Most mergers are driven by the notion, sometimes wildly mistaken, that the combination will bring both a competitive advantage. Some pairs of companies, however, seem so intuitively right for one another, no bottom-line considerations should be allowed to interfere with their matrimony. Like a slot machine and a blue hair with a pocket full of quarters, these two were meant for one another.

George Carlin has a famous rap (NSFW) about Americans and our love of stuff, which drives our need to build more places to put our stuff. That's always struck me as an integrated business plan. Two seemingly perfect partners for such a business are Dollar General (NYSE: DG) and Public Storage (NYSE: PSA).

Dollar General is a leader in recreational shopping for the denominationally challenged. If you have a hankering for neon-colored plastic, something covered in polyester fur, food with the half-life of uranium-235 or clothing with the style of Piltdown Man, DG is your go-to source.There you'll find shelf after shelf of non-essentials, the kind that end up in storage sheds. Currently, the 8,260-store company is in the process of merging with Buck Holdings LP.

If this deal falters, though, how about a merger with Public Storage? PSA (I'm a little uneasy with a company whose stock ticker is the name of a prostate cancer screening test, by the way) is a REIT with direct and indirect interest in over 2,000 self-storage developments in the U.S., containing, I'm sure, a great deal of material from Dollar General. The merger would be an excellent opportunity to double-down on America's seemingly inexhaustible need for more stuff.

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The markets made mild gains closing out the holiday week on lighter volume. The Dow gained 203 points this week to close at 13611.68 a 1.5% gain for the week.

Target Corporation (NYSE: TGT) moved higher $3.89 (6%) to $68.10 with active options trading on rumors it may shed its credit card business. Silver Wheaton (NYSE: SLW) rose $0.68 (5%) to $13.17 on higher silver prices. Chicago Mercantile Exchange (NYSE: CME) rose $19.11 (3%) to $574.80 after sweetening the CBOT takeover offer.

The NYSE had volume of 2.3 billion shares with 1,971 shares advancing while 1,285 declined for a gain of 49.15 points to close at 1,0075.39. On the NASDAQ, 1.6 billion shares traded, 1,740 advanced and 1,259 declined for a gain of 9.86 to 2,666.51.

Target (NYSE: TGT) saw heavy volume on the July 67.50 calls (TGTGU) with over 20,000 options trading. On the different July strikes there were about 44,000 calls traded while the puts traded only 28,000 contracts. There was an even bigger difference in August where about 20,000 contracts traded on the calls compared to about 4,000 contracts of puts. For all the different strikes on Target there was 30,000 more calls than puts traded for a put/call ratio of 0.62. The purchase of all the calls on target is a bullish sign as investors are betting the stock is going to go up soon. The stock saw 29.8 million shares trade today over 3 times its three months moving average.

Other stocks that had heavy volume include Dollar General (NYSE: DG) which saw heavy volume on the January 15 calls (DGAC) with over 50,200 options trading. Cisco Systems (NASDAQ: CSCO) moved 21,000 contracts on the July 27.50 calls (CYQGY). In options there were 3.3 million puts and 4.4 million calls traded for a put/call open interest ratio of 0.75.

Kevin Kersten is an Options Analyst with InvestorsObserver.com. Do you have any deadwood in your portfolio? Check out the 18 Warning Signs That Tell You To Dump A Stock.

Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.

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So, you run a chain of stores where everything costs a dollar and you are wondering how to advertise it. One of the biggest such outfits in the U.S. does so simply by referring to its shopping experience as the "Thrill of the Hunt."

Dollar Tree Stores (NASDAQ: DLTR) runs a network of about 3,300 discount variety stores in 48 states, operating under Dollar Tree, Deal$, Dollar Bills and Dollar Express banners. The stores offer housewares, toys, seasonal items, food, health and beauty aids, gifts and books. All items are priced at one dollar. The outlets are generally located in high-traffic strip centers, anchored by mass merchandisers and supermarkets. Dollar General (NYSE: DG) and Family Dollar Stores (NYSE: FDO) are major competitors.

The firm pleased investors earlier in the week, when it reported Q1 EPS of 38 cents and revenues of $975 million. Analysts had been looking for 37 cents and $966.4 million. Management also guided Q2 EPS to 29-32 cents (31 cent consensus), Q2 revenues to $960-$985 million ($963.64M consensus), FY08 EPS to $2.00-$2.12 ($2.10 consensus) and FY08 revenues to $4.28-$4.38 billion ($4.30B consensus). The news kept DLTR shares cycling through a positive three month trading channel. The price is currently at the base of that channel, where Momentum and Stochastic technical parameters suggest the potential for a rise back toward the top.

