TODAY’S S&P 500 SET-UP – February 14, 2013

As we look at today's setup for the S&P 500, the range is 16 points or 0.68% downside to 1510 and 0.37% upside to 1526.




*Buy trade and sell trade levels updated as of 02/13/13











  • YIELD CURVE: 1.77 from 1.75
  • VIX  closed at 12.98 1 day percent change of 2.69%

MACRO DATA POINTS (Bloomberg Estimates):

  • G20 finance ministers, central bank governors meet in Moscow for two days
  • 5:30am: U.K. to sell GBP4b 1.25% 2018 bonds
  • 8:30am: Initial Jobless Claims, Feb. 9, est. 360k (prior 366k)
  • 9:45am: Bloomberg Consumer Comfort, Feb. 10, prior -36.3
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 10:30am: Fed’s Tarullo testifies before Senate on regulation
  • 11am: U.S. to announce plans for sale of 10Y TIPS
  • 11am: Fed to purchase $4.75b-$5.75b in 2017-2018 sector
  • 12:50pm: Fed’s Bullard speaks in Miss. on economy
  • 1pm: U.S. to sell $16b 30Y bonds


    • 9am: Northrop Grumman briefings on defense programs
    • 9:30am: House Appropriations hears from Undersecretary of State on embassy security
    • 10am: Senate Appropriations Cmte hearing on sequestration
    • 10am: House Select Intelligence Cmte hearing on advanced cyber threats
    • President Obama speaks on economy in Decatur, Ga.
    • Senate Banking Cmte hearing on Dodd-Frank rules
    • Sens. Richard Durbin, D-Ill., Mike Enzi, R-Wyo., Lamar Alexander, R-Tenn., introduce legislation allowing states to collect sales tax from Internet-based retailers


  • AMR, US Airways boards said to approve $11b merger
  • Dell said to plan holder meetings to assess demands for LBO
  • AB InBev to sell U.S. Corona rights to meet deal demands
  • Apple says it will fight Greenlight’s effort to block vote
  • Google sues BT Group unit over 4 patents for network services
  • Buffett’s PacifiCorp denied rehearing of Cal ISO case at FERC
  • Endeavour hires advisers, considers sale of company
  • Time Warner said to talk w/Meredith about magazine deal
  • Total in ‘advanced talks’ to sign China shale exploration accord
  • Newfield to examine alternatives for international properties
  • Bertelsmann said to work w/Lazard on RTL Group share sale
  • Pershing, other funds to report holdings as of Dec. 31


    • Precision Drilling (PD CN) 6am, C$0.08
    • Alliant Energy (LNT) 6am, $0.57
    • Cenovus Energy (CVE CN) 6am, C$0.38
    • Encana (ECA CN) 6am, $0.39
    • Alexion Pharmaceuticals (ALXN) 6:30am, $0.53
    • Regeneron Pharmaceuticals (REGN) 6:30am, $1.37
    • SPX (SPW) 6:30am, $1.56
    • Barrick Gold (ABX CN) 6:46am, $1.05 - Preview
    • PPL (PPL) 6:53am, $0.46
    • General Motors (GM) 6:58am, $0.51 - Preview
    • Incyte (INCY) 7am, $(0.02)
    • Alpha Natural Resources (ANR) 7am, $(0.49)
    • Discovery Communications (DISCA) 7am, $0.76
    • Jarden (JAH) 7am, $1.26
    • PepsiCo (PEP) 7am, $1.05 - Preview
    • RioCan Real Estate Investment Trust (REI-U CN) 7am, C$0.37
    • GNC Holdings (GNC) 7:30am, $0.46
    • NorthStar Realty Finance (NRF) 7:30am, $0.22
    • BorgWarner (BWA) 7:30am, $1.14
    • DIRECTV (DTV) 7:30am, $1.15
    • Molson Coors Brewing Co (TAP) 7:30am, $0.64
    • Waste Management (WM) 7:30am, $0.60
    • Apache (APA) 8am, $2.29
    • Vulcan Materials (VMC) 8am, $(0.09)
    • Realty Income (O) 9:15am, $0.54
    • CI Financial (CIX CN) 12:41pm, C$0.34
    • CBS (CBS) 4:01pm, $0.70
    • DaVita HealthCare Partners (DVA) 4:01pm, $1.58
    • Brocade Communications Systems (BRCD) 4:04pm, $0.16
    • QLIK Technologies (QLIK) 4:05pm, $0.23
    • Agilent Technologies (A) 4:05pm, $0.67
    • Health Management Associates (HMA) 4:05pm, $0.19
    • Fairfax Financial Holdings Ltd (FFH CN) 5:01pm, $8.87
    • Goldcorp (G CN) 5:01pm, $0.55
    • Key Energy Services (KEG) Post-Mkt, $0.08


