Everybody Has A Coupon

Friday evening the wife and I ventured out for dinner, coupon in hand. Besides the usual question I pose, what do you feel like eating tonight, I now add another, what coupons do we have? We chose Olive Garden because the local Italian eateries didn't stick a coupon in front of us this week. As we finished ordering, my wife announced to the waiter "we have a coupon." "Everyone has a coupon tonight" was the response.

Americans are becoming their grandparents and it is about time! We are finally saving more and spending less. What is being spent is being spent wiser. This is a nationwide phenomenom. My Oliver Garden meal was in Omaha, Nebraska, an area minimally affected by the national real estate meltdown. But everyone needed a coupon to part with their cash. The prior weekend I was at our winter home in Florida and not only did all diners and shoppers carry coupons, there were not very many people in the restaurants and stores. Wal-Mart's parking lot was packed, but strip centers were empty. America is changing for the better, but it is going to be a miserable transition.

The transition from easy credit and spending future income to saving before you spend will be a difficult process as we won't need as much retail space or manufacturing facilities. Slower growth for our companies will mean lower valuations for stocks. Less spending means less sales tax revenue for the always voracious government entities. Goverments will attempt to tax away our frugality so they can continue their spending habits.

Just as our forefathers survived the Depression years, Americans will come through our current malaise. It has begun to sink in that good times are not just around the corner. Change in behavior is necessary and our society as starting to adapt and take personal responsibility. Our governments need to be forced to accept that same reality. Deficits need to be reduced through cost and program cutting, not tax increases. It is no longer business as usual in the American family and "tax and spend" cannot continue at any government level.

Our coupon society will lead to lower valuations as growth will be hard to come by. Cost cutting can't result in increased net income beyond an initial burst and flat earnings aren't worth much of a P/E. All companies will not fall victim to lackluster sales, but those with heavy debt loads will. Except for companies with exceptional niches, the only ones with growth potential will be the debt free that are still generating lots of free cashflow and can become larger through acquisitions. Now is the time to shed companies with debt. Not only will they not be able to participate in M&A, they will likely have difficulty rolling over maturities as bankers become more cautious.

The stock market has rebounded nicely over the past several months and may go higher as vacations end and investors return. But, the "new normal" would suggest that equity positions be trimmed in companies with diminished growth opportunity and significant debt levels. If an investor has an appetite to stay long, own the acquirers as they are the only ones with a chance of P/E stability.

K12 Could Become a Shortseller's Nightmare

I've thought that internet learning was destined to be a significant component of educational spending since 2000. That was the year that K12 was founded. That was also the year that I put money into a private placement of Class.com equity. The companies are very similiar as they deliver distance learning content over the internet, except that Class.com limits itself to grades 9-12. The similarity also departs in revenue production as K12 generates sales of $32oMM while Class.com is much smaller. After long gestation periods, both started making money several years ago.

In addition to my stake in the private company, I've put together a position in K12 as well. Like many stocks, it has made a nice recovery from its lows. I think it will continue to do well as it is in the sweetspot of education. It can save school boards brick and mortar expenses, enhance charter school curriculum, and remains popular with home schoolers. It works for remedial as well as advanced placement. Since a teacher is involved, even the teachers unions aren't adamant about killing the process.

With tight school budgets, shortsellers identified LRN as a candidate for decreased funding and resultant revenues. That hasn't happened, but the short interest is still present. And what a presence-it's huge! At mid month, there were over 7.5M shares borrowed and sold short. That is 39% of the float. At present volume levels it would take 63 days to cover those shorts. Take a look at the following table:

K12 Inc ( LRN) Short Interest

LRN K12 IncNYSE Settlement Date Short Interest Avg Daily Share Volume Days To Cover 8/14/2009 7,475,753 118,512 63.080135 7/31/2009 7,482,091 150,145 49.832435 7/15/2009 7,571,249 271,850 27.850833 6/30/2009 6,986,742 628,145 11.122817 6/15/2009 6,619,042 199,696 33.145591 5/29/2009 6,503,427 208,614 31.174451 5/15/2009 6,365,058 316,718 20.096925 4/30/2009 6,225,823 190,804 32.629416 4/15/2009 6,034,347 234,290 25.755888 3/31/2009 5,637,529 314,036 17.951856 3/13/2009 5,073,388 283,731 17.880979 2/27/2009 4,412,162 202,359 21.803636 2/13/2009 4,121,379 197,533 20.864256 1/30/2009 3,936,154 233,823 16.833904 1/15/2009 3,377,937 256,939 13.146844 12/31/2008 3,324,043 194,866 17.058096 Shares short has remained high while volume has lessened. Does that mean that everyone is on vacation? That shares are getting difficult to borrow? That shortsellers are biding their time until after the company reports quarterly results on September 9th? LRN's price has been creeping up which will cause one of two possibilities to happen. Either sellers will renew their attack on the company and be willing to borrow even a greater percentage of the float or decide that revenue isn't crashing and make a move for the exit. If the latter happens, with 63 days to cover, a significant squeeze could occur and the share price could move nicely higher. Would it stay high? It could as a squeeze would attrack notoriety and momentum investors, plus K12 is still growing, a rarity today, and in an insulated space. I'm keeping my position and hope that I see some nervous shortsellers in the next couple of weeks.