Brokers recommend the issue with four "strong buys," three "buys" and 10 "holds." Analysts expect a 13% average annual growth rate through the next five years. The DLTR Price to Cash Flow ratio (11.87), Price to Free Cash Flow ratio (18.00), EPS Growth rate (22.58%), Return on Assets (10.46%) and Return on Investment (12.83%) compare favorably with industry, sector and S&P 500 averages.

Institutional investors hold about 95% of the outstanding shares. The stock is one of those used to calculate the S&P 400 MidCap Index. Over the past 52 weeks, it has traded between $23.90 and $44.12. A stop-loss of $36.95 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.

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Tom Petruno at the Los Angeles Times makes a strong case [registration required] for strength in companies catering to working-class folks as opposed to hedge funds managers and Hollywood types. The trend has been in the opposite direction in recent years. Consider this: "On Wall Street, Coach Inc. (NYSE: COH) versus Wal-Mart Stores Inc. (NYSE: WMT) hasn't been much of a contest since 2000. The high-end leather goods maker's stock price is up 1,326% since then; shares of Wal-Mart, the retailer to the masses, are down 9% in the period."

But here's what's changed. Wages are rising: "Average weekly earnings of U.S. production workers rose 4.4% in the 12 months through March, according to the Labor Department. That was up from a 3.8% increase in the 12 months ended in March 2006 and a mere 2.6% in the period before that." Worker incomes rose 1.1% in the first quarter, the largest such rise in six years.

At the same time, growth in corporate profits is slowing. So if you decide to go with the hypothesis of working- and middle-income people having more money to spend, here are two stock picks:

While Wal-Mart has drawn the ire of critics for its lack of social responsibility, Target Corp. (NYSE: TGT): has gone upscale, but not too upscale. Some of their recent "fashion" items are so in demand that they're selling out in days and showing up on eBay for several times their retail prices. Target successfully revamped its image and if wage workers are earning a little more, they may opt for the company's "affordable luxury."

Companies like Dollar Tree Stores (NASDAQ: DLTR) may do less well. All that extra money could make people less budget conscious, and they could head for stores like Target instead of Dollar Tree.

On a final note, these are not stock tips. There are numerous other factors, and one should never buy stocks solely based on macroeconomic factors. A bottom-up analysis of individual companies is always necessary. But if working Americans find themselves with a little more cash, Target and Car-Mart could be beneficiaries.

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According to the Wall Street Journal, discount/single-price point stores like Family Dollar Stores Inc. (NYSE: FDO), Dollar Tree Stores Inc. (NASDAQ: DLTR), and the soon to be KKR owned Dollar General Corp. (NYSE: DG) are growing in popularity [subscription required] with consumers, reporting solid same-store sales growth and expanding sales of food products. According to Family Dollar CEO Howard Levine, "The low-income customer is always stressed and always strained. When things like a minimum-wage increase happen, that's a great benefit to them. When gas prices come down, that's a great benefit to them, and conversely when they go the other way, that has a negative impact."

Because of sky-high real estate prices in my area, we have no dollar stores. There used to be one in a local mall but it got replaced by a jeweler. I'm not kidding. However, anytime I'm traveling, I go to a dollar store, not because I'm "always stressed and always strained," but because it's fun. I was recently driving with my brother and we passed a Family Dollar and I practically ordered him to turn the car around. He reluctantly agreed with only this protest: "You are such a loser."

He waited in the car while I went in and returned with bottles of knock-off designer colognes (On clearance! 33 cents each! Great gifts for people you don't even like, and good car fresheners too!), body wash (about $2 less than it costs at the grocery store), a couple old Sherlock Holmes DVDs (I'm a dork, what can I say?), and assorted office supplies and some candles.

I mention this because while I'm certainly not the consumer that Family Dollar's CEO described in the conference call, I think I make up one of the core groups that discount stores appeal to: People who just enjoy saving money. For me, the thrill of saving a dollar or two on antiperspirant is worth a lot more than the money. It's the thrill of the hunt; it's the feeling of being a savvy consumer who doesn't pay more for stuff than he has to. Wal-Mart Stores Inc. (NYSE: WMT), the greatest -- for better or for worse -- discount retailer of all seems to understand this. In March, I wrote about the company's new efforts to target its three core demographics:

"There are 'brand aspirationals' (people with low incomes who are obsessed with names like KitchenAid), 'price-sensitive affluents' (wealthier shoppers who love deals), and 'value-price shoppers' (who like low prices and cannot afford much more)."

When I was at the dollar store, I noticed quite a few luxury cars in the parking lot. It got me to thinking: How many people shop for discounts because they really need to, and how many people just enjoy a bargain?

