I Would Volunteer

Make this commission full of private citizens rather than bureaucrats and we could be on to something!:
http://www.washingtonpost.com/wp-dyn/content/article/2009/12/30/AR2009123002576.html?wprss=rss_politics

This way the pols don't have to worry about taking blame and losing votes from the constituents. Let people who care about the long-term make the hard decisions.

Enjoy New Year's Eve!

-2outof4

Failure

Happy Friday. Here's a great speech to keep in mind from a very interesting man. Google his PBS trading videos from the '80s to get a flavor.

http://www.scribd.com/doc/16588637/Paul-Tudor-Jones-Failure-Speech-June-2009

-2outof4

My Head!

That bump on my head is from beating it into my desk!

Surprise surprise, more short-termism out of Washington:

http://thehill.com/homenews/house/69295-dems-push-wall-street-150b-stock-tax

How can anyone possibly think this is a good idea except the orgs that put money into these pols' campaign coffers?!?

The comments following the article are the most instructive. Of course it will trickle down to the common man! You think Street trading firms are going to feel this? As painful is the crutch of "Buy and Hold" investing that these pols lean on. If the person watching your money over the last 24 months was not trading in a tactical manner knowing the macro backdrop, then s/he was doing you a disservice!

If you live in the state DeFazio or Perlmutter represents, please question their thought process and just what they think they are going to accomplish. If the foresight is that low concerning this tax, there can only be more trouble on the horizon.

-2outof4

Shopping Tips

Happy Monday!

Departing from the norm doom and gloom, I want to offer up 2outof4's holiday and beyond shopping tips.

First of all, absolutely 100% refuse to pay full price this year. Literally every chain retailer out there has some sort of online or in store promo for no less than 30% off. If you need a coupon, just ask around. A day doesn't go buy without some sort of fantastic deal coming into my inbox.

Secondly, and going beyond the holidays, give Amazon a chance for your everyday non-perishables. Mrs. 2ooutof4 and I signed up for Amazon Prime (well, actually it was her). This gives us free shipping until mid December. So this morning we bought razor blades at about 30% off and no sales tax. The plan is to do this with TP and paper towels as well. I know people who use it for diapers. I've also priced out nuts, that are way cheaper than at the Grocery.

Anyhow, whether you are looking for gifts this season or staples, do not pay full price! We're getting deflation before the big spike in inflation!

-2outof4

Background Check

Good Morning! I'm engulfed in President Obama's "Dreams of My Father" at the moment. I am only up to the point where the President becomes an "organizer", but my intuition is that every American voter should have read this book pre-election.

So far, that same intuition tells me that the man at the top does not possess the pre-disposition to deal with the economic trouble that America was mired in at the time of the election in a manner to set us on a path to sustainable recovery.

Unfortunately, this piece also seems intuitive:

http://online.wsj.com/article/SB10001424052748704431804574537490451978558.html

I still like the Short XRT (ETF) as an investment idea. Have a great weekend!

-2outof4

China Lectures Us

Are we living in a sustainable policy environment? This is a question Mrs. 2outof4 and I were trying to answer on the drive home from a great weekend with family. Our answer, no. And when China is lecturing us on the fiscal policy, the lack of sustainability in our fiscal policy seems pretty evident:

http://online.wsj.com/article/SB125826103009548975.html?mod=article-outset-box

-2outof4

Oh Boy

This is a culmination of some many things posted on 2outof4. It is almost so sad, its funny:

http://online.wsj.com/article/SB10001424052748704107204574473724099542430.html

-2outof4

Reasonable Short?

I heard an interesting point yesterday. Pull a 3 year chart of the XRT, which is one of the retailer ETF's (exchange traded funds).

http://www.google.com/finance?client=ob&q=NYSE:XRT

Does it make sense that a basket of retailers would be trading in the market at roughly the same level as before things cliffed last September? For several reasons I would argue no, but I'd be curious to hear your thoughts.

The components of the XRT can be found here:

https://www.spdrs.com/product/fund.seam?ticker=xrt

-2outof4

Would Shorter Political Terms Change "Short-Termism?"

Einhorn shorts U.S. 'short-term thinking' - NY Post reports David Einhorn is bullish on gold because he's bearish on Obama. Members of President Obama's prized economic team, including Treasury Secretary Tim Geithner, are "quintessential short-term decision makers," Einhorn said, explaining his sudden fondness for gold. Watching Geithner, Federal Reserve Chairman Ben Bernanke and White House economic advisor Larry Summers on television recently, "my instinct was to short the dollar," Einhorn joked at the Value Investing Congress. Instead, he decided to invest in gold, even though futures hit a record price of $1,072 an ounce last week. Gold does well when "monetary and fiscal policies go awry," said the hedge-fund manager best known for shorting toppled investment bank Lehman Brothers. Specifically, Einhorn trashed the team's "too-big-to-fail" policy requiring taxpayers to prop up large, troubled institutions, like banks. "Our authorities have taken the view that kids will be kids," he said, comparing the officials to the parents of teenagers who know they will be rescued any time they get caught. He suggested public officials break up large financial institutions that appear on the brink of collapse rather than bail them out. Einhorn also said Geithner's regulatory reform plan was akin to efforts to stop terrorism by "frisking grandma and taking away everyone's shampoo." He scoffed at the idea that the government might try to regulate complex financial instruments like credit default swaps, believing they should be wiped out. He said regulating the swaps is like "trying to make asbestos safer."

On a side note, Mr. Einhorn has made a couple of 2outof4 appearances now!

-2outof4

Thanks Barney

Where is our financial education?

The myth of the perpetually rising home price lives on:

http://www.businessinsider.com/20-year-old-buys-home-with-183000-fha-loan-and-just-35-down-2009-10

This girl's efforts could be directed so much more sensibly!

-2outof4

No More Overseas Vacations

The funk that I've been in and part of the reason there have been fewer posts recently is partially a result of politicians' attempt to reflate American assets by deflating the currency, and the lack of political will to reverse the trend.

At this rate, the US Dollar (USD) is going to lose its position as the currency of trade.

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

So what you say? This is what:

http://online.wsj.com/article/SB10001424052748703298004574458923186941870.html

I sat in a meeting today where a respected Wall Street strategist said the only way out of the current economic situation is to inflate assets. I think that is a horrible idea. As has been stated here many times, we need to work our way out of it and not try to legislate out of it.

Seeing crap like this, at the 9:55 mark, boils my blood and frankly depresses me:

http://abcnews.go.com/Video/playerIndex?id=8746931

As usual, free money will be spent - it has a tendency to do that! But it is not in the long-term interest of Americans or the USD. I'm beginning to wonder if either party cares.

-2outof4

My Beer Gut is Not Your Problem!

I ate one of the best cheesesteaks of my life last night complete with onion rings and ice cream. If I have a heart attack this afternoon, do you think Mrs. 2outof4 is going to sue my local cheesesteak joint?

