J.C. Penney Is Serving Diluted Kool-Aid

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NEW YORK (TheStreet) -- On Thursday, J.C. Penney announced a 38% share dilution that reminds me of a childhood summer spent at my grandparents home.

My grandmother, having gone through the great depression, diluted everything. If a pack of Kool-Aid called for two quarts of water, you could bet she was making it with three. For Campbell's chicken noodle soup and just about everything requiring water, it was the same -- diluted. Now, 35 years later, I still remember how much I hated drinking watered-down Kool-Aid. There's simply no debate that dilution obliterates the taste.

My grandparents passed with plenty of money, and so they didn't need to water down everything. My grandmother knew she had a choice, but when you live in fear of "you never know," it changes your behavior.

The difference between J.C. Penney and my grandmother is the company is running out of options, and investors will enjoy diluted shares less than drinking watered down Kool-Aid. Raising capital shouldn't come as a shock considering the company is bleeding cash rapidly and reported last month a loss of $2.20 a share for its fiscal second quarter.

It was the sixth quarter in a row of losses and the worst quarter in years. After shares fell another 20%, investors rightfully started to question the company's business.

In response, the company issued a press release dated Sept. 26, which states:

The Company continues to be encouraged by improvements in purchase conversion both in store and on jcp.com, primarily due to being back in stock in key items and sizes the customer expects to find at JCPenney. Overall sales on jcp.com continue to trend double digits ahead of last year.

The Company still anticipates it will experience positive comparable store sales trends coming out of the third quarter and throughout the fourth quarter of 2013.

On the very next day, J.C. Penny and Goldman Sachs announced a 38% share dilution. Apparently, J.C. Penney is hoping investors will drink its watered-down Kool-Aid. Interestingly, Goldman Sachs downgraded J.C. Penney and Macy's , and Goldman is suggesting J.C. Penney's bondholders buy five-year credit-default swaps.