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Did You Buy Social Media Puts?

When you’re right, you’re right.


Hedgeye CEO Keith McCullough pulled no punches during his hour-long conversation on Monday with Fox Business’ Maria Bartiromo where he spelled out his current market and economic concerns, in particular, the growing bubble in social media stocks.


The timing was especially prescient given the bubblicious market spectacle that ensued including Candy Crush’s disastrous IPO, Facebook’s $2B purchase of Oculus, and Twitter getting hammered 9% this week.


As he told Bartiromo, 74% of the companies that have come public in the last six months do not make any money -- only eclipsed by the dot-com bubble in 2000 when 80% of companies that went public didn’t make any money.


“If you’re long the S&P 500, don’t worry,” he joked. “It won’t top for another couple of months.”


Take a look at the video beginning at the 4:15 mark where McCullough advised investors:


Buy some [social media] protection. While you’re in the rental mode, go buy some protection—bombed out puts,  August and September puts in social media stocks.”


He added:


“Big social media stocks, don’t forget, are tied to the advertising cycle. The advertising cycle is pro-cyclical. So if we’re at the end of an economic cycle, you’re going to wake up at some point this year—and Twitter looks like it’s already pricing this in—to some kind of a disappointment on revenues from an advertising-based social media stock. That’s what I’d be looking for. I have no idea which one it’s going to be, but you can buy puts on a pretty good basket of those.”


As he wrote in today’s Morning Newsletter:


I know no one wants to call it a bubble. There’s career risk in calling something what it is. But seriously mo bros, with Facebook (FB) -17% since March 10th (coincided with the all-time-bubble-high in US stocks) and Twitter (TWTR) -30% YTD, what’s the fuss?





VIDEO | Keith's Macro Notebook 3/27: EUROPE US CONSUMER UST10YR

LEISURE LETTER (03/27/2014)



 Friday, March 28 

  • Nevada gaming revenues release for February 
  • MPEL board meeting
  • Wynn Macau board meeting

Tuesday-Thursday, April 8-10

  • Mid-America Gaming Congress (Columbus, OH)

Wednesday, April 9

  • SHO Investor Day

Thursday, April 10

  • HST Investor Day


CZR – announced its intention to close Harrah’s Tunica in Mississippi on June 2, resulting in 1,300 job losses.  "There’s just too much supply in that market.  The Harrah's has not been profitable for a while,” said John Payne, president of the company's central markets division. 

TAKEAWAY:  Another sign of the tough times.  Interesting there are no interested buyers for the property...or maybe there is a lack of funding for such acquisitions.


CZR – the company announced, via an SEC filing, it received correspondence from a law firm representing a group of its bond holders who want the company to shutter Caesars Growth Partners.  The bond holders assert the parent company violated its fiduciary duties to the creditors when the parent company opted to sell certain assets to the Caesars Growth Partners.

TAKEAWAY:  Never attempt to run-over your bondholders as they never forget and doing so will jeopardize future borrowing negotiations. 


MPEL – unveiled final plans for its newest hotel at City of Dreams. The 40 story hotel will include 780 guestrooms, suites, and villas as well as spa, ultra lounge, and sky pool.  The property will open in early 2017.

TAKEAWAY:  City of Dreams needs the additional hotel capacity.


LVS – reduced the payout for blackjack at its Venetian and Palazzo tables from 3:2 to 6:5, resulting in the payout falling from $15 to $12 on a $10 bet. 

TAKEAWAY:  Hold could be higher for the coming quarters. Media contrasting that with Sheldon's "concern" for the average joe who could be duped with on line gaming.


LaQuinta – proposed ticker LQ, offering 37.2m shares, IPO Price $18-$21, proceeds of $678 million used to prepay long-term debt.  Post offering Blackstone to own 66.7% or 63.8% if underwriters option exercised.  

TAKEAWAY:  We're favorably inclined on the lodging cycle although near-term revpar may be under pressure.