Nancy Pelosi and Co. need to heed Mr. Kent's advice. Get your kids off the couch and back to more active lifestyles. Americans need to take responsibiltiy for their health without looking for scapegoats, and once again choosing market winners.

http://online.wsj.com/article/SB20001424052748703298004574455464120581696.html

Two maintenance guys got on my office elevator this morning and when they got of one floor later, one said to the rest of us, "I bet you hate the guys that only ride one floor." I don't them at all, I just think they are extremely lazy. Maybe if they took the stairs a couple of times daily, they could enjoy that tasty Coke!

-2outof4

Golden Nuggets

Hello. Happy Friday! I have two recommendations for you today.

The first is a book, 'The Million Dollar Portfolio: How to Build and Grow a Panic-Proof Investment Portfolio' by David and Tom Gardner, the guys behind Fool.com (http://www.amazon.com/Motley-Fool-Million-Dollar-Portfolio/dp/B002M3SOZ6/ref=sr_1_1?ie=UTF8&s=books&qid=1253897791&sr=1-1). I think it is a reasonably easy to read text regarding investing as an individual investor. I am about a third of the way through, and already feel like it has been worth the read.

Sometimes it is important to go back and reread things you think you know. I never dismiss opportu reinforcement and reminders of sound ideas.

The second rec comes from the reading and a piece of news flow that hit the tape yesterday - McDonald's (ticker: MCD) raised its quarterly dividend from 50 cents to 55 cents. That means the MCD annual dividend is now set at $2.20. At the current share price that results in a dividend yield of 3.9% ($2.220/$56.99).

At today's valuation of 13.3x FY10 earnings, net debt to total capital of 40%, a return on capital of 27% and a top five global brand, I think you could be happy purchasing MCD stock without the dividend yield. However, with the dividend yield, this is a no-brainer. You need to keep up with market developments and what is going on operationally at the company, but generally speaking this stock can be tucked away in your portfolio. If the stock manages just 2% capital appreciation per year over the next seven years, you would have made almost 50%. Slow and steady wins the race!

I know the fries kind of suck and the Angus Burger doesn't stack up to an In and Out Double Meat, but MCD has made some good menu adjustments and the drinks franchise is slowly coming to dominate as the value-oriented alternative to SBUX. That McCafe thing is tasty! For a stock, you could do a lot worse than MCD.

Have a good weekend!

-2outof4

Codifying Thoughts on Gold

I have chatted with several goldbugs recently - one can hardly escape their infomericals - and I have had questions regarding my own position on Gold.

Over the past couple of weeks I have had the chance to codify my thoughts on Gold. I also went to a coin store the other weekend to familiarize myself with the buying process.

In conclusion, I think it makes a lot of sense to own gold. The primary reason is that I do not see how we avoid inflation given the constantly churning dollar printing press. Most people agree gold holds its value during times of inflation. Therefore, the question then becomes how should I hold gold and how much of it.

This is where the codification of my thoughts comes in. I think it makes sense to look at Gold as an insurance policy. If it goes up in value then you will have been successful in your battle against inflation. If it goes down in value, oh well, you did not lose a lot of value from other assets.

When I was speaking to a family member who was going to test the waters, I said that if you want to buy some, buy an amount that you would not be upset about if you lost half the value. If you cannot be comfortable with the idea of insurance or paying something for protection that you may never benefit from, then Gold is probably not for you. Also, if for whatever reason Gold does drop precipitously, then you have the opportunity to buy more if you have not blown your spending power up (assuming you still see the inflation or other threat that caused you to buy it in the first place).

There are several ways to own Gold. The easiest for you and me are through the exchange traded fund ticker GLD, which you can buy just like a stock, or physical. Physical is a lot easier to buy than I had expected. A reputable coin store that I went to sold Krugerrands and US Eagle coins. They were one ounce coins quoted as the spot price (about $1,010/oz) plus a premium. The premium was $55/coin for Krugerrands and $65/coin for Eagles, which if you think about it, is a damn high commission.

The argument for the higher Eagle premium is that Americans still like to buy American. I was somewhat wary of the authentication "process." I was just told that the shop eyeballs them and there are very few frauds. So one would need to shop around and make sure this is in fact true. However, if I had a couple of thousand dollars on me, I could walk out with a couple of coins. The shops are far less intimidating than I thought. The staff should be happy to educate you.

I would love to hear your thoughts on inflation protection and Gold specifically. Have a great weekend!

-2outof4

Inflation Backfiring

On the commute in this morning I was reading one of my favorite investment newsletters - The High Tech Strategist by Fred Hickey. It is a worthwhile monthly publication and affordable to the average retail investor, not just institutions.

One of the interesting points he made, which ties to my current puzzlement regarding the recent surge in the stock market, is that we are experiencing inflation. Sure it is not in consumer goods prices. In fact, there may be a case we are experiencing deflation in consumer goods. But we are seeing inflation within other asset prices, see commodities, like gold and oil, as well as, stocks.

When money is dumped on the global economy at the rate the various global printing presses have been running, it is logical to see and fear inflation. A cynic might say our government's plan is to inflate our way out of all the debt we've piled on. But we are not seeing it in consumer prices because of job losses and wage deflation.

This phenomena has the exact opposite effect the Administration desires. It makes the rich richer and the poor poorer. The wealthy have assets that can benefit from the inflation while the poor do not. Therefore, in a time of asset inflation, the gap widens.

Maybe the US should check its misguided fiscal policy before clamoring for higher taxes on the wealthy and limits on pay. When you bow to populism without taking the outcomes into account, bigger problems can ensue.

-2outof4

Edu Costs to Infinity

This article puts some interesting numbers around a topic discussed many times on 2outof4:

http://online.wsj.com/article/SB10001424052970204731804574388682129316614.html

As we've said before, as long as money is made available for what seems like no cost at the time, it will be spent!

The solution: if the institution is depending on these Title IV funds from the government, the government has every right to protect the consumer and limit tuition increases.

-2outof4

The Captain Doesn't Want to Pay Taxes Either

This goes back to the FairTax and the kinds of distortion that a convoluted tax system can cause.

If the US tax structure was flatter/more simplified the good folks of Puerto Rico may be keeping these jobs:

http://www.latimes.com/business/la-fi-rum2-2009sep02,0,4042398.story

Lord knows the 2outof4 family will be contributing to the Diageo boon over the next three months!

-2outof4

More Unnecessary Healthcare Costs

I know readers probably don't want to hear the nitty gritty of my medical issues, but I have further detail on some of the excess costs related to my knee surgery and subsequent rehabilitation.

First as I've mentioned before, the surgery and hospital stay was $4,000, for which I paid nothing. Then there was the brace that cost $1,200, for which I paid $176 - strangely the approximate cost I found on the net for the brace itself. Finally, I have just been billed for some of my therapy sessions.

If I'm reading the bill right, it was about $1,000 for five sessions (I've had 22), for which I paid $20 a session. The bill I received was for $20 because I indeed did not pay one of the earlier co-pays. The eye catcher on the PT bill was of the $1,000, $130 was for ice packs. That is correct, ice packs!

So in conclusion, if I was paying for all of this myself with some combination of High Dollar insurance and medical savings account, I can tell you right now I would not need the medical supply company coming to deliver and fit my brace, and I sure as heck would ice my own knee! That alone would save $1,130.

