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The S&P 324

If the S&P held to its $4bn market cap hurdle, it would lose 166 components. With 75% of apparel S&P components under that level, this is something to consider.

What does it take to get removed from the S&P 500 Index? LIZ was booted last week due to not even coming close to hitting market cap hurdles. According to S&P, here’s what get’s you the boot from the index. One thing that is clear to me is that S&P has hardly been true to these standards on a consistent basis.

A company must “substantially” violate at least one of the following criteria for an “ongoing” period:

1) Market capitalization must exceed 4 billion
2) Adequate liquidity defined by having the ratio of annual dollar value traded to market cap great than 0.3
3) Corporate governance structure must be consistent with U.S. practice
4) The U.S. portion of revenues, operations, fixed assets, and employees must be a significant portion of the total.
5) Financial viability must be expressed through consecutive quarters of positive as-reported earnings and an operationally justifiable balance sheet.
6) Company should not be involved in mergers, acquisitions, or significant restructuring.

Recently, the Nasdaq temporarily removed their minimum market cap rule…

Below is a chart of the lowest market cap companies in the apparel space:

Zach Brown
Jr Analyst

INDIA: Perspective on the Mumbai Attacks

Despite the devastating terrorist attacks from only five days earlier, life in Mumbai had largely returned to normal by Monday - sidewalk vendors had resumed their business, streets were “choked” with traffic, and the train platforms—the very same platforms that the terrorists arrived on—were congested with commuters, heading in and out of the station now filled with bullet holes. Despite this appearance of normality, not unlike the activity in New York a week after 9/11, the question remains, has the world changed as a result of these attacks? Unequivocally, in our opinion, just like after prior major terrorist attacks, that answer is yes.

In contrast to our view, the main stream consensus media has decided to react differently this time, the “other” times being the other major terrorist attacks post-9/11: Madrid in March 2004 (killed 191, injured 1755) and London in July 2005 (killed 52, injured 700). In numerous reports, the media has mentioned that the terrorists coordinated the attacks with Blackberries, as if for a minute to bring the violence into the living rooms of Blackberry owners and create the image of these attacks being close to home. More generally though, the gravity of these attacks has quickly been dismissed likely because the number of victims didn’t approach the 9/11 numbers, or because Mumbai is so far from US soil.

As Keith noted in The Early Look this morning: “The facts were there – this cross border attack from Pakistan to India was not a trivial one to consider. The financial network media simply chose not to highlight it.”

What we’re left with today is a number of facts and speculation on intelligence. What we know: The 62-hour siege of Mumbai was carried out by ten heavily armed and well-trained gunmen, suspected to have links to the Islamic terrorist group Lashkar-e-Taiba (LET), which is believed to have links to Pakistan’s military intelligence agency. The goal of these terrorists was to kill over 5,000 people, which would have rivaled the 9/11 attacks, the fact that they failed does not alter the seriousness of the action.

According to Goldman Sachs, the India terror attacks won’t hurt the economy. Goldman seems to be, just like the mainstream media, painting an overly optimistic view. We actually believe the implications are potentially significant for stability in the region and tensions between Pakistan and India. This was the fifth major terrorist attack on Indian soil since May. This attack, had it been executed properly, would have been on par with the largest terrorist attack in the last decade, and finally, this action only amplifies heightened tensions between Indian and Pakistan.

We remain short India via the IFN, iShares India etf.

Daryl Jones - Managing Director
Matthew Hedrick - Analyst


ISLE’s FQ2 was a disaster. Company EBITDA missed projections by a whopping 24%. EBITDA fell 21% from last year, and last year was certainly no prize. So the stock should be down big, right? Wrong. ISLE’s stock is ripping, up 10%.

I’m not necessarily making a call on ISLE although I am biased to the long side. The $95 million in insurance proceeds from Hurricane Katrina will help the balance sheet, and the company’s liquidity position was already in decent shape thanks to Dale Black, CFO. The suspension of Capex, as announced today, is another good liquidity move.

However, the stock is essentially an option, and there are probably better risk/reward opportunities on the short and long side elsewhere. I do think the investor reaction to these horrendous operating numbers is quite positive for other regional gaming stocks. This may signal a bottom for stocks such as BYD, PNK, and PENN. All of these companies have ample liquidity and are not going away.

This fits the definition of a bad quarter yet the stock is up!

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Commodity Exposure Exposed – Casual Dining

Last week, the USDA lowered its food inflation forecast for 2009 by 0.5% to reflect the decline in prices for meat, eggs, dairy, cereal and baking products. Despite these declines, food prices are still expected to increase by at least 4% in 2009 (marking the third consecutive year that food prices have increased by 4%). The USDA left unchanged its forecast for 2008 food prices, which are expected to rise 5.5%, the largest increase in two decades.

Specifically, 2009 beef, pork and poultry estimates were lowered and are now forecasted to grow 3% and the forecast for dairy prices were reduced to up 2.5%. That being said, commodity inflation pressures should begin to moderate on a YOY basis in calendar 2009, but will still remain at historically high levels. Gas prices, which are down 40% YOY, should help from both a cost standpoint as added fuel surcharges begin to decline and from a customer demand perspective.

The tables below highlight specific casual dining companies’ commodity exposure and their most recent cost outlook for fiscal 2008 and fiscal 2009.

SP500 Levels Into The Close...

Using 3PM EST prices to refresh our models, here's where we wash out on the SP500:

Negative "Trend" Line resistance = 886

SELL "Trade" = 833
BUY "Trade" = 747

Provided that the VIX closes above 64.58, the US$ closes weaker, US Treasury yield curve continues to flatten, and the SP500 closes under that 833 line, watch out below. You have -10% downside from here.

The Flattening Global Yield Curve...

On this morning's call, we highlighted that the US yield curve is starting to flatten again. This, on balance, is one of the primary reasons why I have a zero position allocated to US equities.

Primarily, this flattening is a function of the long end of the curve coming in hot in the last week. Today 10yr yields in the US are making new lows, trading all the down to 2.69%. Financial models work when the yield curve is steepening (borrow short, lend long), not flattening. Financial liquidity builds from a base of real savings. Real savings do not appreciate when the return on that capital is cut to zero (Japan).

Take a look at the nominal interest rates at Europe below: 1. they are higher than the US rate, and 2. monetary policy has not been neutered yet (they can still actually cut rates and have it matter on the margin).

The balance of global economic power is shifting. The world is gaining what the compromised American central bankers are giving up. The US stock market got clocked yesterday for a lot of reasons. This is one of the big ones.

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