a nice profit) I think the shares go lower in price over the next few months.

I want to buy GS when the stock and the sector are hated.

This is not the case - as Goldman Sachs is still loved.

Regular readers of my diary know I sometimes post things that replicate the theme of the "Tell Me Something I Don't Know" segment on MSNBC's "Hardball With Chris Matthews."

So... "Tell me something I don't know, Dougie."

OK, here goes

The force of corporate buybacks in a low volume tape (May's volume was running -10% below the full year average) cannot be overestimated.

Over the last twelve months corporate buybacks amounted to nearly $600 billion.

One brokerage has commented that over the last 10 trading sessions where S&P futures were weak overnight, there was a tendency to rally in afternoon trading -- a possible signpost that buybacks are influencing a quiet tape.

Indeed while S&P futures have been in the red in six of the last seven days at 6 a.m. (down 21 basis points, on average) -- by the 11:30 a.m. European close, futures were higher six out of the seven days (up an average of 17 basis points from the 6 a.m. lows. And by 4 p.m. at the close of trading, futures were on average 25 bps higher than where they were at 6 a.m.

Finally, it should be noted that 70% of the S&P Index component companies should be in their blackout period by the end of next week -- which could significantly reduce buying demand (all things being equal!)

From my pal Rosie:

At midday the markets are well off the premarket and morning lows.
With Spyders back up to $275.20 I was thinking about re-shorting (SPY) but I am going to sit tight and give the market a wider berth. And I don't see the necessity - after some first half success - to play every jig and jag.
The consensus seems to be that the market will discount Trump's rhetoric like it has in the past when he expressed preliminary policy narratives - and that it will continue to float higher off of the -40 handle nadir (in the S&P) in premarket trading.
Regardless of direction this afternoon, in this new regime of volatility an unemotional and aggressive trader can deliver high octane returns.
I continue to recognize and I am guided by the following:
* We are in a new regime of volatility.
* The lack of predictability in a market without memory from day to day is a continuing investment mantra for me.
* Others may be certain, I am not self confident in view.
* Staying flexible.
* The market's complexion has changed.
* It is not time to be complacent.
* The market structure (popularity of ETFs and proliferation of quant strategies) has hurt price discovery and has rendered a lot of charts (and technical analysis which follows those charts) as less useful than in the past. Be forewarned.
* Downside risk is substantially greater than upside reward.
* The market is growing more difficult to navigate for the bullish crowd.
* The investment mosaic is not simple. Rather, in normal times, it is a complicated cocktail of fundamentals, technical, sentiment and valuation - among other factors. (One dimensional decision making strategies and processes using spurious, and empirically losing, factors like unusual call activity and others - in a non directional and choppy market backdrop - are a mug's game and is a path to the poor house).
* These are not normal times - investment wise or political.
* The White House has introduced a greater degree of economic uncertainty and market volatility than has been seen in years.
I am small net long in exposure - though I am maintaining my negative second half view as expressed in today's opener.

From Sir Arthur:

Traders watch to see if "recent pattern" reasserts - circle wagons as Europe closes around 11:30 EDT. Then, holding into early afternoon when the buy the dip types begin to trim losses. As usual, the greatest risk is failure (rollover to lower low). S&P low 2740/2745.

Apple (AAPL) is -$4.03 on tariff talk.
I have a large short trading rental at very good prices (I scaled on strength).

While I might typically trade around (and cover some on this sort of weakness) I have no current plans to take the profits yet.
Should the broader markets break down from here - I can see Apple being viewed as an "ATM" and as a source of funds.

Wishin' and hopin' and thinkin' and prayin'
Plannin' and dreamin' each night of his charms
That won't get you into his arms
So if you're lookin' to find love you can share
All you gotta do is hold him and kiss him and love him
And show him that you care

- Dusty Springfield, Wishin' and Hopin'

Over the last 5-8 trading sessions I have seen a large, consistent and persistent buyer in Campbell Soup (CPB) .

I am not a big "flow" guy (in stock or options) but this one is conspicuous.

