Check out LGF

I own LGF and I'm glad. I see them executing on a simple strategy: create content and look for opportunities to generate revenue from TV and cable. Basically, create and manage a library of product. They also show discipline in a few way sthat I think are an advantage
1. Focus on action and youth markets: many of their movies are silly comedies or horror movies or straight up action (The Transporter).
2. Focus on cost management: budgets tend to be low: <$20M per movie. They get talent by sharing in the upside. As a movie production house, they generated ~$500M in box office revenue from various movies including: 1. The Saw IV 2. The Bank Job 3. Rambo 4. 3:10 to Yuma 5. Juno They also invested big with Tyler Perry (this concerns me because he seems to be prolific but quality is supposedly dropping) They have a lot of movies coming out that should continue to generate profits (Saw V, The Spirit) They have a Nicolas Cage movie coming out that got positives from the New York Times http://www.nytimes.com/2008/08/24/movies/24raff.html?_r=1&oref=slogin

In other words, they have box office money. I doubt they will hit the same $500M mark, but who knows.

And they are a powerhouse on cable TV. They own DEAD ZONE, WEEDS & MAD MEN and are debuting a new show with Dennis Hopper. The key here is that WEEDS just hit its 4th season - which means that they can get the syndication money. DEAD ZONE is already in syndication

They have also put their library to use: they are Paramount, MGM, & Viacom to launch a new cable channel. And the Blu Ray DVD releases should juice things up.

Add it up and they earned $1.4B for their fiscal year ending May 30th. Up 39%. They also surprised everyone with a major upside: instead of a ($0.05) loss they had a $0.06 EPS profit. Their balance sheet is fine - debt is low and almost equalled by cash. The stock is also steady.

Can they keep this up? As a sector, entertainment is one place that Americans tend to indulge, in good times and bad.

And they are positioned well with a low-cost, steady revenue business model.

I would consider buying them and writing covered calls. or just buying them and looking for a 10%+ annual rise.

How to improve my investing results

Yet again I did my research to find companies firing on all cylinders. I favor undervalued growth companies with improving fundamentals and excellent balance sheets.
And again, I see the same bag of companies pop up that I have invested in – mostly energy companies.

Yet these companies have been – and continue to be –spanked hard. So it begs the question: is my investing strategy wrong for current market conditions? Broadly speaking, I detect a flight to consistency – companies that have a history of delivering steady sales and growth.

Energy companies are delivering the only exciting growth around but their stocks are in the doldrums because they face an uphill battle convincing funds that this commodity run will continue. After all, it is axiomatic that you disinvest in commodities at the end of the business cycle. Staying in energy is doubly risky: time based risk (MUR aside, we bought calls) and country dependent (very dependent on Chinese oil/coal demand).

If I am correct – that the market will pay a premium for consistency – then I have the wrong strategy. I have worsened this situation by trying to be opportunistic and not executing well. For example, I bought the calls on the premise of a dead-cat bounce and I didn’t sell when I could. Same with the puts – we had an amazing opportunity in July before the rally started.

So this is what I am going to do
Assume the rally is ending and the market will crash before January –
Ultrashorts – hold them. They are mostly ~10% below our purchase price and breakeven just means a 5% drop in the markets (i.e. Dow <11,000).
Puts – Hold them. We have 2 more quarterly earnings seasons before they expire. We are mostly in consumer retail (AN, HOG, NKE, ZLC) and construction (VMC). Some of the most hurting sectors out there. And we have stocks that are clearly overpriced with problem balance sheets (NKE excepted). The risk here is time – it’s not if but when will these stocks head down.

Assume an oil rally by November (election time). This is risky. But I’m noticing a floor in oil and Natural gas, and that’s where we are concentrating. A cold winter can only help. Also, Chinese oil and coal imports should pick up now that the Olympics are over.
A lot is being written about oil prices going forward. The price is tied to the dollar, obviously. Also, fears of demand erosion are strong. Normally, oil prices would shoot up on a war fought near major oil terminals. And there are technicals – last week saw an expiration of future contracts. Interestingly enough, oil has stabilized since then, suggesting a stabilizing direction.

Calls – hold them for now.
DUG – This has done well but I think we need to leave. I put in a price of $39.50.

Inject trading but in a managed way
I don’t like trading and being opportunistic. Unless I can watch the market every day, all day, it’s easy to miss the opportunities. So here’s what I want to do.
I want to buy a lot of ETFC and sell the covered calls each month. Here’s my thinking
* ETFC has bottomed imho. It could still slip a bit, but the story has shifted dramatically. It is no longer a question of if they will recover but when.
* ETFC Covered calls yield ~2% per month for a strike price 33% away (the Oct $4 are ~3.4%). If not exercised, that is a solid yield of 20% over the year
* Manages downside risk. Over time, this creates a cushion of flexibility. If ETFC does not recover or even drops, I can hopefully have built a 20%+ cushion such that I am profitable even at $2.35.
* Adds to upside return.

More specifically, let’s say I buy ETFC today at $2.94. I sell the Sept $3 covered calls for $0.15.
* If ETFC >$3, I get $0.06 for the stock plus $0.15 for the calls. That’s 7%+ return for 1 month investment. I’ll do that as frequently as possible.
* If ETFC <$3, my cost basis is $2.79. Hopefully, I can write another batch of calls and get ~$0.15 again.

