Investors in financial shares have fared well this year, as almost all are significantly higher than their March lows. Those that bought shares near the lows have obviously fared better than the original owners, But the time has come to be wary. Dilution looms, again, on the horizon.

Archipelago (ARCL) goes public on Thursday. The company intends to raise $100 Million, with shares coming approximately one-half from the company and the remainder from selling private equity companies. At the mid point of the anticipated offering ARCL will be valued at $400 Million.

Providence Equity Partners bought the company in January 2007 for approximately $85 million and owns 77 percent. Founded in 2000, the company had sales of $42 Million over the past 12 months. Earnings for the nine months ended September 30 were $6.9 Million while the net profit for the prior year was $1 million. ARCL has been growing their student enrollment and has recently entered the high school market. Their business is basically internet based test preparation.

Soon the Democrats will have their healthcare victory. It may be a hollow victory that barely resembles their initial goals, but it will be declared momentous and beneficial to all Americans. We will have more laws and taxes for the sake of illusive healthcare improvements. Any consequences of the legislation, such as debt, increased taxation and job losses, will be several years away, so the celebration can begin.

With some sort of a healthcare victory behind Obama and the Democrats, they can turn their attention to what Americans are really concerned about. That is the economy and job creation. The party in power has been slow to realize that healthcare reform is not the voters' number one priority. In 2010 the Democrats will innundate us with job creation legislation.

I've owned Smart Balance (SMBL) on and off over the past several years. The story hasn't changed, but the share price is inching lower. An opportunity is at hand if you can wait five years. Regardless of the "market's" results, Smart Balance will reach $1 Billion, control a significant share of the dairy case, and sell out for a very nice price.

The story here is one of smart management that has built brands successfully before. Steve Hughes, SMBL CEO, has been the architect of tremendous brand growth at ConAgra (CAG), Dean Foods (DF), and Celestial Seasonings. His team has years of experience and the goal of building SMBL into a billion dollar foods concern. They are currently at the $250MM level after several years of business.

It's well known that commercial banks have faced strong headwinds for the past several years.

While banking commentators acknowledge that not all of the problem mortgage loans have been foreclosed yet and commercial real estate problems loom, the industry has been saved by the combined action of the Fed and the Treasury. Share prices have moved dramatically upward off the fear induced bottom. Many seem inclined to believe that there is more upside to be had as long as the Fed keeps interest rates near zero.

I've thought that internet learning was destined to be a significant component of educational spending since 2000. That was the year that K12 Inc. (LRN) was founded. That was also the year that I put money into a private placement of Class.com equity. The companies are very similar 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 sweet spot 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, short sellers 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:

Yesterday was day of celebration in the market as investors took comfort in the government's latest plan. It should have been a day of outrage toward government bureaucrats and politicians that have now blessed the very actions that they demonized over the past two years and crippled the world's financial industry.

Banking should be conservative and rather boring. It shouldn't be a place for extraordinary returns and aggressive risk taking. There should be more thinking and less algorithms in bank credit decisions. If our current credit meltdown doesn't teach us a long term lesson our future will evolve into a very unstable, rough ride.

The old banking saw was the 3-6-3 rule: pay depositors 3%, lend the money out at 6%, and be at the golf club by 3 o'clock. That 3% net interest margin, more like 4% in recent decades, didn't allow for many lending mistakes. Significant losses were hard to make up when you only earned 3-4% NIM. Bankers knew this and behaved. Earnings came slowly and incrementally. Mistakes caused an increase in loan loss provisions, greatly reduced net profits, and several years of pain and stagnation. Bankers said NO to questionable deals.

I like Waste Management (WMI). It makes sense as a use for new money, but don't buy now. It's apt to go down like all securities in the current market. Good companies that continue to throw off good cashflow returns go down along with the poor earners. Study WMI, but be patient and buy it later. You will be rewarded.

Waste Management is a great company with a huge moat around its franchise. It is the nation's largest garbage company and now operates as almost a douopoly now that Republic Services (RSG) has acquired Allied Waste. These two companies now control over 40% of the country's waste business. They have the ability to influence prices and I anticipate that they will, to the stockholders advantage.