  • Sugar War Revived as U.S. Senators Back Cuts in Price Supports
  • Cattle Disappearing Amid Drought Signals Beef Rally: Commodities
  • Gold Demand Rose 3.8% in Fourth Quarter, Narrowing Annual Drop
  • Platinum Widens Spread Over Gold as Supply Concern Drives Rally
  • Aluminum Climbs for Third Day Before Report on Jobless Claims
  • Wheat Rebounds From Seven-Month Low as U.S. Exports May Increase
  • Barrick Gold Takes $3 Billion Writedown on Zambia Copper Mine
  • Astra Agro Targets 10% Production Growth This Year, Mahdi Says
  • Soy Spread Surging Amid Wait for Big Harvest: Technical Analysis
  • Indonesian Palm Exports to Slump to Four-Month Low; Futures Drop
  • Gold Fields’ Profit Declines 7.4% After Strikes Cuts Production
  • Desalination Seen Booming at 15% a Year as World Water Dries Up
  • Alpha Quarterly Results Exceed Estimates After Coal Exports Rise
  • ‘No Moo in Mince’ Claim Helps Horse Meat in Food Scandal Twist
  • Gold Council Sees Central Bank Bullion Buying at 48-Year High


















The Hedgeye Macro Team





New Deal for Anheuser-Busch InBev/Modelo and Constellation Brands

What’s New?

In a press release this morning, Anheuser-Busch InBev, Grupo Modelo and Constellation Brands announced a revised merger agreement that completely divests Grupo Modelo’s interest in the U.S. in perpetuity.  Under the terms of this revised agreement, STZ will acquire (in addition to the Crown JV as originally contemplated) Compania Cervecera de Coahuila, an asset that includes Grupo Modelo’s brewery in Northern Mexico as well as the profit stream associated with the sale of beer to Crown.    The total compensation now moves to approximately $4.75 billion ($2.90 billion for the brewery and $1.85 billion for Crown).

This revised agreement provides for STZ’s complete control over all aspects, including production, of Grupo Modelo’s brands in the United States, effectively establishing STZ as the third largest brewer in the U.S

Almost certainly, this revised agreement was created within the context of the ongoing discussions with the Department of Justice, satisfying most, if not all, of the concerns expressed in the DOJ’s complaint, making regulatory approval extremely likely.

What Does it Mean?


As some background, there are two profit streams associated with the sale of Grupo Modelo’s brands in the United States.

  1. Crown JV - $2.5 billion of revenue, $430 million of EBIT – to be acquired by STZ under original agreement
  2. Compania Cervecera de Coahuila - $310 million of EBITDA derived the manufacturing and licensing of the Modelo brands to the Crown JV

STZ will own the entirety of the profit pool associated with the sale of Grupo Modelo’s brands in the United States.  The quick and dirty math is as follows (2013):

  1. Approximately $660 million of EBITDA generated by the wine and spirits business at STZ
  2. An incremental $450 million of EBIT/EBITDA to be acquired under the terms of the original transaction (likely very little depreciation as there were few assets associated with the deal)
  3. $310 million of EBITDA associated with Compania Cervecera de Coahuila
  4. $1,420 million in total EBITDA at Constellation (roughly and conservatively)
  5. At $40 per STZ share, we conservatively estimate EV/EBITDA at 10.5x – for perspective, TAP trades at 9.4x a 2013 EBITDA number we don’t think that the company will achieve

The Good and the Bad

  1. Positive – deal almost certainly gets done having satisfied the bulk of the concerns expressed by the DOJ
  2. Positive – STZ becomes the 3rd largest brewer in the U.S. with a premium portfolio in the fastest growing segment of the U.S. beer market
  3. Negative – new transaction moves STZ between 5.0 – 5.5x debt to EBITDA
  4. Negative - deal moves from asset light to asset heavy for STZ – there were virtually no assets associated with the original deal.  Under the modified terms, STZ owns a brewery and one that needs to be expanded over time to meet the demands of the Crown JV, to the tune of $400 million in CAPEX over three years