Unbelievable! Price discovery is key to reducing healthcare costs. If prices were made available and there was a true market for these goods and services, paying our own way would seem far less daunting than it does today. The doctors and insurers make the market one of the most opaque in the world.

I'm not convinced the technological leap toward price discovery and a consumer market for healtchare is the chasm the pols claim!

-2outof4

Bringing Down Healthcare Costs

A friend sent me this article from the Atlantic:

http://www.theatlantic.com/doc/200909/health-care

It is a good, if not long, read on the author's take regarding the real issue within the current healthcare debate. I can't say that 2outof4 disagrees. There is a lot in the article that's been said on this site before. What is being discussed at present is by no means real reform!

Enjoy the start to your week.

-2outof4

Cash for You Name It...

Hello! I'm back from one of the most phenomenal, albeit short, vacations of my life. I highly recommend checking out the frontier-like Arizona Strip. In the vicinity are the northern rim of the Grand Canyon, Bryce Canyon and Zion National Park. Truly an amazing area of the country.

While I was traveling I thought about the idea of posting the occasional video message in the future. Would that liven things up?

In the meantime, I realize this money was essentially pre-authorized, but how slippery a slope is this?:

http://online.wsj.com/article/BT-CO-20090819-713704.html

I read today that Democratic Party approval has dropped below 50% for the first time since President Obama entered office. This is neither a good nor bad thing in my mind per se, but it seems to suggest that the populace is not ignorant to what is going on around it. Why would you want your taxes to fund Joe Bob's new dishwasher?

When I was out in AZ I picked a bumper sticker for my friend who would rather go back to the '80s than try any dramatic change such as the FairTax. It reads: "I'll keep my guns, freedom, and money. You can keep the change!" Seems like that might be tough.

-2outof4

Savings Question

My mind is not really on money or politics as I get ready to go out to AZ tomorrow morning. However, can anyone explain the different pricing (rates) on these CD's from HSBC Direct?

https://www.hsbcdirect.com/1/2/1/default/learn-more/ocd?code=CSM0000630&WT.ac=HBUS_CSM0000630

To me the 12 month one sticks out as a no-brainer. Are they just trying to reel you in or is there a reason I'm not considering that the 12 month offer seems mispriced?

Compare the above to ING Direct:

http://home.ingdirect.com/products/products.asp?s=OrangeCD

I know the absolute return is laughable, but that 12 month HSBC CD seems like a relative deal.

I assume neither of the above banks believes that anyone is going to sign up for a CD of greater duration than 12 months in today's environment, so maybe HSBC is only planning on shorter duration customers and therefore use the longer dated CD's as marketing for that 12 monther. It made me curious.

Have a great weekend!

-2outof4

Whole Health

The CEO of Whole Foods has done some wacky things, see posting on investing Internet sites pushing the merger of Whole Foods and Wild Oats. However, he's got some interesting points re Healthcare:

http://online.wsj.com/article/SB10001424052970204251404574342170072865070.html

-2outof4

Commuter Blues

I drove into work on Tuesday because I had to go to PT afterward (BTW, I actually ran two minutes a couple of times last week) and it was a miserable commute.

At least on the train I can peruse the reading of my choice. All the radio shows talked about were the continued and increasing spending on various programs the government considers necessary. My very own Mayor is lobbying the state legislature to allow for an increased city sales tax for a "limited time" to cover the city's deficit.

My favorite program though is "Cash for Clunkers". How many times has 2outof4 said that if you provide free money, people will spend it! My forensic accountant hat says that this is a huge revenue pull-forward and will only inhibit future revenue growth.

I've been advocating a change to our tax system and highlighting the negatives within the current Withholding structure in regards to government spending, but maybe what we need is an excuse for these pols to limit spending! This articles was sent to me and outlines just that sort of mandate:

http://online.wsj.com/article/SB10001424052970203946904574300513655895856.html

Maybe because talking about money in America is taboo from an early age, and there is essentially no education on personal finance as American kids grow up with the exception of what they observe mom and dad doing, we are just uncomfortable confronting each other when spending has to be cut off.

I just went through the unpleasant experience of telling friends I would be unable to make the excursion to Vegas at the end of the month for another friend's bachelor party. But look, am I going to pay for the myriad new insurances that come with being married and a previously planned trip to go and visit Mrs. 2outof4 at her most recent outpost, or am I going to load up the credit card to the tune of another $400 to $600? I certainly would not hang myself out as a model of fiscal restraint over the last year and a half, but in this case the decision was simple, although hard.

We have to start making these kind of harder decisions on the State and Federal levels of government spending. If we cannot really afford Obamacare
(http://online.wsj.com/article/SB10001424052970203609204574314622075560890.html) or
Cash for Clunkers or Cap and Trade without raising taxes on the Middle Class, then let's figure out another way.

There is no reason to not find innovative, lower cost solutions to the majority of our perceived "necessities" (see prior post on Philadelphia libraries: http://2outof4.blogspot.com/2009/02/hey-mayor-nutter-likes-libraries-too.html), but if the only way to do it is by borrowing from the future, then maybe the only way to control our government spendthrifts is by limiting the amount they can spend!

-2outof4

Dutchman's Quiz

These are my responses to Dutchman's FairTax quiz. What do you think?

(1) HR25 abolishes the IRS and the IRC.False. However, it will greatly reduce both the cost and size of the organizations.

(2) There are 67,000 pages in the Internal Revenue Code and supporting Regulations.False. Although, I have no idea of the exact page count, the number is too high. Can anyone argue that shorter less politically manipulable (I may have just made this word up) code is worse than what we currently have in place?

(3) A sales tax inclusive rate of 23% would be revenue neutral.False.

(4) The after tax price of retail purchases will be about the same.False.

(5) The “prebate” is a tax refund paid in advance.I know your answer is False, but I don’t want to play games of semantics. The prebate is money to cover an essential basket of goods for everyone. So whether it’s a refund or in advance, I’m not really concerned. It helps offset the consumption tax for people that the FairTax would otherwise be a regressive form of taxation.

(6) Your dollars will purchase more under the Fairtax.True. My tax dollars will purchase more under the FairTax. I have demonstrated this using your numbers.

(7) You choose when and how much tax to pay.True. Please don’t come back with false on this based on verbiage. Under the FairTax I choose when and how much of a good(s) I purchase.

(8) Everyone will be economically better off under the Fairtax.False. This is from an immediate financial standpoint. Over time though, I believe that the country as a whole will be better off.

(9) Interest bearing investment and debt instruments are not taxed.This needs to be verified. If your read of 801-806 is accurate then the answer is False. That provision of the FairTax would then need to be adjusted!

(10) There is $10-$15 trillion of US owned assets in offshore accounts.This is the viewpoint of the authors of The FairTax Book. I’m not sure how either you or they prove it. It is fair to say there is some percentage of that number at minimum.

(11) Buying “used” goods, (tax previously paid), eliminates the tax costs from the sales price.False. Of course the initial tax is imbedded in the reseller’s mind as part of the COGS.

(12) A national sales tax would have no impact on State and Local governments.False. There will be lots of impacts. My viewpoint is that those impacts would be beneficial and go toward making State and Locals more sensible when it comes to spending their revenues.

