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Home Seems Far When You're Rowing Away

|Includes: Family Dollar Stores Inc. (FDO), FRED
"On the boats and on the planes
They're coming to America
Never looking back again
They're coming to America

Home, don't it seem so far away
Oh, we're travelling light today
In the eye of the storm
In the eye of the storm"

-Neil Diamond

I knew I was playing with fire yesterday to suggest the market is manipulated, but it would be bogus for me to say otherwise. I received a ton of emails yesterday from people that don't invest, or are invested, and are very frustrated. I expected that, but some of the emails expressed more emotions than even I was prepared for. I really appreciate when I hear from people that read the market commentary.

Here is one letter that got me going:

"I think anyone in the stock market (and I am in) right now is playing Russian roulette. I wish I had bought gold (at least 1/3 of what little money I have) a long time ago. I wish I had heard of Glenn Beck before he came to Fox as I could have gotten started then.

I currently don't trust ANYBODY in our government - nope, not one of them -

The worst part is, I hate feeling this way...I really do. I want a government I can trust, or at least have confidence in. I miss the Gipper. This particular aspect of life is a real downer. Thank God I have wonderful kids and a wonderful husband!

You, sir, are inspiring - except that I wonder sometimes if you don't feel like you are selling snake oil. Please don't take that personally, but when we all know that our government is doing (God knows what) to manipulate the money and markets how can you tell people to buy into the markets??

I know you are really busy, but when you get time, can you answer that? And keep it simple, this Texas girl didn't go to college, and it's all I can do to figure out some of your daily updates. But then, I wouldn't want updates from someone who wasn't smarter than me!

Have a great day.

Diane A."

My immediate reply:

"Diane, I've attached the current model portfolio and actions taken by my subscribers this month. It's not snake oil to invest in companies that represent blood, sweat, and tears of the workers. There is manipulation in the market, it's something I deal with, but I feel great trying to help people make money. My returns crush gold returns. That said, I understand people being frustrated, but I think you make a big mistake losing faith in the country.

BTW, the attachment is from yesterday. Today we asked people to take profits on ACAS, REE, CF, KLAC, KCP, and a loss on AIXP.

So the answer is I feel great, if you used your credit card 100 times today including once to buy my service I'm the only person whose goal is to make you money. Everything else you spend your hard earned dollars on will fade into worthlessness.

Charles Payne"

Admittedly, I was frustrated with the email because so many people are throwing in the towel. I learned a long time ago that life isn't fair so you make the best of it anyway. You may work in a job where only blondes get promotions and you are a redhead. You may work in a company that values the pedigree of the sheepskin more than the actual skills of the employees. You may not work and yet know you have something of value to offer. Today, people will hang on the back of turn-of-the-century trains in Central America and make their way to the U.S. border. They don't fret about the Fed's convoluted ways of trying to spark the economy.

I still consider it a privilege to be able to invest in the stock market. I still think companies with great management, improving fundamentals, innovative products, and other superlatives will see their share prices move higher. The road from undervalued to fairly valued can be choppy in part to market manipulation and investor emotion. I would like to see people take advantage of such gyrations rather than be victimized by them. I'm not talking about day trading but always being in the market, which is different than being fully vested. You don't compete against the try to take advantage of the manipulation.

I know it's frustrating for everyone. Hundreds of billions of dollars in stocks were sold into the inferno during the worst of last year. That selling had nothing to do with fundamentals, and was more a byproduct of our weak politicians that spent a year trying to see who could scare us the most. TARP triggered massive selling, then the stress test triggered massive selling, and the hits kept coming. Then, the Fed began sucking up all kinds of garbage and essentially gave banks money for free. Banks took that cash and in turn, made so much money they paid off the TARP ransom with interest. Of course you're frustrated. But, hiding out in mutual funds is unlikely to change your economic status. Digging a hole in your backyard only makes the situation worse.

It has been two years since the world went crazy and the fear, while still prevalent, has morphed into anger. Neither fear nor anger are building blocks for a true economic recovery. I don't like the idea of banks getting free dough to buy stocks, especially when stocks are cheap in many ways. Make no mistake, if this is the route they want to take how about sending taxpayers $10,000 a piece to buy stocks (stipulate they must hold for a couple of years) and let the banks trade their own money or their clients money? Oh, I forgot that's against the law these days. So, there are three more POMO operations to go on September 30, October 5, and October 6. On days that the Fed has its Permanent Open Market Operations the Dow is up more than 697 points.


In Crain's New York is the story of Isaac Ovid who was a 24 year old day trader and church minister entrusted with $10.0 million in parishioner's money in spring 2005. He lost all the money in the market and then embarked on a Ponzi scheme that raised another $3.0 million. By November 2005 he begged the congregation for forgiveness and turned himself in to the US Justice Department. Mr. Ovid wasn't arrested or charged, left the country to his native Trinidad, enrolled in an MBA program and got a job in construction management. He was finally arrested while on a business trip to Florida.

Prosecutors have declined to comment as has the SEC enforcement director when Ovid confessed. This story along with the misadventures of Bernard Madoff underscores the fact it really has never been about more power for the SEC but more accountability. It wasn't a lack of manpower, when a guy walks through the door and admits he's a crook it seems pretty simple; lock him up and official charge him. In this case it took three years.

Should You Put Investment Dollars into Dollar Stores?
By: Brian Sozzi, Equity Research Analyst

Family Dollar (NYSE:FDO) was out with a nice $0.05 beat to consensus earnings this morning. However, the in line versus consensus guidance underscores the evolving mix of sales of dollar stores (more towards traffic driving consumables and away from discretionary) and creeping inflation (transportation currently, but product inflation waiting in the wings). All in all, gross margin beats by dollar stores (DLTR/FDO used) have subsided in the last two quarters, with the bottom line beats accelerating, supported by tight expense management (productivity) and share repurchases. How long the beat on earnings story is sustainable in light of weakening gross margins for the sector, well we are going to find out in 2011.

In the meantime, we have a neutral view on the high profile dollar stores; they are not particularly expense relative to discounters or inexpensive in front of a shift in the fundamentals that drive earnings growth. We think if one is inclined to play the dollar store sector under the premise the economic recovery will be uneven, focus should be on the names that have underperformed the peer group in 2010 yet have a compelling story.

One name is Fred's (NASDAQ:FRED), which is valued at a sector low 13.4x consensus forward earnings, below the P/E multiple of Family Dollar (14.7x) and Dollar Tree (14.2x). The company conceivably has room to grow earnings by 20% in 2011 through sales acceleration, a stronger sales mix of national brands, and a continued focus by the management team on productivity. We also note the company is the lone dollar store to operate pharmacies inside its box.

Positive Aspect to FDO Report:
* $0.05 beat on another quarter of gross margin expansion (20 bps).
* Operating expense control improved compared to FY trend.
* New $750 million share repurchase plan announced (though the company may be incurring debt to fund the plan).

* Higher than consensus sales guidance, but in line EPS guidance, underscoring the evolving sales mix and inflation.
* 4Q comparable store sales fueled entirely by customer traffic. Any pullback in traffic by an already stretched low income customer, exposes lower transaction value brought about by increased consumables sales. Not good.
* Investors relying on operating margin expansion in 2011 through expense management, unsure if that expectation can be assumed. The company announced a very aggressive new store/remodel store plan this morning at a time in which gross margin is modeled at flat for FY.