Just wishin' and hopin' it can put a bow on a very good year!

I bought the early morning weakness in (PG) and (CMCSA) .

Just paid for more (GLD) ($120.72)  - based on price and an improving reward v risk. (Not a trade, an investment!)

The shares are near the $120.50 support and the low RSI is a contrarian indicator.

I have covered my (GM) trading short rental for a small profit this morning.

I just took off my trading short rental in Allstate   (ALL) for a tiny profit.

Howard Marks takes on the important subject of passive investing and the changing market structure, "Investing Without People" - a subject dear to my Diary.

Peter Boockvar cites the trade war of attrition:

The strategy now seems a trade war of attrition defined on Google as "a prolonged war or period of conflict during which each side seeks to gradually wear out the other by a series of small scale actions." I repeat that I get what the end goal is but the means to that end is now going off the rails if this is the current strategy (how else to explain that US semiconductor companies are going to be paying the cost themselves for the semi tariffs on China). Slower growth and higher inflation is the only result of the current path.

The market response in China was ugly with a 3.8% drop in the Shanghai comp (down 12% ytd), a 5.8% plunge in the Shenzhen index (down 16% ytd) and a 3.2% fall in the H share index (down 1.9% ytd). If China wasn't the 2nd biggest economy in the world and a major driver of global growth I guess this wouldn't be that big of a deal. The Nikkei fell 1.8% (down 2.1% ytd), the Kospi lower by 1.5% (down 5.2% ytd) to name a few others in Asia.

Days after the ECB meeting last week, Mario Draghi spoke today and said "We will remain patient in determining the timing of the first rate rise and will take a gradual approach to adjusting policy thereafter." He's had rates below zero now for four years and reiterates his patience. The word Patience is now defined as continuing to do something that doesn't work but you can't admit or understand that it doesn't so just give it more time.

Draghi will take his economy into the next downturn (whenever that might be) with rates still below zero and barely out of QE. He's now repeated every single monetary mistake of the BoJ because he's obsessed with 2% inflation. The euro STOXX 50 is down by 1.1% and by 2.1% ytd. The euro STOXX bank index is lower by 1% too and trading just a hair above the weakest level since December 2016.

Interestingly an ex BoJ official said last night on the policy of the BoJ and its own attempt at achieving 2% inflation, "The last five years have confirmed that the policy hasn't had any effect. At some point you have to give up." He thinks they should just accept a goal of zero inflation. Ironically, that is the real definition of price stability.

Bruce Kamich did a deep technical dive on Box (BOX) yesterday (the shares were +6% in a rotten tape).Here it is!

* Risk happens fast - Trump trade policy whacks futures this morning
* We remain in a trading sardine market - not an eating sardine market
* Hastily crafted policy that conflates politics is dangerous in a flat and networked world

* The return of an untethered Orange Swan is market unfriendly ... brace yourselves
* The Supreme Tweeter will likely "Make Uncertainty and Volatility Great Again" (#MUVGA)

The First Half of 2018
The first half of 2018 has been a tale of two markets. Maybe three markets.
January brought a market fervor - in which global equities rose dramatically, likely in response to the expected stimulative contribution and impact of the Administration's reduction in statutory tax rates.
As interest rates began to climb in January, bullish investor sentiment crested and the risk parity trade went array.
Stocks fell violently in February and the new regime of volatility commenced - in a market revealed as increasingly illiquid.
The S&P Index fell from nearly 2900 and successfully tested the 2550 level twice. Several meek rallies commenced but the S&P had 2-3 more successful tests at about 2600 and stocks recently closed in on 2800 (S&P Index).
1Q2018 corporate revenues and profits didn't disappoint but the complexion of the market had clearly changed - and valuations (the S&P Index's price earnings ratio expanded by almost 3 points in 2017) began to contract. Wall Street, which outperformed Main Street in 2017 - reversed roles in the first six months of 2018.
While the stock market reeled with volatility since January 1, the FAANG stocks generally stood tall throughout the year as the market narrowed and investor interest focused on the 5-10 anointed stocks. 
The first half of 2018 was also characterized by a series of questionable and controversial presidential policies (the most recent being trade/tariff decisions) at the same time the Federal Reserve was pivoting on monetary policy. By overtly playing to his base, having little sense of economic history, Trump has contributed to even greater volatility in a market without memory from day to day.
Finally, during the second quarter the European Union's economic instability and weak banking foundation (read: Deutsche Bank (DB) ) contributed further to the new regime of volatility.
Despite these intrusions -- up until a week ago -- stocks climbed steadily higher. I shorted into that rise.
Since my marshalling assignment at the US Open at Shinnecock, the markets have declined for six consecutive trading sessions. (It also has been a bad time for six others: Jordan Spieth, Rory McIlroy, Phil Mickelson, Tiger Woods, Jon Rahm and Jason Day).