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Discount general merchandise retailer Dollar General Corp. (NYSE: DG) had the kind of earnings in 4Q 2006 one would expect from a company closing over 400 underperforming stores and liquidating that inventory. Although the short term numbers are not good, they are more or less in line with what Dollar General forecast it would cost to shed that much baggage. Last week, Dollar General reported fourth-quarter net income of $50 million, or $0.16 per share. This compares with 4Q 2005 net income of $145.3 million, or $0.46 per share. For the full year 2006, Dollar General reported net income of almost $138 million, $0.44 per share, compared with full year 2005 net income of $350 million, $1.08 per share.

Dollar General marked down over $279 million worth of inventory, and had closing related costs of almost $33 million. It is not surprising its earnings were not favorable. Despite these factors, 4Q net sales were still $2.5 billion, up 3% from 4Q 2005. Net sales for 2006 were $9.17 billion, an increase of almost 7% over 2005. Dollar General also repurchased 4.5 million shares of its common stock for $80 million.

Dollar General still has very strong cash flow and continues to operate over 8,000 neighborhood stores. These factors convinced affiliates of Kohlberg Kravis Roberts & Co. (KKR) to purchase Dollar General for $22 per share, a slight premium over the closing price of $21.11 on 4 April 2007, but at a 31% premium at the time of the deal in March.

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Kohlberg Kravis Roberts & Co., reportedly has BCE Inc. (NYSE:BCE), the owner of Bell Canada, in its sights.

A deal for the telecom company would be worth about CAD$30 billion (over USD$25 billion), making it the largest acquisition in Canadian history and one of the largest buyouts ever, according to the Globe and Mail newspaper. KKR is looking for Canadian partners such as the Ontario Teachers' Fund since foreign firms are prohibited from owning more than 46% of a telecom company's voting shares.

Shares of BCE were up 12% pre-market trading. They have dropped about 4% this year.

KKR already has its hands full:

The New York-based buyout firm is part of the $45 billion TXU Corp. (NYSE: TXU) deal, the largest buyout ever. KKR also is among the companies in the hunt for Australian retailer Coles Group Ltd. Last month, it agreed to buy Dollar General Stores Corp. (NYSE: DG).

Apparently, there's no limit to the number of multi-billion acquisitions that KKR can juggle at the same time.

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MOST NOTEWOTHY: ConocoPhillips (COP), InfoSpace, Inc (INSP), Verizon Communications (VZ) and Advanced Micro Devices (AMD) were some of today's more notable downgrades:

• Goldman Sachs downgraded ConocoPhillips (NYSE: COP) to Neutral from Buy.

• Stanford cut InfoSpace Inc (NASDAQ: INSP) to Sell from Hold as the firm believes shares are overvalued since the company has no clear plans to reignite growth.

• Buckingham downgraded Verizon Communications (NYSE: VZ) to Neutral from Accumulate.

• Advanced Micro Devices (NYSE: AMD) was cut to Hold from Strong Buy at Matrix as the firm believes growing competition is driving down selling prices and narrowing margins.

OTHER DOWNGRADES:

• Goldman downgraded Anadarko Petroleum Corp (NYSE: APC) to Sell from Neutral.

• Merriman cut Fiberstars, Inc (NASDAQ: FBST) to Neutral from Buy.

• Bank of America downgraded Dollar General (NYSE: DG) to Neutral from Buy.

• Cantor cut AudioCodes Ltd (NASDAQ: AUDC) to Hold from Buy following the company's lowered Q1 outlook.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

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MOST NOTEWORTHY:

• Keefe Bruyette cut Accredited Home Lenders Holding Co (NASDAQ: LEND) to Underperform from Market Perform, saying the downturn in the subprime market raised liquidity concerns on the stock.

• RBC downgraded RadioShack Corp (NYSE: RSH) to Underperform from Sector Perform, explaining that cost cutting measures are largely complete and margin expansion estimates are too aggressive.

• Shuffle Master Inc (NASDAQ: SHFL) was downgraded to Hold from Buy at Jefferies, citing the lack of visibility into the company's placements and potential IP protection risk in Macau. Shuffle Master was also cut to Underperform from Peer Perform at Bear Stearns following the company's announcement that it will have to restate prior financial results.

• UBS downgraded shares of Marvell Technology Group (NASDAQ: MRVL) to Reduce from Buy, citing risks to HDD demand given upcoming launches by Apple (NASDAQ: AAPL) of NAND-based Video iPods. The analyst expects HDD weakness to phase in and not collapse, but sees limited growth in the HDD segment.