(13) FICA payroll deductions are a tax.True. I would prefer non-government run/third party payor insurance programs. It is a tax on me because I could provide for my retirement and long-term care better and at a lower cost than the current programs do.

(14) The Fairtax will save Social Security.False.

(15) The Fairtax is progressive.
False. It is not progressive. However, it is far less regressive than both the current system and a Flat Tax.

-2outof4

Withholding and Medical Costs

I wanted to title this post FairTax and Medical Costs, but thought I would refrain from setting off another firestorm!

Anyway, a friend of mine, who is President of a medical devices company sent me the following article. I would say that the author is fairly well respected.

Read it and pause to think about how the FairTax (or any other alternate method to Withholding) could benefit the healthcare system:

http://www.hoover.org/publications/digest/3459466.html (Note: I just linked the first link that came up using Google.)

When government intervenes, and one of its main ways to do so is by manipulating the tax code, bad things often happen. And as we've seen previously on 2outof4, easy money (when the payor does not have to consider the cost) leads to higher prices.

The idea of a combination medical savings account and high deductible/big ticket insurance plan seems like an intelligent answer to me.

-2outof4

Stock Interest List Update

2Q earnings season has been an interesting one so far. More companies than usual have exceeded analysts' earnings expectations, but that has not necessarily led to soaring share prices. They soared before the earnings reports in many cases and estimates had been reduced significantly across most companies and industries! Overall, I am still pessimistic on the consumer and the economy in general, but as always, think there are some interesting individual stock ideas out there.

I'm sorry I never put ANN on the Buy Interest List. At 2x EV/EBITDA the market was suggesting death, but it had a fair amount of net cash and a saveable brand. Add in a Goldman Sachs upgrade and it has been off to the races. Hopefully, we find more like it, and you offer up some possibilities!

SPTN - reported its 1Q09 last night. I don't think anything surprising came out of the call, but the stock was off almost 15% today, making it about flat from when it first went on the Buy Interest List. The company said that the next 12 to 18 months would be tough for the customer base (remember, Michigan grocery stores) and that the comparable store sales figure for the year would be down in the low single digit range.

Meanwhile trailing twelve month (TTM) return on invested capital was solid and Free Cash Flow (FCF) generation improved year-over-year. For 4.6x Enterprise Value to EBITDA (EV/EBITDA) and 8.0x earnings, I think Michigan going further into the toilet seems discounted into the share price. SPTN will remain on the Buy Interest List.

PETS - reported its 1Q09 on Monday and surprisingly it seemed to work through its inventory issue at the end of the year, as the Company said they would. Operating margin increased and cash flow improved.

Despite the model having no sustainable advantage and there existing several websites that have better prices on the same goods, PETS has maintained its P&L. New order growth dropped from double digit growth the last three quarters to 5% growth this quarter, but reorder growth remained pretty constant in the low teens.

I will give it one more quarter, but PETS is becoming a prime candidate for removal from the Short Interest List.

One more note, it does look as though 20% of the shares outstanding are shorted, which is fairly high, and can often make shorting painful if the fundamentals of the Company's business are still positive. A high percentage short can often lead to painful "short squeezes", when the people who are short have to buy shares (adding to the rise in price) because they no longer want to be short the stock.

-2outof4

Seems Fairer to Me

Rarely does one read something and think that if we as a country follow the plan outlined that life really could change for the better and for everyone.

I am grateful to have been alerted to this book, 'The FairTax Book: Saying Goodbye to the Income Tax and the IRS' by Neal Boortz and Congressman John Linder:

http://www.amazon.com/FairTax-Book-Neal-Boortz/dp/0060875410/ref=sr_1_1?ie=UTF8&qid=1248633491&sr=8-1

The book is simply a must read for every American, supporter of personal freedom, denouncer of inefficient bureaucracy and loather of political manipulation and special interest power. Read this book and you will have a new view on how we as a people are taxed and controlled.

The authors did a good job of keeping the book easy to understand and quick to read, just like the FairTax Bill they support before congress (HR 25 before the House). I literally could not put the book down.

Prior to reading this book my general view on taxation was that I would gladly "pay my share" to support the government that takes up for the underprivileged and supplies the goods and services that private enterprise never would (parks, clean drinking water, etc.). Upon reflection though, and the book provides a great brief history of our withholding tax system, our current system and how every one of us who pays tax is manipulated by that system is abominable.

Simply put I do not believe that our current withholding system is the best revenue collection mechanism for our country. It has the unintended consequence of increasing the price of American goods and making those goods and services less competitive with lower tax nations. The current system breeds inefficiency everywhere. There are trillions held offshore just to avoid tax. There are further billions spent on avoiding paying tax. Yet for those of us who do actually pay into the system, the government can increase the rate whenever they cannot figure out how to efficiently solve for the monetary requirement of our ever-growing government programs. It is not fair and our current system is not "progressive". It progressively taxes the middle class more!

The guys on the high end can hide their money. The withholding system hurts people like me, people who are in the middle class and end up paying the difference in what the government needs and what the high end people can afford to avoid and the low end people do not provide.

This post does not need to be a place to rehash all the mechanisms of the FairTax. Here are a couple of good sites in terms of background and explanation: www.fairtax.org and http://en.wikipedia.org/wiki/FairTax. I would prefer 2outof 4 to be a discussion and question forum to hash out the positives and negatives of the FairTax.

In short though, the FairTax repeals all Federal payroll, income, social security, medicare, dividend, capital gains, interest, and inheritance tax. It replaces these taxes (which are mostly withheld from gross earned income in your paycheck) with a consumption tax of 23% on all goods and services at the retail level. The proponents contend that the FairTax will be "revenue neutral" for the government. However the book suggests that 15 of the last 16 quarters (at the time of writing) would have produced more revenue under the FairTax than under the current system.

There is also a monthly "prebate" paid to each household based on national poverty line standards in order for every household to pay for its basic necessities without paying the 23% tax. So this eliminates the argument that this is a regressive tax.

No tax on labor or capital should lead to businesses relocating factories to America. As a positive externality of this kind of relocation of capital back to our shores, proponents of the FairTax suggest GDP will double in 15 years. That implies the tax base will also grow.

It is difficult to succinctly say what I want to say about the FairTax. From 2outof4's perspective, the point that speaks most loudly is that with the FairTax comes the repeal of the "political class's" ability to control mine and your hard earned income.

The FairTax is fair. It does not try to pick winners and losers among industries. The way government can pick winners and losers is through the current banal tax code by various incentives and breaks. I believe in fair playing field and letting the best enterprise win. Our current tax code panders to people who know how to manipulate the system and the code.

My reading of The FairTax Book is that not only will we become more efficient and productive as a society we will all be able to build wealth faster under the FairTax. We will all keep more of our pay checks and then not be taxed on the growth of any of those dollars put toward investments.

Greater employment, more money, less power in the hands of special interests and politicians. What more can we ask for from our tax code?