The Return of the Orange Swan

President Trump's aggressive negotiating strategies with regard to trade is a crude tool and is clearly disruptive and destabilizing to the markets. That policy and those negotiating tactics hold the risk that business confidence could be jeopardized and supply chains may be disrupted.

In turn, the real economy is vulnerable.

The Administration is trying to get a "better deal" for America but the way to get a better deal is to make us more competitive and the Trump strategy, rooted in the past and not the present, is not the way to do it.

The Second Half of 2018

My concerns are multiple over the balance of the year:

• The possibilities of policy errors (fiscal and monetary) are multiplying.
• The Fed is tightening. If the global economic foundation is as weak as I believe, our central bank may go too far in raising rates.
• A poorly and hastily crafted trade policy, though not having a large direct impact on the domestic economy, could deliver a big psychological drain to business confidence.
• In a flat and interconnected world economy, global cooperation is at an all time low.
• The corporate tax reduction will likely trickle up and not down.
• Debt is out of control and politicians are paralyzed.
• Both the Democrats and Republicans are guilty of fiscal irresponsibility. With rates rising, 'the judgment day" is nearing.
• With over $50 trillion in non financial domestic debt, every 100 basis point increase in rates produces a $500 billion economic drag.
• The Global Citigroup Economic Surprise Index is weakening (even China is slowing) -- worldwide growth is becoming more ambiguous, less steady and less reliable.
• Short dated Treasuries now yield more than the S&P dividend yield.
• The yield curve continues to flatten - underscoring the fragility of domestic economic growth.
• Technicals are deteriorating: (1) The market is narrowing (see my repost of Bob Farrell's Ten Rules of Investing), (2) New highs are contracting, new lows are expanding, and (3) Valuations of the median stock on the NYSE is already contracting. More contraction may lie ahead.
• The markets are growing more illiquid and with so many market participants worshiping at the altar of price momentum - market structure is a risk (with so many on one side of the boat).
• With strength in the US dollar and emerging weakness in the EU and elsewhere, US denominated debt concerns could continue to raise issues regarding the emerging markets.

I have long argued, in my 15Surprises for 2017 andfor2018 and in my Diary, that the "Orange Swan" would ultimately be market unfriendly - that an untethered Trump would "Make Uncertainty and Volatility (in the markets) Great Again." (#MUVGA)

And, I have recently argued over the last few months, that the President's behavior is now beginning to impact the capital markets.

Acting upon his impulses, growing more isolated and becoming more unhinged -- the Supreme Tweeter is now an Orange Swan headwind. In my view, this is market unfriendly and one of the reasons the markets may continue to act poorly.

Past is indeed prologue as Trump's White House is now replicating The Trump Organization - both are built on a small body of personnel with policy developed on "gut instincts" (and without thoughtful planning). We witnessed this during the campaign and we now see it in the government of the U.S.

As I wrote in "A Presidency of One" a few months ago:

* Trump's behavior may finally matter to the capital markets
* The Administration's disorganization, revolving door and impulsive policy actions may soon intersect with market valuations
* Investors should consider taking C.I.T.A. ("cash is the alternative") to the prom and should consider avoiding a dance with T.I.N.A. ("there is no alternative")

"Rex, eat your salad..."
-President Trump

Since 2017 year-end, the White House has been a poster child of turnover and disorganization.