• Roth Capital cut WPT Enterprises, Inc (NASDAQ: WPTE) to Sell from Hold, citing valuation, reduced earnings expectations and execution risk related to bringing the online gaming business in house.

• China Eastern Airlines Corp (NYSE: CEA) was downgraded to Underweight from Equal Weight at Morgan Stanley.

• China GrenTech Corp (NASDAQ: GRRF) was downgraded to Neutral from Positive at Susquehanna.

• RBC cut Nova Chemicals Corp (NYSE: NCX) to Sector Perform from Outperform.

• Sandler downgraded shares of OceanFirst Financial (NASDAQ: OCFC) to Hold from Buy.

• Citigroup downgraded Dollar General Corp (NYSE: DG) to Hold from Buy.

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The markets are higher today, with mild gains fueled by optimism after some big takeover deals helped lift investor's spirits. With warmer weather there was also some weakness in Oil futures as they fell about a dollar a barrel. In economic news, for the first five months of the fiscal year the federal deficit is 25% lower than last year as tax receipts are larger than expected. What this means is that as people prosper -- in what has been very good economic growth over the last few years -- they pay more in taxes to the government. Those unexpected taxes drive down the federal deficit.

The NYSE had volume of 2.6 billion shares with 2,154 shares advancing while 1,142 declined for a gain of 25.94 points to close at 9120.93. On the NASDAQ, 1.6 billion shares traded, 1,766 advanced and 1,276 declined for a gain of 14.74 to 2,402.29.

Stocks moving today included: Dollar General (NYSE:DG) rose $4.29 (26%) to $21.07 after making a deal to be purchased. Apparently some of that excitement also rubbed off on Family Dollar Stores (NYSE:FDO) as it rose $1.75 (6%) to $30.42. Sierra Health Services (NYSE:SIE) rose $5.67 (16%) to $41.57 on news it is being bought by UnitedHealth Group (NYSE:UNH). Accredited Home Lenders (NASDAQ:LEND) fell $4.38 (-28%) to $11.40 on the continuing sub-prime lending slump.

In options there were 4.4 million puts and 7.3 million calls traded for a put/call ratio of 0.61. This is significantly down from the 1.2 area we were running last week as a large amount of dividend arbitrage is taking place for Altria Group (NYSE:MO). Five of the top ten most active options are in the Altria. The Altria March 80 calls saw 1.28 million contracts (MOCP) and the March 85 calls (MOCQ) saw 1.14 million contracts. These two options contracts account for one third of all the calls traded today. The March 70 (MOCN) calls had 268,000 trade and the 80 puts (MOOP) saw 115,000 contracts move. Altria is set to pay an 86-cent dividend tomorrow. All this activity is likely the result of trying to pick up the stock using options to capture the dividends and make a small profit.

Kevin Kersten is an analyst with InvestorsObserver. DISCLOSURE NOTE: Mr. Kersten owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about.

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A week ago I wrote an article comparing the two best known dollar stores. "The battle of the dollar stores" was my attempt to decide which of those two discount operations might provide better growth in 2007. A quick review of their respective performances amidst the current market downturn indicates that while not performing spectacularly, Dollar General (NYSE:DG) appears to be weathering the storm. What prompted me to write this current mention of DG was a couple comments which I witnessed on a message board. A couple of emotional writers exchanged swipes in regard to DG and I find them quite humorous. The comments linked to here reflect common sentiment towards DG right now, that being that the company's share value is deflated well below expectations.

It is my opinion that positions held in stocks which were undervalued prior to the markets turning south is a good spot to be in right now. Historically it's the positions in stocks which consensus declared were overvalued which have taken the biggest pounding in market down turns. So if you are holding shares of Dollar General and you purchased them prior to the market slide during the period in which they've been deflated, in my thinking you now hold a pretty safe position in which to ride out the storm.

See my declarations regarding the market's bearish turn here, here and here.

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I thought it might be interesting to present a comparison between the two best known dollar store operations. Both Family Dollar (NYSE:FDO) and Dollar General (NYSE:DG) are well known for their penny pinching product packed stores but in a financial sense how are these two discount chains faring within the far flung retail world and how do they compare to one another? With reckless abandon I have chosen to dive deep into the darkest reaches of the Internet to draw some insight on the dollar store world.

Dollar General, a Fortune 500 discount retailer, has been in operation since 1955 and currently operates 8,309 stores. The Dollar General website predicates the company's mission upon the statement, "Dollar General stores offer convenience and value to customers, by offering consumable basic items that are frequently used and replenished, such as food, snacks, health and beauty aids and cleaning supplies, as well as a selection of basic apparel, housewares and seasonal items at everyday low prices."