What Lesson?

Did we learn anything? Quicken Loans is currently running a TV advertisement that blows my mind. It's pushing FHA loans that do not require a downpayment, nor an appraisal!!

I understand Quiken's desire to do some business as they are acting as a broker and will have no skin in the game. But FHA authorizing and guaranteeing these poorly underwritten is additional proof of government's ability to act responsibly. Buying votes trumps logic every time.

Please don't let government get hold of healthcare. No matter how expensive and screwed up our health system is, they WILL make it worse. Just like their inability to say no to home ownership for those that have no money for a downpayment, they can't even talk about the first step to improving the cost of healthcare: eliminating the requirement that illegal immigrants are entitled to medical care. We don't even talk about this basic cause of healthcare inflation.

I hope I'm just old and that is the reason nothing makes sense, as opposed to everything really being wrong-hugely wrong.

THANK YOU MR. MARKET

Flowers Foods reported this morning and beat the street by 2 cents. They also reconfirmed 2009 earnings guidance. Perfect. But they also lowered their revenue guidance which was disappointing. They're still growing, quite an accomplishment in this economy, but not getting the bang for their buck out of last year's acquisitions.

The stock market has taken .70 off the price so far this morning. The good news is that it makes my $25 covered calls that expire on Friday a winner. I get to keep the premium and the stock. And I'm still very happy with the company and its prospects. It is still a winner in this downturn and when the economy turns as it continues to grow responsibly and profitably while paying a 3% dividend.

I own quite a few shares so I haven't decided to buy more with this sell off, but I could if it gets more severe. We'll see what the day brings as early morning results are usually driven by day traders and short sellers. The conference call may turn the tide.

Monday I'll sell calls again, reap the premium, and sleep nicely with this outfit.

Market Declines Take Even The Conservative Positions

I remember being cautious during the internet bubble and having a portfolio that consisted of stocks like Oracle. They were real companies that were selling at "reasonable" P/Es, not the story stocks that were the frothy leaders of the market. When the big decline came they went down also. They didn't melt off the face of the earth, but it felt bad anyway as my net worth shrank and it took quite awhile to regain ground.

Prior to the financial meltdown of the past year, my portfolio, for the most part, was also conservatively positioned. At least I thought so. But when the big decline kicked in my stocks went down also. Not as far as the bad names, but down.

After a 40% ramp up I am apt to see the same thing. My few holdings have felt good as they increased in value, but they are aching today and I shouldn't be suprised. All stocks dive in a dive.

I should exit the entire portfolio, but i won't as I have ample cash and trouble putting it to work as is. Therefore, I'm going to try to prepare myself for feeling miserable as my conservative, dividend paying stocks get killed along with the Citibanks and the AIGs of the world.

Flowers Reports on Wednesday

Flowers has been one of my favorite companies for the last several years. The more I learn, the more I become a believer. Management is good and they don't get confused by "high finance" in Thomasville, GA. They consistently grow sale, earnings, and the dividend. A very nice dividend.

On Wednesday they report quarterly earnings. I have no idea if they will exceed analysts' expectations or not, but I'm confident that they won't miss their guidance. Part of my confidence comes from Sara Lee, the bread division, and Tasty. Both reported last week and grew sales and gross profits, benefiting from price increases and ingredient cost decreases. I would expect FLO to benefit from those same trends.

Flowers isn't a home run stock, but it is the kind to own in crummy times. They pay a nice dividend and there is room to move upward in share price, and, the downside, if the market craters, isn't huge. It's a company that allows you to get a return through not only share price appreciation, but a conservative dividend, and a small covered call premium. Now I'm going to eat a donut and contribut to sales revenue.

Enjoy Summer Because The Fall Is Coming

And I do mean the fall. Falling stock prices this Fall. The market, no matter how good it feels, is way ahead of reality. I know Warren Buffett says that markets rebound before economies do, but this economy has a long way to recover before it is healed. We have made only a small dent in deleveraging the years of debt exuberance.

This Summer I've lopped a couple of strokes off my golf handicap, worked down the honey-do list, grilled and floated in the pool with the dog. My remaining stock portfolio has done wonderful and I don't regret any opportunity cost associated with my outsized cash position. Grilling, beer, and a growing portfolio-perfecto!