I do think that we are heading for a major financial meltdown which will reflect back on ETFC. So I am waiting to pull the trigger – I’d love to do this closer to $2.60.

The trick is to pick a stock that has minimal downside.

Essentially, we continue to be trading sideways with down movements. The best way that I know of to trade in a sideways market is to sell covered calls and lock in a few percent each month. And if it turns down, the accumulated call revenue cushions the downside and – even better – potentially the stock is chosen such that it has little or no downside. I see ETFC as having much more positives than negatives.

LGF is another candidate- it also delivers a 3% monthly yield on the call.

Inflation is not a signal to watch

Bernanke said that inflation will come down soon, maybe as soon as 6 months.
In at least one respect, this pronouncement matters: the direction of interest rates. Currently the Fed is in a lose/lose position: raise rates to combat inflation or lower rates to pump up the economy. A lower inflation rate gets them out of this position.

But overall, the idea of inflation going down is misleading.
For starters, inflation will naturally ease as long as commodity prices don't go up. It's just math: inflation is the measurement of the price this year compared to the price last year. Yes, food and oil prices surged in the last 6 months, but as they ease, the prices come closer to where they were a year ago. Better yet, if oil <$120 next Spring, the Fed can even claim that inflation is dropping! Break out the champagne - the Fed Governors are genuises!

Inflation matters but disposable income matters more. Let's say Jane's take home income is $100: $40 goes to gas and food and $60 to other things. With inflation, she now spends $50 on gas and food and $50 on other things. No problem: Jane will ask for a raise, the traditional way fo dealing with inflation. Except that, in a recession with rising unemployment (tickling 7.5% in california and 6% in the US), wage earners have no leverage. So an ease in inflation matters in that Jane's spending won't further erode and she'll be left with $40 on other things and $60 on gas/food. But the picture is still bleak: Jane still only spends $50 on other and not yesteryear's $60.

Joe is in worse shape. He has no job. His discretionary spending is $0.

Our economy has to adjust to both Jane's lower spending and Joe's non-spending.

The focus on inflation is like worrying about some splinters when you've been knocked on your ass by a 2 x 4. Splinters are the least of your concerns right now.

Interesting Aspects to our Puts

It is a fact that motorcycle and car sales are down, but you woldn't know that to look at the stock prices of HOG and AN. Also, with consumer jewelry spending down, you would expect ZLC's stock price to be shattered and not approaching a 52 week high.

I dug deep into these stocks and I think I understand what is going on. The premise of my puts is sound, but I also chose target stocks with some challenging ownership

AN
Shares short latest reported month – Increased 1M
Shares short % of float ~40%
88% held by 15 firms
* 46% Eddie Lampert
* 6% Gates Foundation
* 30% 9 Institutions
* 6% 4 Mutual Funds

Eddie Lampert purchased 3.5M shares July 29.

There is a dual problem here: short squeeze and concentrated share ownership. The concentrated share ownership means that a drop in price really requires one of these players to walk away and dump shares. Meanwhile, with very few shares floating around, it is hard for shorts to cover positions without paying a premium

HOG
Shares short latest reported month – decreased 1M
Shares short as % float ~12%
68% held by 20 firms
* 46% 10 Institutions
* 22% 10 Mutual Funds

While not as concentrated as AN, this again explains a lot of the resistance to a falling stock price. I am counting on a bad Q3 to scare away these companies

NKE
Shares short latest reported month– increased 1.8M
Shares short as % float ~5%
35% held by 20 firms
28% 10 Institutions
7% 10 Mutual Funds

Almost no concentration that would hurt our short. I am counting on weak overall sales and a stronger dollar to erode their EPS.

VMC
Shares short latest reported month – increased 2M
Shares short as % float ~22%
63% held by 14 firms
53% 10 Institutions
10% 4 Mutual Funds

Very similar to AN and that explains the stock's strength in light of a very poor quarterly release and lowered guidance. The fundamental story is very bad - rising costs and falling revenue (not a lot of interest in building infrastructure). They have a forward P/E of ~25, which is pretty high for a firm providing construction supplies, and especially for a firm growing <10%.

ZLC
Shares short latest reported month– no change
Shares short as % float ~45%
153% held by 20 firms
109% 10 Institutions
44% 10 Mutual Funds

Short squeeze is driving this stock. Almost half of the stock is shorted.

What about our ETFC?
ETFC
Shares short latest reported month – decreased 2M
Shares short as % float ~25%
30% held by 14 firms
24% 10 Institutions
6% 4 Mutual Funds

While ETFC also faces a lot of short pressure, that pressure is lightening: down 2M shares in one month alone. A short squeeze could move the stock a little, but overall this stock is driven by fear and uncertainty in the Financial market.

After reviewing the short positions, I reach the following conclusions:
- AN, HOG, VMC & ZLC stock prices do not reflect the weak business conditions because of concentrated ownership and short squeezing
- When the stocks drop, they will plunge hard
- Still plenty of time
- NKE is the only risky investment from the standpoint of fundamentals. All other puts are dead on with respect to business conditions