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Talks Between the DOJ and Anheuser-Busch InBev "Progressing Smoothly"

It isn’t our habit to respond to Bloomberg articles, but we received some questions so we thought it might make sense to respond more broadly.  Just prior to the close, Bloomberg reported that talks between the Department of Justice and Anheuser-Busch InBev regarding the proposed transaction involving Grupo Modelo were “progressing smoothly”.  The article further suggested that the DOJ’s focus was on Constellation Brands’ plans to expand Piedras Negras (brewery in Northern Mexico).

 

The article went on to suggest that it was unlikely an agreement would be reached prior to March 19th (the date both parties agreed the pending litigation should be stayed until).


Three quick points:

  1. It appears to us that the DOJ wants to make certain that ABI will be removed from the business of brewing the beer that comes into the US.  This is unsurprising as the DOJ, in the original complaint, equated controlling the supply with de facto market share control.  Absurd? Yup, but the current deal structure should satisfy the DOJ on this count.
  2. It would also seem that the DOJ is comfortable with STZ being involved in the transaction (another frequent question) – in fact, it is unlikely that ABI would have reworked the deal in the fashion it did without at least a wink from the Justice Department that it could live with STZ as the owner of the Corona brand.
  3. The March 19th date isn’t a drop dead date – both parties agreed to the date, and both parties can agree to extend the date.  We are fairly certain any Judge would be happy to keep the negotiations going, particularly if progress is being made.  Most courts have better things to do.

So, to the extent that the facts contained in Friday’s article are correct, they are wholly consistent with our view of a high probability of the new deal structure gaining regulatory approval.  Having said that, we prefer the risk/reward profile on BUD (versus STZ), and think BUD can work toward $110 per share.  STZ has upside toward $50 per share, in our view, but more significant downside risk in the event the DOJ elects to revert to some of its prior irrationality.


Call with questions,

 

Rob

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E: 

P: 

 

Matt Hedrick

Senior Analyst


THE WEEK AHEAD

The Economic Data calendar for the week of the 11th of March through the 15th of March is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

THE WEEK AHEAD - WeekAhead


TRADE OF THE DAY: GS

Today we bought Goldman Sachs (GS) at $153.09 a share at 3:38 PM EDT in our Real-Time Alerts. When markets rage, Goldman crushes it. Stock is immediate-term TRADE oversold within a Bullish Formation. Check out Hedgeye Financials Sector Head Josh Steiner's research note from yesterday. 

 

TRADE OF THE DAY: GS - TOTDGS


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VIDEO: Making Moves In The Markets

 

Hedgeye's Director of Research Daryl Jones appeared on CNBC's Closing Bell Exchange this afternoon to discuss the S&P 500 and record highs being made in the US equity markets. Jones discussed how the strong outlook for the US dollar will be good for the American consumer and how derivative plays on housing are worth allocating capital to. He also reiterated his call made on CNBC last week that being bullish and overweight on US equities is the key to success.

 

You can watch Daryl's full appearance on CNBC in the video posted above.


Employment Data Confirming Bearish Casual Dining Stance

Comparing the job growth trends, implied by the BLS data released today, in limited service and casual dining suggests that the relative softness in casual dining trends is continuing.  

 

Knapp Track same-restaurant sales data track BLS employment growth data for the full-service restaurant industry.

 

Employment Data Confirming Bearish Casual Dining Stance - knapp versus full service employment growth

 

 

Employment growth by Age

 

Employment growth by age data continues to imply that quick service restaurants are benefiting from improving job growth in the younger age cohorts while casual dining struggles are being exacerbated by decelerating employment growth among some of that sector’s most important demographics.

 

The chart below illustrates continuing growth in the employment of 20-24 year old's while employment growth in the 35-44 YOA and 45-54 YOA cohorts declined in February, albeit at a lesser rate than in January. 

 

Employment Data Confirming Bearish Casual Dining Stance - Employment by Age

 

 

Industry Employment

 

If we assume that hiring within the restaurant industry serves as a proxy for operator confidence, it seems that QSR operators have a much different outlook than casual dining operators. 