It took a while but I finally got out of a stupid investment, Southwest Airlines. When I bought it I opined that it was a lousy industry and even Buffett had trouble making money in it. But I thought LUV was the best and the price was attractive. Well I've been in a deep loss for months and the market euphoria has finally pushed it up enough that I've exited with a decent gain. But, the industry stinks and I've learned a lesson. Never buy a great company in a bad industry.

Flowers reports soon and I think all the insider buying bodes well for the results and hopefully it isn't already baked into the price. Aarons and K12 have rebounded nicely and should continue to move upward as their sell-offs were overdone. My remaining stocks like the above names and Waste Management are all defensive and should do relatively well when the market moves South as I expect it to this Fall.

Why do I expect it to decline? Here's why:

Commodity prices don't signal growth, they signal speculation

China's growth will be modest and their commodity binge is troubling

The chicken and the egg question and I think the American consumer will not be enticed by cheap Chinese goods. Saving yes, buying no.

Financials are not healed and will need another round of capital raising, if they can get it.

Obama is finally starting to scare both business and consumers

I could be wrong, but as Charles Barkley says: "I don't think so". It remains better to protect capital than to miss gains.

Instead of Rent-To-Own, the Market Makes AAN a Gift-To-Own

It occassionally happens and you have to take advantage when it occurs. A market over reaction is a gift and gifts goose results. Assuming that the market had AAN's priced efficiently yesterday at approximately $31.50, then today's $4.50 drubbing can only be attributed to Aaron's earnings release. Sellers didn't like what they saw and sold in volume.

What was it that they didn't like? The only negative present, and I don't consider it important, was that revenue at franchisee's stores were down a modest amount. The company attributed that decline to fewer early payouts compared to last year when the Bush stimuus checks put some extra money in the pockets of Aaron's RTO customers. So, revenue was down at franchisees. Not company stores, and there are twice as many company stores, nor same store sales, nor earnings.

What was positive in the report Let's start with quarterly eps of .51 vs. concensus of .44. Net income from continuing operations was up41% for the first 6 months and eps grew 29%. The quarterly numbers were similiar. Revenue was 891MM vs. 799MM and same store sales for stores open one year were up 8% and 2 year SSS were up 5%. In down economies RTO companies can do very well and AAN is validating that premise.

Looking forward for the last 6 months, the company RAISED guidance from $1.90-2.05 to $1.95-2.05. Growth of both revenue and profit. You don't hear that combination much lately.

The balance sheet remains strong with $85MM of cash, only 2MM of bank debt, and $50MM of long term senior debt. Equity stands at 836MM. AAN even pays a small dividend.

Todays sellers had buyers. The buyers were investors that actually read the earnings release and understood what they read. The share price will rebound as the sell off was over done.

In addition to the position that I already own, today I bought call options for August and September. The $25 strike cost me a modest premium, but I expect to get that back, plus more soon.

Blah, Blah, Blah.......

Gheesus, do they ever shutup? Blah, blah, blah. The talking heads are driving me crazy. The head & shoulders top didn't hold as it bumped into the 50 day moving average that was being manipulated by the non-correlated hedge funds hoping that the core PPI didn't collide with the Obama administration's healthcare plan. None of that crap has any bearing on investors. Short term traders and computer trading programs maybe, but not investors and businessmen.

An investor needs to get the big picture correct and not listen to the drones on TV, except for comic diversion. Debt overload was a big picture event and we are still suffering from that trend. A continuation of deleveraging and Obama's spending is a problem that can't be ignored by investors. Increased taxation cannot be avoided since spending cuts are out of the question. Reduced leverage, high taxes, and growing unemployment are not the ingredients of an improving economic picture. Without a growing economy you can't justify high P/Es. Cash continues to look attractive and comforting.

My gameplan includes solid dividend payers, like WMI and FLO, yielding 3-4%. Writing covered call income on that same portfolio.Vanguard Ginnie Maes as the prepayment risk isn't high, the duration short, it's government guaranteed, and the yields are attractive. Add in some selected, shorter maturity, corporate bonds and you get a portolio that yields you 4ish%. I am happy with that return because I'm getting a return. The stock market is not going to give me a return as I expect to see it go lower over the next number of years.

Also, while I don't see wage and price inflation coming, I do see increased interest rates due to the reduced credit worthiness of federal, state, and local governments. Short duration investments will allow for a nice bond ladder in future years.

My remaining equity holdings are few and watched carefully. These positions are mostly for intellectual stimulation and gamesmanship as I will probably lose money, but I need to think I'm smarter than other investors. The big picture says bad economy and higher taxes so get out even though the 200 day moving average is about to form a teapot pattern and everyone will get rich again.