Tough times are prosperous times for rent-to-own companies. Rent-to-own companies are low-end banks. They provide furniture, appliances, and electronics to those that have credit issues or are turned off by the established credit industry.

Customers are generally lower income earners that know that they will get into financial difficulty, again, at some time and like the flexibility of returning the merchandise that they are renting as opposed to the embarrassment and frustration of suits and repossessions. They are willing to pay higher prices for flexibility, such as the return privilege, weekly payments, and the possibility of eventual ownership if they can maintain their financial stability.

On February 5th Flowers Foods (FLO) will announce their latest quarterly results. I expect the results to be good as the company updated 2008 guidance which was announced as recently as early December, and the company has a good record of managing Wall Street's expectations. In our current environment of lower results and cloudier forecasts, I expect Flowers to be relatively upbeat about their 2009 results.

Is Vulcan (VMC) run by managers that understand business or kids playing in a big sandbox? For shareholders' sake, I hope management isn't just a feel good bunch, but logical thinkers that will do what is right for the company. You can't fix a company by avoiding tough decisions.

Thursday, VMC filed a SEC document detailing $400M of new long term debt. The bonds yield 10.375% and 10.125%. That's about 8% more than Treasuries. The rates are punitive. The proceeds will be used to repay short term debt and maturing long term debt. Since they're paying 10+%, rather than using internally generated funds, for the funds necessary to repay debt, I assume that cashflow hasn't been robust.

The economic horizon appears bleak. Yet many money managers reassure us that the the market is a discounting mechanism and will turn upward six months before the economy improves. At some point these optimists will be proven correct. But I fear that the second half of 2009 will not produce the market wide results they forecast.

The legendary investor, Warren Buffett, when asked what will happen when he is no longer at the helm of Berkshire (BRK.A), always is quick to assure us that he has identified qualified successors to run the company and manage the investment portfolio. Besides, he feels fine and his doctors proclaim him in good health.

I believe Warren. He has a plan and who am I to possibly criticize the individuals that he selects as his heirs apparent? Additionally, his diet is similar to mine, lots of cheeseburgers and steaks and, best that I can tell, his exercise routine is as infrequent as mine. So, I'm not worried about Warren's imminent demise or his designation of successor management.

Once upon a time, when banks were run by bankers that had their net worth at risk, the cardinal rule was: "don't borrow short and lend long." The Savings and Loan industry never learned that maxim and it has since disappeared. Regulators, in response to the S&L crisis, put renewed emphasis on Asset/Liability Management and hoped to prevent timing mismatches in bank funding and investments. To some degree that has worked and bankers have found other ways to roll the dice and risk stockholder money.

But the regulators, Fed, OCC, and FDIC know better. Since they are the government, you would think the Treasury would consult their experts. If bank examiners are knowledgeable enough to advise and punish banks, then you would assume that they should be consulted regarding the U.S. government's funding. But, alas, Treasury doesn't seem to be asking for advice.

Vulcan Materials (VMC), the country's largest aggregate company, is like an easy first date. It's easy to get interested as it is going to make you feel good, but it is also really ugly. The whole experience is a one bagger.

This company, and industry, is fundamentally sound. It makes money year in and year out. It can do extremely well when construction is on a roll. It has even done well the past several years when construction has been constrained. But it didn't do well by selling more rock, gravel, cement, concrete and asphalt. While volumes were decreasing, the industry had the pricing power to increase prices. Rare, but factual. Can that phenomenon continue in 2009?

Of late I've felt as if I was Beldar Conehead. Over the holidays I consumed "mass quantities" of food and swallowed beer by the six-pack. Additionally, I'd feel comfortable saying I too was from France, as Beldar regularly answered, since our politicians are inserting the government into more and more aspects of corporate America. We may soon be more French than the French.

During this period of uncertainty, social change, and paralysis, I've put some money into an American investment bank with a strong French heritage. Egads! An investment bank?