Obviously, today's news justifies our view that the value of the transaction to Anheuser-Busch InBev was so substantial globally that the company was willing to make significant concessions related to the business in the U.S.  With the closing of the deal highly likely now that the transaction has been revised, we believe that STZ should move to the mid-$40's based upon our math.  We suspect that the first print of the day will be close to $41 and that buyers come into what will be a very different Constellation Brands going forward.  We may even get a couple of upgrades from the shops that downgraded the name at $31 last week.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Early Look

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Game Plans and Chocolate Choices

“All I really need is love, but a little chocolate now and then doesn't hurt!” 

-Charles M. Schulz, Peanuts.


As I set about to find an appropriate theme for the Early Look this morning, I was reminded that it is Valentine’s Day.  Now just how I was reminded of Valentine’s Day is interesting in and of itself; watching the news get interrupted by yet another commercial for Kay Jewelers pitching their seemingly endless collection of heart-shaped charms and sparkling pendants.  Of course TV isn’t the only place I have been inundated with a Valentine’s Day message to exercise consumerism.  All I had to do was to walk into my local pharmacy or discount store where I had to snake my way around displays of candy boxes in every shape, size, and assortment.  Honestly, without these less-than-subtle reminders, Valentine’s Day might sneak up on me unnoticed and Hallmark might miss the sale of one additional card.


A lot of chocolates and gifts are bought for Valentine’s Day.  According to the National Retail Federation, the average male will spend $175.61 this Valentine’s Day on gifts, jewelry, roses, chocolates, dates and more.  Women will spend just less than $89.  It is estimated that more than 58 million pounds of chocolate will be sold in the days leading up to Valentine’s Day. All totaled, it is estimated that $13.19 Billion will be spent. 


Those same commercials that last night reminded me of Valentine’s Day were also omnipresent both before and after Tuesday evening’s State of the Union message.  Thinking about the marketing effectiveness surrounding Valentine’s Day, I wonder if a similarly unavoidable marketing reminder of the rising United States debt, the current Federal deficit, and pending sequestration cuts would drive more timely decision making by the male and female constituents of congress.  I bet they made their respective Valentine’s decisions before today!


From candy and gifts to the State of the Union.

Tuesday evening’s address seemed to me a rambling list of the wonderful things this administration is hoping to set in place during the balance of Obama’s term in office.  And whenever I hear “hope”, I am now conditioned to question the means behind the anticipated “hoped-for” event.  The President spoke of expansive government involvement ranging from building roads and bridges to pre-kindergarten education for four year olds, and from Social Security and Medicare to energy independence.  Very little discourse was aimed at the funding of these proposals.  Like walking into displays of chocolates around Valentine’s Day, does it not make sense to discover which ones are favored by your sweetheart first?  Certainly, buying every option in the store so as not to neglect that one special favorite is less than efficient, if not financially impossible. 


Not knowing what chocolates are favored, would you elect to push off Valentine’s Day a couple months if you could?  Would you kick the can down the road and address the decision later?  What if Valentine’s Day could not be delayed or postponed?  What then of your chocolate choices?


At Hedgeye, we tend to simplify our thinking wherever possible and bring complicated matters down to sporting metaphors where appropriate.  In this case, I think of the Federal budget as the foundation of any game plan for our government.  Pending decisions for our congressional leaders seem too easily kicked down the road.  Congress has failed to pass a Federal budget since 2009!  How should we expect our leaders to make decisions that potentially influence our enemies and allies alike, positively and negatively, without a game plan?  I played for some Hall of Fame coaches in Herb Brooks and Bob Johnson.  Like Keith and Daryl, I also played for the legendary Tim Taylor at Yale.  Whether it was hockey, football, volleyball, softball, tennis, golf, or any other sport, there was always a game plan!


The Federal Debt level is fast approaching $16.5 Trillion.  It is estimated that 2013 will add another $900 Billion-$1 Trillion.  Rienhart and Rogoff will argue that “Countries with debt to GDP ratios above a certain level (90%) tend to experience slower economic growth.”  It certainly appears that the U.S. has reached the point where our debt levels significantly dampen growth.