I've prattled on enough here, but open it up to you for questions and comments. I also ask that you explore the FairTax further, as I will. I know that one of the fears of such radical change is the possible unintended consequences of the FairTax. Let's hear what some of those might be, and see if we can find a way to deal with them.

Please read this book. I believe that the politician or party that decides to take the FairTax to the next level will be the leaders of a potentially great American Revolution - a real revolution. Regardless, getting out from under the oppression of the current withholding system is a necessity for continued prosperity!

-2outof4

Thin Margin for Error in the Senate

Common sense seems to have prevailed this time:

http://www.nytimes.com/2009/07/17/business/17union.html?_r=1&partner=rss&emc=rss

Enjoy the weekend!

-2outof4

More Net-Nets

A couple of months ago I posted regarding the value investing concept of a net-net (http://2outof4.blogspot.com/2009/03/net-nets-and-more.html). The Company that I highlighted in the post turned out to have been an interesting candidate for further work. So I wanted to throw out a couple of more this afternoon.


By definition these investments are very speculative and I would not put them on the Interest List per se, but that does not mean they should not be on your personal interest list.


The first one comes from a future Hedge Fund manager based in the Pacific Northwest. It is a leveraged play on the price of gas. TravelCenters of America LLC (ticker: TA) operates travel centers primarily along America's highways.

Not only are TA's current assets less total liabilities plus 35% of Plant, Property, and Equipment (PPE) equal to 59% more than TA's current market value, but its net cash (Cash less Total Debt) is almost doubt the current market value. What does that all mean? - either inventory is overpriced or the value of TA's property is overstated on the balance sheet. However, the Company only keeps three days worth of fuel product on balance sheet and its hard to believe the real estate has no value.

There may be some legacy issues with corporate structure as well. However, as my friend in the Northwest posits, if TA experiences a tick up in its fuel margins and can earn even half a percent of net income margin, this stock is significantly undervalued. At half a percent on last year's sales total, the Company would be trading at 1x earnings!

Does anyone out there have any insight as to why TA has traded so low and looks like such a potential bargain?

Imation Corporation (ticker: IMN) is a little easier to understand why it is priced for bankruptcy. Its main businesses are involved in deadly price competition in dying markets. However, there may still be value in IMN with current assets less total liabilities amounting to $395 million compared to market value of $293 million or 35% more.

If one ignores IMN's Flash business and Electronic Products business, and just focus on the magnetic tape business and CD business, one calculates a normalized PE ([Enterprise Value divided by sales]divided by a net income margin of 2%) of 5.7x. Yes, these businesses are declining but still necessary and IMN has effectively consolidated the category into leading global market shares. The Flash business is priced as competitively as DRAM and therefore I attribute no value to it. So, if IMN can turnaround Electronic Products and generate a profit there, that business is all upside.

At its current valuation, the market is predicting bankruptcy and I'm not convinced that is a given!

-2outof4

Regulation in Commodities Trading Markets

A big question recently has centered around the limiting of "speculators" on commodities trading. Essentially, the question is whether the Commodity Futures Trading Commission (CFTC) should put position limits on "non-commercial" (those not using futures to protect actual positions in the underlying commodity) entities speculating on various energy prices through the Futures market.

This is a Bloomberg article explaining the questions facing the CFTC Chairman and Congress this week:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ayPFPSDPLyTw

I understand the argument that so-called speculation drives up prices of a commodity (oil) that we all desperately depend on and that the common man is indeed affected by the increase in price of oil, so therefore the speculation should be limited.

However, the thing I found interesting from this article in Barron's over the weekend was that it suggests Commodity Index Traders (CITs) somehow skirted the designation of "non-commercial" and the author suggests these players are where the excess volume is coming from because they are essentially "buy only funds". Although I did not find a great definition of CIT, I assume these are the buyers of contracts that make up things like the USO (ETF advertised to mimic the price movement of oil) and UNG (ETF advertised to mimic the price movement of natural gas). Thus "Buy Only" because products like the aforementioned ETF's have only been growing in size.

http://online.barrons.com/article/SB124727509296426335.html#mod=BOL_hps_mag

My conclusion is that although I see that these funds are likely responsible for some of the move up in commodity prices at certain times, I would not want to limit your's or my access to such products. There are very real reasons that we would want to have direct exposure to oil or nat gas rather than doing so by investments in individual oil and nat gas related companies. It seems like our government resources would be better used in areas where markets will not sort things out.

At the end of the day $147 a barrel of oil last summer was likely excessive, but did the market correct to something closer to fair value? The answer is yes. And don't speculation and speculative bubbles provide you with tomorrow's next big opportunity? The effort at futures market regulation comes off as simple political posturing and a waste of resources.

Thanks to another local victim of graduate school summer internship programs for sending me the original Bloomie article

-2outof4

Stock Interest List Update

In this time of flux and lack of clarity in the directional pull of the stock market 2outof4 asks more than ever for its readers to offer up their ideas for the Stock Interest List. Surely reader interaction can provide more interesting ideas and dialogue than one man alone. You are encouraged to speak up and let your ideas be tested!

The following idea is interesting to me because Wall Street does not seem to follow the Company. Despite a couple of large mutual funds having greater than 10% positions in the firm, the eponymous CEO does not seem to have more than a 0.76% stake in the Company. So besides being a small cap, I'm at a loss as to why the Company is so under followed. Any information is welcome, as always.

The Cato Corporation (ticker: CTR) is a 1,330 store retailer of value-oriented (2outof4's kind of clothier) women's apparel under the storefronts "Cato" and "It's Fashion". The stores are located in 32 states and from the geographies that I am familiar with it seems like the stores are located near "smaller" cities and near interstate highways. Although, it does look like there is a sizable presence near Dallas and Houston http://www.catofashions.com/locator_results.cfm?state=TX&type=Cato. I may have to rely on the inlaws for some more field research!

In my view the sales growth, same store sales growth an store growth have been reasonable over time, but at a much lower pace the last couple of years. So I do not have a strong sense of what the growth plan looks like, but one service I have access to suggests FY10 sales estimates (whose estimates, I have no idea) of over $880 million from $845.7 million in FY08.

Clearly, it is not growth that attracts me to this Company/Stock. However, the returns on invested capital by CTR are in excess of 50%. Average net income margin for the last 10 years, adjusted for the two best years is 4.9% and there is a ton of cash on the balance sheet, which CTR can either use to grow or return to shareholders.

When one constructs a price to earnings ratio (P/E) using Enterprise Value (market cap plus net debt) divided by sales (EV/S) as the numerator and 10 year average Net Income Margin as the denominator, one calculates a trailing twelve month (TTM) P/E of just 8.0x (0.39/0.049). That seems reasonable for a business that should theoretically benefit for consumers looking for bargains.

At 5.6x trailing twelve month's EV/EBITDA there is also quite a high margin of safety in place because of CTR's strong cash generation. I can apply the average 10 year free cash flow (FCF) as a starting point to a discounted cash flow model, apply zero growth and a 12% weighted average cost of capital (WACC) and still have slight upside to today’s share price. By the way, plugging in last year's FCF to the same model gives one 30% upside to today's share price.

