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					                                                              RESEARCH


                                                              EQUITIES

20 January 2009                                               Flows-based Pairs Trading

 S&P 500: Opened Trades
 We have opened one new trade:

                      > Long IAC/InterActiveCorp (IACI), short Family Dollar Stores Inc (FDO)

 Featured Pairs Trade:
  Chart 1: IAC/InterActiveCorp and Family Dollar                                Chart 2:        IAC/InterActiveCorp and Family Dollar
           Stores Inc                                                                           Stores Inc implied volatility


              100%                                                                  110                     IAC/InterActiveCorp
                                                                                                            Family Dollar Stores Inc
              80%                                                                   100
              60%                                                                    90
              40%                                                                    80
     Spread




              20%                                                                    70
               0%
                                                                                     60
              -20%
                                                                                     50
              -40%
              -60%                                                                   40    implied volatility (%)
              -80%                                                                   30
                 Oct-96   Mar-99   Sep-01   Feb-04   Aug-06   Jan-09                  Oct-08            Nov-08         Dec-08          Jan-09



 Source: State Street Global Markets, Bloomberg                               Source: State Street Global Markets

 See page 2 for further details.


   Pairs Trading relies on identifying assets that move together over the long term, but have diverged in the short term. The strategy then
   profits when the relationship mean reverts. The biggest risk to this approach is that financial relationships can change such that a
   structural break occurs. State Street’s unique insights into institutional investor behaviour provide one way to reduce this risk. For
   example, if institutions continue to sell the underperforming asset then we judge the risk of a structural break too great to implement a
   Pairs Trade.
                                                 th
   Please refer to ‘Flows-based Pairs Trading (12 May 2008)’ for further details.




                                                                                                         Please see important disclosures on page 3
                                                                                                                                    EQUITIES

                                                       RESEARCH                                                                     Flows-based Pairs Trading

New Position 1: Long IAC/InterActiveCorp (IACI), short Family Dollar Stores Inc (FDO)
The prices of IAC/InterActiveCorp and Family Dollar Stores Inc have historically traded in line with one another (the ADF statistic of
their price relative is -4.5). IAC/InterActiveCorp has significantly underperformed Family Dollar Stores Inc such that the price relative
has diverged by more than two standard deviations, 51.4%, from its long-run equilibrium. Furthermore, weekly Flows into Internet
Software & Services are stronger than those into Multiline Retail. Our framework therefore recommends a long IAC/InterActiveCorp,
short Family Dollar Stores Inc position.

  Table 1:               Descriptive Statistics
   Descriptive                          Tkr         Curr.           Price     Mkt Cap         Beta               Implied          Report        Ex-Div.       Industry
                                                                               ($ bn)                               vol            Date          Date
   IAC/InterActiveCorp                 IACI         USD             15.1         1.7           0.5                 49%            06 Feb           -          Internet Software &
                                                                                                                                                              Services
   Family Dollar Stores Inc            FDO          USD             28.4            4.0        0.8                       49%      03 Apr        11 Mar        Multiline Retail

Source: State Street Global Markets, Bloomberg. Note: Prices as of open 19 Jan 09


  Chart 3:            IAC/InterActiveCorp and Family Dollar                                        Chart 5:                    Internet Software & Services & Multiline
                      Stores Inc                                                                                               Retail normalized Flows

             45               IAC/InterActiveCorp                50                                                      1.5               Internet Software & Services
             40               Family Dollar Stores Inc, rhs      45
                                                                                                                         1.0               Multiline Retail
             35     price (USD)                                  40
                                                                 35                                                      0.5
             30
                                                                 30
                                                                                                               z-score
             25                                                                                                          0.0
                                                                 25
             20                                                                                                      -0.5
                                                                 20
             15                                                  15                                                  -1.0
             10                                                  10
                                                     price (USD)                                                     -1.5
             5                                                   5
             0                                                   0                                                   -2.0
             Oct-96    Mar-99     Sep-01   Feb-04    Aug-06 Jan-09                                                      Oct-08 Oct-08 Nov-08 Dec-08 Dec-08 Jan-09

Source: State Street Global Markets, Bloomberg                                                   Source: State Street Global Markets

  Chart 4:            IAC/InterActiveCorp relative to Family                                       Chart 6:                    Internet Software & Services vs.
                      Dollar Stores Inc                                                                                        Multiline Retail Flows differential