 

The Leisure & Hospitality employment growth decelerated in February, suggesting that overall trends for the restaurant industry may be turning negative.   Quick service chains seems to be benefiting from casual dining’s malaise.

 

Employment Data Confirming Bearish Casual Dining Stance - restaurant employment growth

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


6-Handle: Back in Play as Labor Trends Accelerate?

Takeaway: Today’s Employment data supports our domestic #growthstabilizing view and offers positive confirmation of accelerating Labor Market Trends

Summary Takeaways:

  • Unemployment Rate:  Bullish combination of variable dynamics for unemployment rate improvement as a big delta between the change in employed (+170K M/M) and the change in the unemployed (-300K M/M) drove the Unemployment and the Labor Force Participation rate lower. 
  • Temp & Part-time Workers:  Growth in Temp & Part-time employment continues to decline.  To the extent FT can displace temp/part-time workers, consumption stands to benefit as workers gain benefits, weekly wages rise, and confidence/clarity around future income supports marginal spending decisions.
  • Employment by Age:  The barbell recovery in employment remains in effect as employment growth for 20-35 and 55+ year olds remains healthy while job growth for 35-54 year olds is back to negative.
  • State & Local Employment:  Continues to tread water just below the zero line.  It's still unclear how much of an impact the sequester will have on hiring decisions at the state & local gov’t level
  • Revision:  January’s Private payroll number was revised lower by 26K.   The market should look through the negative revision given the strength in the February number.   Adjusted for the negative revision, the change in private payrolls for February still beat by 50K. 

 

 

Today’s Employment data supports our constructive view on domestic #growthstabilizing, and offers positive confirmation of the accelerating labor market trends observed in both the initial claims and ADP series. 

 

Below we revisit the idea of seeing a 6-handle in unemployment in 2013, and provide a two-pronged breakdown of today’s Labor Market Numbers:  Analysis of the Current Population Survey (Household Survey) which drives the Unemployment Rate & the Establishment Survey (CES) which drives the NFP Number:

 

 

6-Handle?  In a previous scenario analysis, we examined the extent to which the variables driving the unemployment rate would have to move to push unemployment below 7% over 2013 (Will We See 6.5% Unemployment in 2013? ).  While a sub-7% unemployment rate probably wouldn’t represent our baseline case, we wouldn’t view it as a tail probability either.  In fact, the declining labor force participation rate and 200K+ employment gain we saw this month represents the variable dynamic required for a move below 7% over the NTM.   

 

A continuation of February's trend and a run at a 6-handle in unemployment into 2013 year-end would effectively extend our existing investment view – long consumption oriented equities, short bonds and commodities as the growth/employment data would remain equity bullish, $USD Bullish (via shifting policy and interest rate expectations) and bond & commodity (to the extent negative correlations to the $USD hold) bearish. 

 

 

 Household Survey: 

 

Total Employed & Employment By Age:  Total Employment as measured by the household survey was up 170K in February with y/y growth decelerating 2bps sequentially to 1.0%.    

 

The hallmark of the employment downturn thru the Great Recession was the contrast between the extreme job loss among younger cohorts and the relative employment stability among older workers (employment for 55-64 yr. olds never went negative through the great recession).   What we’ve seen over the last three years has been a distinct barbell recovery as employment growth for 20-35 and 55+ year olds has been strong while job growth for 35-54 year olds has failed to gain sustainable traction.  This trend extended itself further in February.

 

As it relates to our bullish view on housing, the 20-35 year old cohort remains the biggest demographic driver of household formation. Continued positive employment growth in that age group should provide an ongoing support to housing demand.  

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Employment by Age

 

Civilian Noninstitutional Population:  Each January the Census Bureau's estimates of the civilian noninstitutional population ages 16 and over are revised back to the base period for intercensal estimation, currently April 2010.  The annual benchmark adjustment is applied without any smoothing or rearward revision and shows up as single bolus in the January release.  