So what is the catch? Is the stock just under followed and therefore undervalued in today's market or is there something that we do not know about that makes CTR reasonably valued. I do not have the answers. But based on prior operating performance, the fact the retailer serves a need in today's economy, and attractive valuation characteristics and cash flow, CTR is added to the Long Interest List. A thorough reading of past SEC filings is my suggested way of understanding wher ethe Company has been and where it wants to go in the future.

As always, thoughts and comments are welcome.

-2outof4

Stock Interest List Update

TSCO - preannounced positive earnings guidance on Wednesday for 2Q09. The Company suggested its earnings per share (EPS) would come in at $1.48-$1.50 for the quarter versus consensus of $1.28.

In its press release TSCO CEO, Jim Wright, mentioned that gross margins expanded during the quarter net of advertising because of a program to discontinue TV advertising and focus on more direct marketing campaigns. He also said TSCO was able to increase comparable store transactions by 460 basis points during the quarter.

That transaction increase came as no surprise to myself nor my inlaws, who did some field research for me, on the ground in Texas and Indy. TSCO makes a good ball cap too!

TSCO's stock price has risen 27.60% since the original posting compared to the S&P 500 increase of 1.21%. The Company still appears interesting based on its forecasted and steady growth rate, my store checks on feed sales, and cash generation possibilities. However, I am a bit concerned regarding the current lower margin of safety, and as a result TSCO is being removed from the Long Interest List.

-2outof4

Book List Change and Even a Movie Rec

Happy July! The East Coast's weather has been mild so far and made for perfect reading conditions, whether on a beach chair or by the pool.

For my birthday this year I received both of President Obama's books. I wanted a better understanding of the man in charge.

The second book, Audacity of Hope http://www.amazon.com/s/ref=nb_ss_gw_0_11?url=search-alias%3Daps&field-keywords=adacity+of+hope&sprefix=adacity+of+, is as I expected, the book more focused on the President's policy views. This is the book I started and just completed.

It is a well written easy read that brings out the President's struggle between the negatives of big government and his personal values and desire to bring up the less fortunate and discriminated against. Far more open than one would imagine regarding the political machine and the luck involved in his epic rise to the US Senate, one definitely comes away with a certain level of respect for the President.

I find it refreshing that we have a record of how the man thought and his ideals before being able to judge him on the successes or failures in the country's highest office.

As one might imagine, you can already see that in his first term he has kowtowed to certain interests, as he did in his ascendancy to US Senator, that likely gnaw at him. He wants the Unions to make concessions in the name of free market capitalism, but sadly cannot escape the Unions' political influence. Similarly, although he condemns the subsidies and support of Big Oil in the book, it is interesting to see how readily the Administration crumbled to Big Coal in the latest climate policy.

There are many incidences, like the above, throughout the book where you can stop and judge President Obama and determine for yourself whether he has stayed true to his prior path. Although I have learned that this type of accountability and asking someone to be responsible for all of his/her own actions is not always the best course of action on the home front, it is fascinating to be able to do it with such a public figure through his personally penned manifesto.

I highly recommend reading 'Audacity of Hope' (a phrase from Reverend Jeremiah Wright) in order to gain further understanding of your President's point of view on a myriad of current and future hot policy topics.

As the title of this post suggests, I have more than just a Book List change. I want to throw out a movie and wine recommendation as well.

It just so happens that I enjoyed both together last night.

The wine is called 'The Big Red Fox' (Syrah) from New Jersey's finest, Unionville Vineyard.

The film is 'Taken'. Who knew that Liam Neeson made such a badass action/spy hero? Not only does this movie have action to rival the Bourne and Mission: Impossible series, its plot development, twists and turns make you think a bit as well.

Two thumbs up and worth the Netflix rental!

-2outof4

Sequestering Thought

I sat in on an interesting meeting today. The presenter was an analyst who studies Exploration and Production (E&P) companies in the oil and natural gas business. At the end and as part of chatter wrapping up the meeting he made an interesting point.

He said that the Obama Environmental Bill essentially forcing certain CO2 emitters to "cap and trade" had an interesting rider - of 300 pages! Apparently, one of the amendments was a concession to coal companies. This amendment would give coal companies some form of credit to pay for the underground sequestering of emitted CO2. Apparently the amount of the credit made one operator in West Virginia pretty confident that profits would be maintained.

This is at least one cautious view on Carbon Sequestration, not to mention that in order to sequester all the coal fired emitted CO2 in the US, you would be sequestering 6x per day the amount of natural gas that is removed from the ground: http://www.awwa.org/files/ClimateTestimony.pdf

These actions by our politicians amaze me. I am not a scientist but similar to ethanol, it sounds as though Carbon Sequestration may not even be Co2 neutral (I am hard pressed to find anyone that will defend corn based ethanol today). In other words we create more of a carbon footprint with the combined megawatt creation through coal and sequestering of the resulting Co2 than in not sequestering at all. Additionally, just like the negative externalises of corn ethanol production, skyrocketing food prices, there are potential negative externalises of sequestering CO2, and the research has not even been completed yet to confirm or deny them!

If you think lying down for Big Coal is audacious, get real. The pols are trying to please everyone (Coal and Environmentalists) and in doing so are just creating more taxes for you and me and a less efficent market on the whole.

This returns to a key point I made in response to a comment yesterday: http://2outof4.blogspot.com/2009/06/thoughtfulness-and-free-markets-one.html

As I think about it more, I think it defines my philosophy toward a lot of the issues highlighted on 2outof4 on a much larger scale. You cannot have a free and competitive market when prices are obfuscated. When you do not have a real market, innovation is suppressed. So, if coal production is artificially made cheaper than say solar through the above credit, then consumers will clearly buy coal. Those guys tolling in the basement will not get their more efficient solar device to market because coal is pricing them out, albeit at a non-market price.

The same is true with regards to the high cost of education, the high cost of health care, the low teachers wages, the high cost of oil, the high cost of a machinist at a GM plant, etc. The politicians that we elect are far too frequently rolling over for the entities that can swing their votes, and not giving us a true free market society in which a rising tide will raise most of the boats.

When government is artificially controlling pricing, the greater cost burden falls on all of us. We can be sure of that.

-2outof4

Book List Change: Atlas Conquered

I spent a few days last week on Florida's Redneck Riviera. Love the white sand and clear water there.

Early in the trip I finished a book that took me three renewals and a post-surgery lull to finish. Ayn Rand's 'Atlas Shrugged' is a timely novel depicting the possibilities of free enterprise and limitations of government control.

http://www.amazon.com/Atlas-Shrugged-Ayn-Rand/dp/0452011876/ref=ed_oe_p

There is a reason more copies of this book were sold last year than in its original year of publishing, 1957, and that is because people want to understand and read about what happens when special interests and power-hungry political operatives control pricing across industries.

Whether one sees eye to eye with all or parts of Rand's philosophy, Objectivism, it is hard not to read this book and project the points and outcomes on to today's America - a scary prospect indeed.

After getting through an introduction that was written in the airy tone of an academic, the actual novel itself was remarkably easy to read. Rand keeps your interest with sharp plot and character development whilst illustrating her greater points.