Family Dollar began operations in 1958 and is a part of the Fortune 500 Index. Currently, Family Dollar operates over 6,200 stores which are especially located to serve Family Dollar's middle to lower income target clientele. Their mission statement as presented on the Family Dollar website is a three part declaration of value: "For our customers, a compelling place to shop . . . by providing convenience and low prices. For our associates, a compelling place to work . . . by providing exceptional opportunities and rewards for achievement. For our investors, a compelling place to invest . . . by providing outstanding returns."

Both of these dollar store operations appear to make it clear that it is their intent to offer discounted retail merchandise in first class fashion. Both companies have a drive and focus which place the average American at the heart of their mission and both companies also seek to present their investors with consistently healthy returns. And the more I read about these two compact discount retailers, the more I get the message that they are far less concerned about competing with each other than they are about trimming the edges off of their mutual competitor Wal-Mart (NYSE:WMT).

Current analyst sentiment for Dollar General is being reported as negative and the analyst consensus is hold. Overall it appears that analysts expect that Dollar General will perform below expectations for 2007, although of all the analyst declarations I reviewed the unanimous opinion was that DG shares will make upward progress through the year.

A contrasting opinion prevails for Family Dollar, with analyst sentiment being reported as positive yet with FDO still only garnering a rating of hold. The analysts' positive projections are markedly similar for both retail operations. It would appear that the positive sentiment for FDO is based upon past market performance more than it is based upon any expectations for the future.

If we look at the two year charting for the two companies and use current share price position to determine who has more room for improvement within their respective averages, Dollar General is currently showing more room for improvement within their average and thus has more room to grow. So if I was looking to choose between the two companies in an effort to get a better return for my invested dollars, I would most likely be tempted to buy into the company which is showing by average that it has more room to grow. Brokerage house declarations can be misleading in the jargon that they use. Most often, a rating of "buy" indicates that value is up and there is little room for growth. Brokerage initiations with a rating of hold often signal to me that a company's stock value is within the buying range if it shows potential for growth and when the big boys start hinting at a "sell" rating I generally see actual buying opportunities if the company is sporting healthy fundamentals.

I'll repeat my assertion that retail operations shall have a tough 2007 on almost all fronts. I don't foresee any large gains year over year and that goes most especially for the largest of the retailers. My personal focus for retail investment this year would remain restricted to high end retailers and those particular opportunities which are presented by unsubstantiated short term value decreases such as where Dollar General appears to be right now.

Lastly, at the risk of stepping on toes, I think we need to look at those analyst initiations less from the perspective of where a stock is and more from a perspective of where those stocks are going. Generally, it's already too late when the big brokerage houses state their positions on a company's share value. Unless you're sitting one click from buy or sell and you are right on top of your portfolio when the big guys state their positions, the action has already happened and it's too late for you. That's why I like to think of those brokerage driven investment strategies as a Cramer-istic type investment flow. I suggest that we stop getting sucked into the turbulence behind the heavy money movements. Smart investing is done by predicting future direction and not by merging in behind the flow.

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Is America one big boring cliche after another? To many foreigners it is, since most of our shopping -- a very big reason for tourism anywhere -- is done at cookie-cutter chain stores. Whether it be home furnishings, consumer electronics, food or baby clothes, there is a chain store (and many different ones at that) dedicated to feeding the commerce need we have for every possible segment of living. Capitalism at its best, you might say. Or, its worst, if you're into the "experience" of shopping rather than the "task" of shopping.

For the most part, done are the days of the "mom and pop" store. The chains are everywhere, ready to sell, serve and provide anything they possibly can while collecting as much information about you as they can. Now, I'm not necessarily against chain stores; as the biggest force in the world's largest economy (at least two-thirds of it) runs from the same consumers who keep these chain stores humming night and day.

Chains like the following list are present in almost every large American city (get ready...deep breath) Bed Bath & Beyond; Linens-n-Things; Barnes & Noble and Borders; PetSmart and Petco; Circuit City and Best Buy; Lowe's and Home Depot; CVS and Walgreens; Wal-Mart, Target and Costco; Dollar General, Family Dollar and Dollar Tree. Need more? How about the Apple Store and Pottery Barn, the Gap and Ann Taylor, Banana Republic and DSW, Starbucks and McDonald's. Now that's a lot of chain stores. What would we do without all these chain stores? Probably we'd all pay higher prices while actually enjoying the shopping experience again. We might even form social attachments to our local merchants again. But, the American consumers' motto continues to be "price, price, and -- well -- price."

That's why we have chain stores.

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