 

The January 2013 adjustment (+138K) was largely benign from a historical perspective.  Following the January Adjustment, growth estimates for the CNP are generally stable for the balance of the year.  Note that is the difference between growth in the CNP and growth in the Total Labor Force (Employed + Unemployed as measured by the BLS Household Survey) that drives the movement in the Labor Force Participation Rate.  

 

6-Handle:  Back in Play as Labor Trends Accelerate? - CNP

 

Unemployment Rate:  The Unemployment rate decreased from to 7.9% to 7.7% m/m.  As an Unemployment 101 reminder, the Unemployment & Labor Force Participation rates are primarily a function of 3 variables:  The growth in the Civilian Noninstitutional Population (CNP), growth in the Employed, and growth in the Unemployed. 

 

The sum of Employed + Unemployed = The Total Labor Force, The Unemployed as a % of the Total Labor Force (i.e. Employed + Unemployed) = Unemployment Rate, and  the Total Labor Force/CNP = Labor Force Participation Rate.  

 

In terms of the variable dynamics, there are a couple of simple relationships to keep in mind.   First, as it relates to the Labor Force Participation Rate, if growth in the Total Labor Force (Employed + Unemployed) is faster than growth in the Civilian Noninstitutional Population, then the labor force participation rate will increase & vice versa.  Second, as it relates to the Unemployment Rate, if growth in the Employed is stronger than growth in the Unemployed or, conversely, if the decline in the unemployed in greater than the decline in the employed, the Unemployment rate stands to benefit. .    

 

Thus, a rising participation rate alongside a declining unemployment rate represents the most bullish factor combination and a declining participation rate alongside a rising unemployment rate the most bearish combination from an economic/end consumption perspective.  A declining participation rate alongside a declining unemployment rate, which is the dynamic we have observed for the better part of the last few years, reflects a mixed labor market picture as the decline in the unemployed has been more a function of individuals dropping out the Labor Force (discouraged, retiring, disabled)  than it was those individuals gaining employment.      

 

The principal driver of the decrease in Unemployment this month was the delta between the change in the employed and the change in the unemployed.   Total Employed increased 170K sequentially while the Total Unemployed declined 300K sequentially, a 407K delta.  In this instance, the -300K change in the numerator (Unemployed/(Employed + Unemployed)  dominates the impact and serves to drive the Unemployment Rate lower.

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Unemployment Rate vs. LFPR

 

Part-time & Temp Employment:  Part-time employment (household survey) increased 102K m/m but growth remains negative on a y/y basis.  Temp employment growth (establishment survey) followed a similar trajectory, increasing 16K m/m while decelerating 140bps sequentially on a y/y basis.   

 

To the extent growth in full-time employment can displace growth in part/temp employment and business can gain some further fiscal policy clarity into mid-year (post sequester, debt ceiling, budget resolution) sustainable real consumption growth stands to benefit as workers gain health/retirement benefits, weekly wages rise, and confidence/clarity around future income supports marginal spending decisions. 

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Temp Employment

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Part Time Employment Qtrly

 

 

Establishment Survey: 

 

Total NFP Gains & Growth:  Total Nonfarm Payrolls increased 236K in January vs. consensus at 165K while Private Payrolls rose 246K on estimates of 166K.  January’s Private payroll estimate was revised lower by 26K.  We’d expect the market to look through the negative revision given the strength in the February number.   Adjusted for the negative revision, the change in private payrolls for February still beat by 50K.  Employment comps get marginally easier as we move through the year.

 

6-Handle:  Back in Play as Labor Trends Accelerate? - Total NFP Qtrly

 

State & Local Government employment:  After a four year run of negative growth, state & local employment growth continues to stagnate just below the zero line.  Collectively, states expect continued tax revenue growth in 2013 with total General fund revenues expected to surpass the 2008 peak in nominal terms. The continued recovery in revenues should be a tailwind for employment and investment, however, sequestration and uncertainty around impending fiscal policy decisions at the federal may be weighing on hiring decisions at the state/local gov’t level currently.  

 

6-Handle:  Back in Play as Labor Trends Accelerate? - State   Local Gov t Employment

 

 

Christian B. Drake

Senior Analyst 

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%
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