In my view, this is a must-read for everyone. I will add Atlas to the Book list and remove Andy Kessler's.

-2outof4

Thoughtfulness and Free Markets: One

Thanks to a good friend for sending me this article. I had seen it mentioned on CNBC this morning, but did not get the chance to see the interview with Mr. Burd.

http://online.wsj.com/article/SB124536722522229323.html

Reading this fills me with hope that the brutal healthcare debate may actually find a market based solution rather than layering in additional fixed costs that cannot be covered down the road. I'm literally excited as I type this post.

The key seems to be the opening up to everyone of healthcare costs! Lack of opacity defines a market and when there is a market there is competition. If one could effectively shop for his or her healthcare needs, one could influence the pricing and drive that pricing to a market equilibrium.

If I could have shopped for ACL surgeries and if I had to pay for some of the surgery, you better believe that I would have found the best combination of price, location, and quality of doc. Instead, I just got lucky that the doc I went to was excellent and I could have given two hoots about the cost because I did not pay out of pocket. (Note: it was over $4k.)

If you want to provide healthcare for everyone across the board, then similar to a Flat or Fair Tax, I propose that people below a certain income level would receive free government subsidies in place of the support they receive now. I believe this would be cheaper and in the end provide better care than the current medicare system. There is no reason why poor people cannot make smart economic decisions as well.

The tougher issue becomes those people who don't qualify as needy but whose employers don't cover part of healthcare. That is a difficult situation. However, costs in general will be lower across medical needs (potentially higher for some treatments/procedures) and at least those people will have better information to shop their medical needs.

It appears so clear to me that we need to open up all these government, et al medical databases and make pricing available. Too many special interests win out at the cost of the average person when pricing is hidden. The current and potentially future public options keep the cloak of big government and special interests over pricing and end up taxing us all more.

Who knew the head of a grocery chain could make me feel so excited on a dreary Friday!

-2outof4

Stock Interest List Update

MW - reported 1Q09 earnings on 6/8. This earnings report provided a more interesting entry point for a short as the stock went up significantly on the day.

I understand the comparative store sales figure has improved across the Company’s formats, but at a huge sacrifice to margin. The total revenue is declining (even with the supportive tux business) and store count is completely stagnant. I’m not sure I see the 16x FY09 earnings multiple that one calculates by extrapolating the 1Q earnings beat to each of the quarters in FY09 (i.e. adding 48c to the consensus of 82c prior to the 1Q release).

The FCF looked great but almost all of it came from the YoY delta in Accounts Payable, which I would assume will reverse a bit and even out through the year. MW has not had such a 1Q benefit from rising AP in the last four 1Q’s. The only justification for today’s valuation is based on normalized margins and cash flow. But I don’t see these things returning to normal within the next year to two years - see what happened to Net Income in 1Q. As such, MW remains on the stock interest list.

LULU - Lululemon Athletica Inc. is a retailer of yoga related gear and accessories. One has the opportunity to short this after the short interest has come in following the rally in the shares.

The knock on this short will be that there are only 114 stores and plenty of room for expansion. Whereas that is true, revenue growth in 1Q09 (ended May 3rd) was only 6%, while is comparative store sales was negative 8%. Despite this it appears this niche provider is being valued as a growth stock while doing mid-single digit negative comps and seeing the income statement falling apart.

Gross margin percentage in 1Q09 amounted to 42.8% from 53.4% YoY. Operating margin fell to 12.1% from 15.5% YoY. Meanwhile EPS in the quarter declined by 25%.

My conservative DCF does not come close to justifying the multiple on this Company. I went to the local store over the weekend and it had five women in the shop. One guy was waiting for his significant other and not shopping. I was the only male browsing and I could not find anything for under $30 and while I admit the quality is excellent, anything I would have bought cost $98, and I could not justify it. This is not a significant sample, but on just next door Urban Outfitters was literally packed with shoppers.

LULU seems like the epitome of discretionary spend because it is so substitutable. As such, and in part because I still hold a negative view of the consumer in general in the near-term, I am adding LULU to the Short Interest List.

-2outof4

Isn't Risk What It is All About?

Posting has definitely slowed down as Skyping has gone up! Hey, Mrs. 2outof4 deserves the attention!

Today President Obama and the Administration unveiled a framework for re-regulating the financial services industry. Read a description at either of the links below:

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/17/AR2009061701834_2.html?hpid=topnews&sid=ST2009061703105

http://online.wsj.com/article/SB124524649229423271.html

There is an 85 page white paper linked within the two articles. I see some good, such as the plan to provide for the orderly wind down of failing banks in to protect depositors and prevent general panic. This was the manner in which I thought the original melt down within the banking sector should have been dealt with instead of the taxpayers funding all these zombie banks - but they could not accomplish it in a timely manner.

However, as with most attempts by government to regulate markets, this plan is based on poorly constructed goals and silly premises.

Both articles note the following quote. "Millions of Americans who have worked hard and behaved responsibly have seen their life dreams eroded by the irresponsibility of others and by the failure of their government to provide adequate oversight," Mr. Obama said. "Our entire economy has been undermined by that failure."

What does this mean? As I have said from the beginning, there has been a great amount of abhorrent behavior by many players in the unfolding financial crisis - think the orange man himself, Angelo Mozillo, who the government is going after for insider trading. But from the beginning I have said that just about everybody was compliant in their quest for a quick buck. That includes the lunchroom worker in Brooklyn with six mortgages.

Life dreams have eroded for people who took stupid risks. That ranges from the bank prop desk using little margin to the family of four that purchased a home which left it with a mortgage payment just under its monthly income.

If the Administration is broadly referring to retirement funds, yes people did lose out. However, people should realize that markets will not go up for ever. I did not expect to lose 40%, but I did not bank on 10% a year into perpetuity either. I've seen proposals that that suggest Government run 401k equivalent that guarantee 3% a year. That plan goes hummingly until the market has a 15% down year and blows the whole system out of whack!

We must keep some degree of personal responsibility and risk taking in the system. This proposal sounds like the government wants to control risk taking. How does the Administration think that the US became the most productive in the world?

Strangely, it looks like the WaPo article that I posted above changed whilst I was writing this post. The one I read originally mentioned that the White Paper suggested regulation for banks to make loans in the areas of their deposit base. If this doesn't smack of Fannie and Freddie and the old days of mortgages/loans for everyone, I don't know what does.

Clearly 2outof4 supports free markets and limited interventionist policies. However, we do not want to be blind to any benefits of the current proposal. What do you see in it that may actual help the economy and America's long-term productivity?

-2outof4

Brushed Under the Table or Not?

So, I heard during each of the last couple of commutes to work that the Chrysler Senior Debt Holders were receiving 30 cents on the dollar.

Or really?

I thought the subject of a prior post and President Obama's subjugation a few weeks ago was that a group of hedge funds and other institutional investors had held out for 60 cents on the dollar and forced the bankruptcy. This is apparently not the case:

http://www.businessinsider.com/white-house-directly-threatened-perella-weinberg-over-chrysler-2009-5

My boss told me today that I had missed the change in the Senior Debtors stance because I do not watch Fox News. Apparently, the folks there have been up in arms about it. The news certainly did not get much play in mainstream media.