             100%                                                                                               3.0
             80%                                                                                                2.5
             60%                                                                                                2.0
                                                                                                                1.5
             40%
                                                                                                                1.0
                                                                                                     z-score
    Spread




             20%
                                                                                                                0.5
              0%                                                                                                0.0
             -20%                                                                                              -0.5
             -40%                                                                                              -1.0
             -60%                                                                                              -1.5
             -80%                                                                                              -2.0
                Oct-96    Mar-99    Sep-01    Feb-04        Aug-06     Jan-09                                     Oct-08         Oct-08     Nov-08    Dec-08     Dec-08   Jan-09

Source: State Street Global Markets, Bloomberg                                                   Source: State Street Global Markets

  Table 2: Valuation & Performance Statistics
  Valuation                                                 P/E             P/BV          P/BV rel                  Div.          Payout          ROE          Debt /        LT
                                                                                          (5y avg)                  yield          ratio                       Equity      Growth
  IAC/InterActiveCorp                                       16.1x           0.51x           -58%                      -              -             3%           11%        10.0%
  Family Dollar Stores Inc                                  15.2x           3.06x           2%                      2.0%           30%            20%           20%         11.6%

  Performance & Sentiment                                    1w              1m             3m                       YoY           BB             Buy /           #        Δ EPS
                                                                                                                                  rating          Sells       analysts      est.
  IAC/InterActiveCorp                                        1.1            -7.4           -0.9                     -28.1         3.4 / 5         5/2            17         0%
  Family Dollar Stores Inc                                   3.3            12.2           15.2                     60.5          3.2 / 5         5/3            18         4%

Source: State Street Global Markets, Bloomberg

For the latest research, visit www.globallink.com                                   20 January 2009                                                                                 page 2
                                                                                                                         EQUITIES

                                                        RESEARCH                                                         Flows-based Pairs Trading

Important legal information – please read
The Producer
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The persons responsible for the production of this report are Peter Sullivan (Head of Global Equity Strategy), Christopher Mellor (Senior Equity Strategist), Marija Veitmane
(Senior Equity Strategist), Benjamin Jones (Equity Strategist), and Cecilia Li (Equity Strategist) who are employed by SSGMI as research analysts.

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Risk Warning
Past performance is not necessarily indicative of future results. In addition the price and/or value of and income derived from any particular security may vary because of
changes in interest rates, foreign exchange rates, operational or financial conditions relating to a specific issuer or other factors. Investors may therefore get back less than
originally invested. Furthermore, these securities may not be eligible for sale in all jurisdictions or to certain categories of investors.

Stock Ratings
State Street Global Markets does not assign specific ratings to the securities covered or discussed in its research reports. The pairs trade recommendations are based on
statistically-based methodology, which uses purely quantifiable factors to generate a long / short matched trade.

State Street Global Markets believes, for the sole purpose of complying with the disclosure rules of the Financial Services Authority, that when both stocks are traded together
as a pair, the long position corresponds to a Buy recommendation and the short position to a Sell recommendation.
However, because the quantitative model is based on the relative attractiveness of one security compared to another, the long / short recommendation can not be directly
equated to buy and sell categories for each stock individually. Accordingly both stocks must be traded concurrently and your decision to buy or sell a security should be based
on your individual investment objectives and only after evaluating the expected absolute performance of the relevant security.

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© State Street Corporation, 2009.




Research:
Peter Sullivan               Saul Henry, CFA               Christopher Mellor, CFA       Marija Veitmane, CFA              Benjamin Jones                 Cecilia Li
+44 (0)20 7864 7211          +1 617 664 8932               +44 (0)20 7864 7610           +44 (0)20 7864 7366               +44 (0)20 7864 7630            +44 (0)20 7864 7281
pjsullivan@statestreet.com   sdhenry@statestreet.com       cmellor@statestreet.com       mveitmane@statestreet.com         bdjones@statestreet.com        cli3@statestreet.com
Sam Burns, CFA               Christopher P Harvey          Robert J Hughes               Simon P Whitten                   Naveen Malwal, CFA             Victor Morange
+1 617 664 2881              +1 617 664 5057               +1 617 664 1883               +1 617 664 7789                   +1 617 664 0413                +1 617 664 4939
seburns@statestreet.com      charvey@statestreet.com       rjhughes@statestreet.com      spwhitten@statestreet.com         nmalwal@statestreet.com        vmorange@statestreet.com


For the latest research, visit www.globallink.com                                20 January 2009                                                                                 page 3

				
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