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Eye On Leadership: "Obamerica"

As we mentioned in the Early Look this morning, we are beginning to proactively prepare for a Barak Obama victory in three weeks. The polls, news flow and every incremental data point seem to point to an Obama victory. In our opinion, this is a victory that could easily morph into a landslide.

The most recent national poll, from CBS-NY Times, has Obama with a 14-point lead at 53 – 39 in likely voters. This poll is obviously an outlier, but a noteworthy call out in that the last time this poll was taken, seven days ago, Obama only had a lead of 3-point lead in the poll.

The other indicators we are focused on include:
• The Real Clear Politics national poll average now that has Obama leading by 8-points and, for the first time ever, Obama is polling above 50% in the average;

• The Real Clear Politics electoral college poll average now has Obama/Biden at 313, McCain/Palin at 159, and Toss Ups at 67, so even if all states currently categorized as Toss Ups swing to McCain he will lose; and

• The Intrade Market now has Obama trading at 80.1, which means that if you buy Obama you only get a payout of 19.9 if he wins.

Absent an “October surprise” between now and November 4th, an Obama victory is almost a sure thing. The impact of this Obama momentum will also be felt in the congressional races. Increasingly, an expanding Democratic majority in the House and the potential for a filibuster proof majority for the Democrats in the Senate. Incidentally, the last time the Democrats won the Presidency, had a majority in the House, and filibuster proof majority in the Senate was Jimmy Carter in 1976.

While we could easily make the case that Barak Obama is the second coming of Jimmy Carter, the current Republican administration is hardly differentiating themselves as free market capitalists. As Allan Mendlowitz very aptly stated: “The Bush administration, which took office as social conservatives, is now leaving as conservative socialists.”

Daryl G. Jones
Managing Director

Dear George, It's Time...

At the risk of sacrificing accuracy for verbatim, I will paraphrase what JPM's CEO, Jaime Dimon, just said on his quarterly conference call when asked about what he plans on doing with the $25B (bee-llion) that Paulson just passed over to him and the boys at “Investment Banking Inc”...

'While it we may NOT have needed the money, we'll GLADLY accept it'...

Is this what Hank Paulson had in mind in setting this entire country on fire with alarmist rhetoric? JPM doesn’t need the money!

This is beyond embarrassing. American integrity is being short sold by the world this morning. We can do much better than this. George, it’s time to fire Hank “The Market Tank”. He is crushing our retirement accounts. Bring in someone else and the ensuing market rally will make Monday’s melt-up look tame.

You used to have a man managing the Iraq situation as recklessly. His name was Rumsfeld.

Sadly,

Keith McCullough
Research Edge LLC

A ‘Must Read’ on an Underappreciated Issue

I can assure you that almost no one I talk to considers the Employee Free Choice Act a big deal. My Partner Todd Jordan has been all over this one. Here’s a ‘must read’ excerpt from his lodging note this morning that has implications across every industry. People in retail (including me) are looking at higher imported inflation, but are they looking at domestic employee wage pressure as unions rebuild after years of shrinkage? You can bet that Wal*Mart is looking seriously at this...
Brian McGough
“We will pass the Employee Free Choice Act. It’s not a matter of if, it’s a matter of when.” – Barack Obama

“Madam Speaker, I rise today in support of the Employee Free Choice Act, because the right to organize is essential to the path to prosperity for all Americans.” – Speaker of the House Nancy Pelosi

“Every single Senator ought to support this bill.” – Senate Majority Leader Harry Reid

These quotes should remove any doubt. If Obama is elected President, the Employee Free Choice Act will become law. Whether or not the removal of secret ballots in deciding union elections makes employees more free is not important. Since 1989, unions have contributed almost $500 million to political campaigns. Over 90% of that cash has gone to Democrats. The favor will be paid back by an Obama administration and a Democratic congress.

So what does this mean? The elimination of secret ballots will make it much easier to unionize. Secret ballots are the cornerstone of any modern democracy for a reason. People can vote without the pressure that an open petition would apply. More unions = higher wages and benefits for hotel, casino, and leisure companies to name just a few.