After the recent multiple changes (of senior government officials) in the first months of this year, impulsive policy decisions/statements, the lack of shared policy conviction, a seeming Administration agenda of fear (rather than hope) and given potential legal problems, the President has likely seriously cut off his ability to hire capable people for White House assignments.

Without counsel, the President's decision making process poses a threat to the markets.

Nowhere is it as clear as in the trade tariffs being levied towards China and other nations.

Meanwhile, the sounds and pictures of recent immigration policy grow move vivid and a potential Blue Wave may loom only four months from now - creating the potential for even more uncertainty. It is looking increasing likely that the November mid-term elections could result in important changes in the majorities and point to the increased likelihood that little meaningful legislation may be forthcoming over the balance of the Trump Presidency. As I put it in my Surprise #1 in my 15 Surprises for 2018:

Surprise #1: President Trump's Behavior Finally Does Matter

"The tax reform bill becomes the sole landmark piece of legislation of his presidency."

To me, Trump is looking more and like a disembodied brand who, while maintaining a strong core base, is appealing to a contracting minority - reversing the need to expand the Republican party's tent in an America which is turning more of color with a more engaged base of students (the NRA may have finally met its match!) and in which, the LGBT community and women are becoming more vocal and active.

It took a while but I believe the weight of the Trump Administration has now become an influence on the markets (but not in a good way) - as also carved out in my 15 Surprises for 2018:

Surprise #2: Politics is Upendedin 2018 as the U.S. Electorate Pushes Left in Mid-Term Elections

The tax cut for the rich is election manna for the Democrats.

The U.S. economy falters next year, more due to monetary tightening, but everyone blames Trump and the ineffective tax reform initiatives put in place in late 2017 that do little to encourage capital expenditures and feather the bed of corporate executives.

With a malfunctioning and disorganized administration, almost nothing gets done in Washington, D.C.

The House falls to the Democrats in the November mid-term election, but the Senate remains barely (by one seat) in control of the Republicans.

Establishment Republicans -- seeing an intermediate and longer-term threat because of large losses in voters who are minorities, females and those under age 35 -- panic and begin to reconstitute the party's leadership toward a more youthful profile and try to expand the party's tent in order to survive the reduced support seen for the Trump administration.

House Speaker Paul Ryan, recognizing the need for party change, resigns.

Bottom Line

* Price momentum and hope float but fundamentals propel."
- Kass Diary

My S&P forecast remains unchanged:

Market Downside: 2400 to 2450
'Fair Market Value': 2500
Trading Range: 2550- 2750 to 2800
Monday Close: 2775

So, according to my calculus, downside risk remains far greater than upside reward and I remain net short.

The market's reaction to news over the last few months indicates that there is not a lot of conviction out there.

While I remain concerned about the monetary pivot of the world's central bankers, higher interest rates, fiscal irresponsibility (on both sides of the political pew), too optimistic consensus on corporate profits and domestic economic growth, a potential trade war with China, and other possible headwinds - the Presidency (and his actions) will now likely continue to weigh on the markets (and on the Republican Party over the balance of the year).

When we superimpose the market structure (with so many in one side of the investment boat), the secondary market implication of all this is a continuation of a new regime of heightened volatility and a wide trading range - which favors trading sardines over eating sardines.

Moreover, if we are 12-18 months from a recession - we will blow out our deficit to more than $1.5 trillion - which I can't imagine the bond market will like very much.

Finally, I don't see, given the above concerns, that the FAANG stock price rises are sustainable. I feel like a lot of people are waiting for the moment to jump off the train - it could be a hard fall.

Investors should consider taking C.I.T.A. ("cash is the alternative") to the prom and should consider avoiding a dance with T.I.N.A. ("there is no alternative").

I have flattened out my SPY short in premarket trading -- putting me back into a small net long position.

With S&P futures down by nearly 40 handles, I have taken a profit in a portion of my SPY short -- moving from large sized to medium sized.
This takes me back down to small net short in overall exposure.