Of particular interest to me during the State of the Union speech were the President’s plans projecting out a decade and longer.   At Hedgeye we talk about duration and believe projections longer than three years out are highly subject to forecasting error.  Already the US economy is showing anemic growth.  The most recent figures showed a decline of -0.1% in US GDP during the fourth quarter.  The CBO office is projecting 1.4% growth for fiscal 2013.  And projecting 2.6%, 4.1%, and 4.4% in ’14, ’15, and ’16 respectively.  Unfortunately, much of the US expenditure projections are not as flexible or easily manipulated as the revenue and economic growth assumptions.


Just for reference, the average US GDP growth rate over the past ten years was 1.7%.  What is the real plan and how does Congress make it flexible enough to adjust for the game changing and to embrace the unknowns?


And what about the sequester and Congress?  Referring to Congress after the State of the Union speech by President Obama, House Speaker John Boehner stated,  “None of them have ever lived under a sequester.  For that matter, neither have I…This is going to be a little bleak around here when this actually happens and people actually have to make decisions.”    A sobering thought during times when decisions have to be made that will affect the lives and finances of so many.


My Valentine’s wish is for Congress to develop a game plan; one with real metrics, transparent to voters, and offering accountability.


As for chocolate choices, I know yours will be easier than the decisions that face our Congressional leaders.  My Valentine’s Day game plan is simple.  My wife will wake to a card on the counter under a package of Reese’s Cups.  And I am likely to read my card from her as I down a handful of plain M&M’s with my morning coffee.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, and the SP500 are now $1, $116.98-118.91, $79.71-80.31, 92.78-94.46, 1.96-2.01%, and 1, respectively.


Happy Valentine’s Day!


Bob Brooke

Managing Director


Game Plans and Chocolate Choices  - Chart of the Day


Game Plans and Chocolate Choices  - Virtual Portfolio


The Macau Metro Monitor, February 14, 2013




The Year of the Snake continues to bring thousands of tourists to Macau, although the growth rate has slowed down.  Yesterday, Macau welcomed close to 162,000 visitors, an increase of 16.4% YoY.  That marked a growth slowdown in comparison with the day before, when Macau welcomed almost 167,000 visitors, up by 28.4% YoY.  Note that the figures provided by the Tourist Office also include non-resident workers and students, some of whom exit and re-enter Macau during the holiday period.


Of the total tourist arrivals recorded yesterday, close to 114,000 were from the mainland, up by 24.6% YoY. The soaring number of tourists is putting heavy pressure on Macau’s borders, in particular on the Border Gate checkpoint, which is the busiest.  Media reports said that people had to wait for several hours either to enter or leave Macau.  Some chaotic scenes and scuffles were recorded, though there have been no reports of people being injured.


In the first four days of the Year of the Snake, Macau welcomed close to 566,000 tourists, up by 21.5% YoY.



Marina Bay Sands was fined $475,000 by the Casino Regulatory Authority of Singapore (CRA) on Wednesday for surveillance breaches.  The integrated resort had failed on three counts and were fined under Regulation 3(2) of the Casino Control (Surveillance) Regulations.  The first breach, which led to a $150,000 fine, was for failing to retain casino surveillance footage during the period of Sep 14, 2011 to April 12, 2012. Casinos have to retain footage for a specified time period. The time period was not disclosed.  The second fine of $100,000, was for failing to ensure continuous recording of casino surveillance footage from Dec 17, 2011 to June 14, 2012.  The third fine of $225,000, was for the lack of notification system to alert the casino of failures to their surveillance system.

Practioner Pants

This note was originally published at 8am on January 31, 2013 for Hedgeye subscribers.

“Only practitioners (or people who do things) tend to spontaneously get the point.”

-Nassim Taleb


On a flight to Denver last night I had round 2 with Taleb’s new book, Antifragility. It wasn’t painful, but I definitely feel like the guy has something brewing inside of him. Transitioning from a market practitioner to a philosopher can’t be easy.


“I am re-connected to my practical self, my soul of a practitioner, as this is a merger of my entire history as practitioner and volatility specialist combined with my intellectual and philosophical interests in randomness and uncertainty…” (page 13)


People can go a little squirelly when they over-think the complex.