Todd Jordan
Managing Director

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Early Read: Good Sports Apparel Numbers

Sports apparel sales continue to look good, despite the malaise out there in retail-land. The latest Sportscan numbers (for the week ended Sunday) were +5.2%. Trailing 3 week trend (which I think is far more relevant) is trending higher for $$, units and ASP. Better on the margin for FINL, FL, DKS and HIBB.

FREE EMPLOYEES, NIX THE SECRET BALLOT

“Madam Speaker, I rise today in support of the Employee Free Choice Act, because the right to organize is essential to the path to prosperity for all Americans.” – Speaker of the House Nancy Pelosi

“Every single Senator ought to support this bill.” – Senate Majority Leader Harry Reid

These quotes should remove any doubt. If Obama is elected President, the Employee Free Choice Act will become law. Whether or not the removal of secret ballots in deciding union elections makes employees more free is not important. Since 1989, unions have contributed almost $500 million to political campaigns. Over 90% of that cash has gone to Democrats. The favor will be paid back by an Obama administration and a Democratic congress.

So what does this mean? The elimination of secret ballots will make it much easier to unionize. Secret ballots are the cornerstone of any modern democracy for a reason. People can vote without the pressure that an open petition would apply. More unions = higher wages and benefits for Restaurants, hotel, casino, and most leisure companies.

Todd Jordan
Managing Director

For the restaurant industry, labor costs have been a significant issue for years. At this point in the cycle, there is no reason to assume that these labor cost increases are going away. Instead, the mandated increase in minimum wage, coupled with the Employee Free Choice Act could accelerate labor cost pressures for all restaurant companies.

Something to think about.......

Read Through From JNY Miss

JNY puked the quarter. So now what? Here’s my take on other names that are likely to be arbitrarily taken out back and shot this morning. JNY, LIZ, RL, VFC, PVH… More to come.

Despite my view that the consumer would not notice if half of JNY’s portfolio ceased to exist, I was not expecting such a meaningful 3Q miss. In tearing it apart, it’s interesting to see that sales were decent enough relative to expectations – with no sequential erosion in aggregate versus 2Q levels. Gross margins were quite good, actually, as the company continues to decimate its moderate apparel business. But unfortunately it delivered SG&A by over 300bp. I think that the current management team is doing the right thing by investing in a portfolio that has long been ignored and undercapitalized by the former CEO. Unfortunately, keeping such discipline makes for painful deleverage on the way down. Even more unfortunate is that my confidence that JNY’s EPS will ever poke its head above $1.00 is close to nil.

I’m less concerned about JNY this morning as I am with how the market will take the rest of the group out back and shoot before aiming. Some will be justified, while others will not. Here are a few standouts…

1) LIZ: forever JNY’s top comp, it is almost a mathematical certainty that LIZ will trade down today. I’m buying into that. The key part of the LIZ story that people don’t seem to appreciate is that the company is cutting capex – potentially in half in FY09 – as it slows growth meaningfully and corrects margin. With a 42% SG&A ratio – to JNY’s 28% and industry norm of 35% -- we should see cash flow accelerate meaningfully in FY09. I like this name at current levels.

2) RL: Am I increasingly worried about wholesale sales? No. But Europe (near 1/3 of sales) is more of a concern for me given the sheer uniformity we’ve seen across Europe across all consumer spending categories (note Burberry on Monday). I still think that numbers are too low for RL, but my confidence level in the ‘smoking expectations factor’ has come down a notch. If RL simply hits the consensus, then even though it is sub-6x EBITDA that’s not cheap relative to other names in this new valuation paradigm.

3) VFC: VFC is unlikely to tank the quarter on Friday. Jeans business is hanging in just fine, Outdoor business is losing share on the margin to Columbia in the sporting goods channel, but is being shifted to TNF’s company-owned stores (which scare me). Acquisitions help this quarter as well. But starting in 4Q there WILL be a meaningful deceleration in top line due to acquisitions and FX, and cash flow compares get much more difficult. I still don’t understand how this name trades at 6.5x EBITDA in that context (several notches above all else). Is it the 3.7% div yield? I have to admit that I like that. But I’m still not owning this puppy at these levels.

4) PVH: Likely to get shot this morning. Given earnings risk associated with core men’s shirt and dress furnishings businesses, it should. I’m not comfortable going near this name without a 20% hit.

More updates later…

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