Four Season Hotels – recently has made several announcements regarding leadership appointments at the executive vice president level. 

TAKEAWAY:  While we didn’t take note individually of each appointment/promotion, when viewed in totality, it would appear Four Seasons is getting ready to go public.  


RCL –  RCL introduced a more flexible dining program for its newbuilds Quantum of the Seas and Anthem of the Seas. Called Dynamic Dining, the new program will give passengers a choice of 18 restaurants, of which seven will be fee-free for all guests: four full-service and three casual eateries.  A new reservations system also will be used onboard so passengers can decide when, where and with whom they want to eat each night. 

TAKEAWAY:  This innovative change will help onboard spending - an area which RCL had led in growth recently 


INDUSTRY NEWS              

US Gaming Industry to vet gamblers funds – the United States Department of Treasury Financial Crimes Enforcement Network (FinCEN) is considering rules which would require US casinos to fully vet the source and origin of a gambler’s funds.  FinCEN is also investigating possible compliance lapses at other Las Vegas casinos.

TAKEAWAY:   The US Treasury efforts are to explicitly regulate casinos like a financial institution in an attempt to crack down on potential money laundering activities.  Political payback to Wynn and Adelson?


Las Vegas casinos subject to anti-money laundering probe – the United States Department of Treasury Crimes Enforcement Network is currently investigating un-named Las Vegas Casinos for possible anti-money laundering compliance lapses.  This investigation follows, Las Vegas Sands August 2013 agreement with the Department of Justice to pay $47 million fines for anti-money laundering lapses at LVS’ Venetian and Palazzo properties in Las Vegas.

TAKEAWAY:   Stay tuned, more headlines and fines forth coming...


New Jersey Casino Expansion Bill – despite outspoken opposition by various elected officials, legislation was introduced to allow casinos at Meadowlands and Monmouth Park racetracks.   As we noted last week, officials indicated no expansion of gaming would be considered until after 2016, when the Atlantic City revitalization plan expires.

TAKEAWAY:  We doubt this legislation will pass given the Governor's vocal opposition. 


Federal Legislation to ban internet gaming – legislation was introduced in the US House of Representatives and the US Senate to reinstate the Wire Act of 1961 regulations which would thus make internet gambling illegal.

TAKEAWAY:  The proposed legislation appears to strictly prohibit all existing  and considered forms of internet gambling including online poker and lottery activities.  No grandfathering provisions were offered. We doubt this passes.



Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.  

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Bubbles Popping

Client Talking Points


They don’t have Facebook in the Italian MIB index which is up well over +11% year-to-date. Guess what? Asian and European stocks didn’t particularly care about what happened in the growing US Social Media bubble yesterday. Impressively, the DAX and EuroStoxx50 are both up this morning, holding TREND supports. Meanwhile, US Social Media bubbles are popping as the Candy $KING gets crushed.

US Consumer

The only sub-sector in the US stock market that has already gone bearish on both our TRADE and TREND durations is US Consumer Discretionary (XLY down -4.1% year-to-date). We'll say it again: again #InflationAccelerating slows consumption growth.


The 10-year yield is doing precisely what it should be doing (falling) as consensus comes to the realization that US #GrowthSlowing in 2014 isn’t just about the weather. 2.70% on the 10-year is compressing the Yield Spread (10-year minus 2-year) by 7 basis points on the week.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


UK Retail Sales +3.7% in FEB as #StrongPound powers the purchasing power of The People @KeithMcCullough


"It’s not what you look at that matters, it’s what you see..." - Henry David Thoreau


Connecticut lawmakers have become the first in the country to pass legislation that would increase a state’s minimum wage to $10.10 an hour by 2017, the same rate President Obama wants for the federal minimum wage. The bill passed the General Assembly, which Democrats control, largely along party lines. (New York Times)

Boom, Crush!

“Boom, crush. Night, losers. Winning, duh.”

-Charlie Sheen


I was in Vegas playing cards with Sheen last night and that’s what he told me about his short Facebook (FB) position. Social Media Bubble, yep. Crushing it.