Back to the Global Macro Grind


Buy or sell? Or, as my 2-year old daughter Callie has figured out (when asking me for something when she senses I am pre-occupied), “yes or no?”. If you are playing this Game of Risk in real-time, you don’t have time to philosophize. Save that for the weekends.


On Monday and Tuesday, we bought the US Equity market open (on red). Yesterday, we sold it (on green). It doesn’t always work out that way - but when it does, at least you know that you did it for a reason.

In yesterday’s rant, I outlined the reasons to make some risk adjusted sales (SP500 and US Treasury 10yr Yields immediate-term TRADE overbought) pre-game. And that’s really why I do what I do. I need a repeatable process so that I can have a plan.


Oh, and the plan is that the plans are always changing …


Some people don’t like that. It doesn’t sound sophisticated, I guess. But on that point, I agree with Taleb: “Simplicity has been difficult to implement in modern life because it is against the spirit of a certain brand of people who seek sophistications…”


Less is more and usually more effective.” –Nassim Taleb


So, let’s slap on the Practitioner Pants and go down that path this morning (just bullet points from my notebook).



  1. Russell2000 reversed from its all-time high yesterday, closing down -1.2% at 896
  2. SP500 was down for the 2nd day in 3, finally making a lower high vs the YTD closing high of 1507
  3. US Equity Volatility (VIX) continues to signal a Risk Range with lower-highs and lower lows (11.94-14.62)
  4. US Equity market Volume is finally starting to show some flickers of light (+8% versus the TREND avg)
  5. All 9 S&P Sectors in our model are bullish on both our TRADE and TREND durations (19 of the last 20 days)
  6. US Dollar Index signaled immediate-term TRADE oversold at $79.24 yesterday
  7. US Treasury Yields (10yr) signaled immediate-term TRADE overbought at 2.04%; next support 1.93%
  8. Apple (AAPL) failed at immediate-term resistance yesterday; Risk Range = $420-461 


  1. Eurostoxx50 and Eurostoxx600 both signaled immediate-term TRADE overbought yesterday
  2. DAX immediate-term TRADE support line of 7771 needs to hold for price momentum to continue
  3. Spain’s IBEX is snapping its immediate-term TRADE support of 8494 this morning (-1.6%)
  4. Italy’s MIB Index is breaking its immediate-term TRADE support of 17189 this morning (-1.1%)
  5. Greece’s squeezage finally stopped for a day (Athex index -1.5%)
  6. Euro (vs USD) = immediate-term TRADE overbought at $1.35 (support = $1.33)


  1. China’s stock market (Shanghai Comp) is signaling immediate-term TRADE overbought at 2384
  2. Japan’s Nikkei (up +28.6% as the Yen gets Taro Aso’d) has immediate-term TRADE resistance at 11159
  3. South Korea’s KOSPI remains bearish TRADE (1976 resistance) and bullish TREND (1959 support)
  4. India’s BSE Sensex is down (net) since being the first major country to cut rates in 2013
  5. Thailand and Vietnam (momentum markets in Asian Equities) corrected -1.1% and -1.6% overnight
  6. Brazil’s BOVESPA Index snapped immediate-term TRADE support of 60889, -1.8% yesterday

What’s new? We have 4 major countries (Brazil, South Korea, Spain, and Italy) showing initial chinks in the Global Equity market armor. It’s only an immediate-term TRADE signal (all remain bullish intermediate-term TRENDs), so do with it what you decide to do. I did.


Catalysts? It’s month-end today. Tomorrow you probably get another confirmation on why stocks are crushing US Treasuries and Gold for 2013 YTD (employment #GrowthStabilizing). But, at the same time, Oil prices up here are a new headwind to global consumption.


Buy or sell? Yes or no? These are simple questions requiring simple answers. No one has a Ph.d in playing a game that’s always changing. Stick with the practitioners. We can win this game together.


Our newly minted Senior Sector Head of Consumer Staples, Rob Campagnino, will be hosting an expert call on pyramid schemes ("An Expert's Opinion on Multi-Level Marketing, Pyramid Schemes and Herbalife” featuring multi-level marketing expert Dr. Jon M. Taylor) at 1030AM EST today. Ping if you are interested.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1649-1678, $113.02-115.22, $79.24-79.81, $1.33-1.35, 89.98-91.68, 1.93-2.04%, and 1495-1511, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Practioner Pants - Chart of the Day


Practioner Pants - Virtual Portfolio


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