There is hope though. The Treasurer of Indiana on behalf of some Indiana pension funds was successful stalling the bankruptcy proceedings. As a result of his actions Supreme Court Justice Ruth Bader Ginsburg stopped the sale of Chrysler "pending further order".

All of these backroom dealings and leaning by the Administration is no better than some of the alleged maneuverings of the previous Administration.

Let it all play out in court and hopefully our previously sacred US contract law will be upheld. There is no reason to keep things below board.

-2outof4

Dreamin' or Screamin'?

I was going to copy and paste an opinion piece titled "California Screamin'" from Barron's over the weekend. However, it seems they edit their HTML so it cannot be cut and pasted. Smart!

Essentially the opinion piece discusses how Califronia has kept down certain revenue streams over the last few decades, but at the same time increased entitlement expenditures, which were affordable in good times (rising home prices) but difficult to handle during hard times.

It is hard to imagine a State whose GDP would rank it as the eighth largest economy in the world (as of 2008), if it were a country, in such dire straits. In the article you would have seen that California seems less worse off than the US as a whole in terms of deficit and debt to GDP, but do not forget, Cali can't print money!

My immediate thought on the article is that you could substitute in a family or individual in Anywhere, USA and envision the same snowball effect. If I keep layering in fixed expenses to my personal budget, and my income suddenly dwindles or goes away, I am going to be underwater quickly. Fortunately, I have flexibility to cut things like the HD box and high speed Internet, States can move with much less expedience to cut so-called entitlements.

As the article notes, people who are getting more for less are not going to volunteer to give up benefits. But these mounting deficits are avoidable. I do not understand why the legislature would raise unemployment benefits while not ear-marking a source of revenues to pay those expenses. My calculations using the numbers quoted in the article puts that $29 billion in unemployment benefits less $11 in tax revenues to pay said benefits, or $18 billion deficit as 20% of this year's projected deficit of $92 billion (5% of CA GDP, which is estimated at 13% of US GDP, which was $14.2 trillion in 2008). It is not hard for one to imagine the other entitlement programs that have sunk California into debt.

The brilliant legislature's last resort to get Cali out of this deficit position? You got it - raise taxes. If you have been reading the Blog for a while, you know if there is one economic concept that I believe, its that raising taxes on business is the surest way to get those businesses to move to a neighboring state - leaving the home state with less tax revenue. Cali already has the 6th largest state tax burden to GDP in the US.

The solution to this mess? Plan smarter. Put aside political gain for long-term viability that does not cramp growth. Do not expand entitlements if you cannot point to the funds to pay for them, especially on a rainy day.

In the end expanding unfunded entitlements will drive productivity out of California, or any state in a similar situation, at an increasing rate!

-2outof4

Firsts

Well there may be reason for some more frequent posts. Mrs. 2outof4 is enjoying her first summer of graduate school, which unfortunately takes her far away to the Mother Land and then off to the land of multiple mothers. There is a reason our front license plate says "My wife and all our money go to Penn!"

I would also like to wish my brother-in-law an excellent first return on Home Leave from Iraq. He has to go back, but is very close to returning for good.

It seems to run in the family, but I would like to congratulate my father-in-law on his first few weeks of service in Iraq as his PRT attempts to foster relations and sound diplomatic practices in helping guide the Iraqis toward self-governance.

I would be remiss if I did not mention a certain University baseball team that is off to its first College World Series in Omaha, NE.

And who would have ever guessed, but I even found my way to Facebook for the first time over the weekend. My profile is under the name my mama gave me. I resisted FB for a long time, but it is a really neat way to keep in touch with people. Does anyone know how to link 2outof4 on FB as something that I'm a fan of in my profile?

The excitement does not stop here guys! Tonight I lifted 30lbs with my left leg on the single leg extension machine for the first time since my surgery. It is just one step closer to being able to hangout with these guys for the close of A-Basin next year:

http://bucketsinlittleton.blogspot.com/2009/06/pond-skimming.html

That dude in the tan leisure suit is the guy who filmed my demise!

-2outof4

Stock Interest List Update

I know there is no conflict of interest in the following Interest List idea because my employer told me that he would not invest in it if I offered him "10 times leverage and completely insured downside." That's a deep value idea if I have ever heard one!

Spartan Stores Inc. (SPTN) stock has been pummeled due to the threat of supercenter (think Wal-Mart and Target) competition and because its retail stores are primarily in Michigan. As a result it is trading at 7.4x FY09 earnings and 4.3x EV/EBITDA. I believe there is upside of 25% to the shares. The catalysts include a move to staples from more discretionary retail company names from investors and the demonstration that the Company can work through the economy and supercenter expansions, like it has done in the past.

SPTN was the product of a co-operative that did a reverse merger in order to go public in 2000. Upon going public a number of the co-op members sold shares, most significantly one that was annoyed SPTN was going into retail and sold its whole 750k shares (when the stock was only trading 20k per day). So, the stock has been troubled from its beginning.

SPTN experienced poor performance after going public due to a CEO whose ideas did not work and did not manage retail for the customers, but for the best deals SPTN got from suppliers. New management had to come in 2003 from the Midwest division of Great Atlantic and Pacific Tea Company. The Chairman today is the CEO from back then. In the first quarter at the Company they went from double digit SSS declines to flat. The Chairman said that two more quarters of SSS retail decline at that time and he could not have saved the Company.

The new management team turned retail into a consumer driven business and a “performance driven corporation”. However, in 2005 Wal-Mart was expanding rapidly in the state of Michigan and brought seven supercenters on (exactly what is happening in the next 12 months). The Company claims this hurts the 4, 5, and 6 local grocers, while the 1, 2, and 3 players end up taking share. SPTN is 1 or 2 in all of its markets, according to the Company. So, there is this perfect storm of investors believing MI is just too auto dependent, the competition from the supercenters and food deflation.

SPTN has managed through the same issues in the past and seem prepared to do it again. 4Q provided +1.2% SSS and the 11th consecutive quarter of retail SSS (Company suggesting +0.3% for this year). Management expects GM% to continue to improve, which means continued benefit from mix at retail. Other pushes for FY09 include implementing efficiency improvements in distribution business, seeking expansion opportunities in adjacent markets, and selling the assets of the remaining Pharm retail operation. Meanwhile, SPTN said the distribution sales SSS is “running flattish”.

In the most recent quarter the distribution business, not retail, accounted for 84% of operating income. As an astute friend in Connecticut pointed out, is Michigan really going to go bankrupt and people stop shopping for food? The government does not seem to be allowing it in California.

In conclusion, for a grocer that has shown decent growth, past ability to manage through competitive cycles, and a trailing twelve months return on capital of almost 14% in a year of a sizeable acquisition and economic downturn, I think SPTN is pretty compelling at today’s valuation. SPTN is the cheapest grocer/distributor on an EV/EBITDA basis in the FactSet screenable universe and has the best Return on Assets of the bunch. If the market sees any move to staples or indication that the Company is dealing with the competition, this will be a solid Long. As such I placing it on the Long Interest List at $12.41/share.

-2outof4