I’m here to give the keynote rant today (11AM Las Vegas time) at the Government Investment Officers Association (GIOA) conference. Kidding on the Sheen part; not on the government.


USA going on the fritz (Federal Reserve Induced Trauma Zone) won’t be the subject of my speech. I’m going to give these guys the Hedgeye wood - #InflationAccelerating slows real US growth.


Back to the Global Macro Grind


I know no one wants to call it a bubble. There’s career risk in calling something what it is. But seriously mo bros, with Facebook (FB) -17% since March 10th (coincided with the all-time-bubble-high in US stocks) and Twitter (TWTR) -30% YTD, what’s the fuss?


BREAKING: Candy Crush (KING) -15.6% on IPO day


Boom, Crush! - social bubble


Boom! Crush. This stuff gets real in a hurry doesn’t it? But does the whole free world care? While 2AM PST isn’t my favorite wakeup call on The Strip, I did smile to see that almost all of Asian and European Equity markets didn’t care about USA’s baggage.




Yes, after creating the 1st internet bubble (1999), then the US real estate bubble (2005-2006), then the commodity bubble (2011-2012)… then the bond bubble (2011-2012), then the 2nd half-baked internet bubble (2013), this is a uniquely American experience.


Maybe that’s why (in spite of the social media stock time-spanking into the close yesterday):

  1. South Korean Stocks (KOSPI) built on yesterday’s gains, closing +0.7%
  2. Indian Stocks (BSE Sensex) closed up another +0.3% to +4.7% YTD
  3. Italian Stocks (MIB Index) are trading up small this morning at +11.5% YTD

I know. The Italians have a lot of crony socialism issues, but one of them is not trying to talk their entire country into calling $2B for a headset (Ocular) another brilliant Zuckerberg idea. WhatsApp was a cool Bud Light commercial for a few weeks too don’t forget.


Back to the real world and our GIP model (Growth, Inflation, Policy):

  1. US continues to see #InflationAccelerating (CRB Commodities Index up again yesterday to +7.6% YTD)
  2. And the slope (rate of change) in real US Growth continues to slow (not just the weather)

But don’t take my word for it, ask the bond market:

  1. US 10yr Treasury Yields down again this week to 2.70%
  2. Yield Spread (10yr minus 2yr) continues to compress (-7bps this wk)

This is precisely what happened in 2011. As the Yield Spread compressed (leading indicator for growth slowing) the Financials (XLF) started to underperform slow-growth-yield-chasing (Utilities) and the US stock market saw multiple compression.


In other words, if you weren’t levered long YELP yesterday, but had:

  1. Commodities long
  2. Bonds long
  3. Anything that looks like a bond (Utilities, REITS, etc.) long

You crushed it.


Yeah, I know. We have you long Gold, and that’s not working this week. At -0.7% this morning, it’s still +7.7% YTD though. Beats Twitter. And it sure beats being long who gets crushed by inflation (US Consumers):

  1. US Consumer Discretionary Stocks (XLY) -4.1% YTD
  2. Utilities (XLU) +7.0% YTD

These performance divergences are called variance. And finally we have ourselves an Angry Bird like game here folks – where stuff actually goes down (hard), while other things stay up.


Coming off generational lows in US sector variance (i.e. you could have bought any sector and been up last yr), across longer-term investing cycles, this is as mean reverting as any portfolio risk in macro. Yep, sector and stock picking is cool again.


So, from here, do you buy the Candy Crusher or the new banking fees boy king at FB? Or do you do neither and go back to buying the Bernanke Bubbles (Commodities, Gold, Bonds) that blew up last year? We’ll do the latter. Mean reversion bubble trading works, duh.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.63-2.75%


VIX 13.03-17.14

USD 79.18-80.40

Pound 1.65-1.67

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Boom, Crush! - Chart of the Day


Boom, Crush! - Virtual Portfolio