$KLAC: Our "Dividend and Buyback" Semis Theme Comes to the Fore

Takeaway: KLAC's announcement this morning puts our "Dividend and Buyback" theme back into focus.

Hedgeye Semiconductor analyst Craig Berger noted earlier this morning that the "Dividend and Buyback" theme is back in focus today after KLA-Tencor Corporation (KLAC) -- a SemiCap equipment firm -- raised its dividend 11% and authorized a new $1 billion share buyback


$KLAC: Our "Dividend and Buyback" Semis Theme Comes to the Fore - klac


Berger spent a fair amount of time during his recent launch discussing how the Semiconductor sector is transitioning into a Cash Return story, and how that's bolstering sector stock performance.


In his detailed and proprietary Cash Return Affordability Analysis, Berger highlighted five other firms in addition to KLAC which could make large dividend or buyback increases, and two others that are in acquisition mode, but could also possibly increase Cash Returns.


Click below to watch Berger's recent Cash Returns & Dividends video:  



Retail Callouts (7/8): ICSC, WMT, TGT, KSS

Takeaway: Another solid data point from ICSC. WMT US CEO doesn't give US consumer clean bill of health. TGT hires three for e-commerce.



Tuesday (7/8)

  • TCS - Earnings Call: 4:30pm


Thursday (7/10)

  • FDO - Earnings Call: 10:00am


Friday (7/11)

  • PSMT - Earnings Call: 12:00pm




ICSC - Chain Store Sales Index


Takeaway: Another solid data point from the ICSC numbers this week - sales up 3.3% on top of a 2.9% number last year. While numbers have climbed steadily since the 13th week of the year, we'd point to WMT's US CEO Bill Simon's comments from this morning quoted in the story below. Not exactly a clean bill of  health for the median US consumer.


Retail Callouts (7/8): ICSC, WMT, TGT, KSS - Chart1 7 8 2014




WMT - U.S. job rebound not spurring spending, Wal-Mart's Simon says



  • "In an interview with Reuters, Bill Simon, the president and chief executive officer of Wal-Mart U.S., said the improving employment picture had so far failed to raise cash register receipts at the retailer's U.S. stores. 'It's really hard to see in our business today … that it's gotten any better,' he said."
  • “'We’ve reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down.'"
  • "Simon said Wal-Mart's lower- and middle-income customers appeared to have made a number of changes to their shopping habits that were 'not the best thing in the world for a retailer,' splurging on events like back to school and holidays like the Fourth of July, but pulling back spending in between. 'They’re adapting to what has been a difficult macroeconomic situation,' he said."


Takeaway: Nothing earth shattering here, but when WMT talks about the US consumer we listen. The company has over 30 petabytes of shopper data to draw conclusions from. All in, this is not a ringing endorsement for the median consumer in America. And it doesn’t bode well for our two least liked names in this space - TGT and KSS. When we looked at shopping intent over the last 3 quarters, WMT was the only retailer in the space with positive readings, so if it is still feeling the macro heat then that pain is being felt across the rest of the industry. Yes, one could argue that WMT is more exposed to the lower end consumer than most of the names in the chart below, more TGT than KSS. But we'd argue that TGT's brand transformations over the past 5 years (P-Fresh, RedCard, etc.) has only increased its exposure to the lower end shopper.


Retail Callouts (7/8): ICSC, WMT, TGT, KSS - chart2 7 8


TGT - Target Appoints Three New Officers, Spanning Information Technology, E-commerce and Digital Product Teams



  • "Jim Fisher joins Target as senior vice president, Infrastructure and Operations, Target Technology Services, where he will oversee Target’s technical infrastructure and operations."
  • "Alan Wizemann joins Target as vice president, and Mobile Product, where he will oversee digital product teams."
  • "David Weissman joins Target as president of DermStore, based in El Segundo, Calif., which Target acquired last year."


Takeaway: Kudos to TGT on these hires. We don't have any edge on any of these 3 personally, but the fact is that TGT has one of the worst performing e-commerce businesses in the industry. Clearly new blood is needed in order to innovate and implement the type of changes that need to be made. We feel like a broken record saying this, but…those changes won't be cheap.


Retail Callouts (7/8): ICSC, WMT, TGT, KSS - chart3 7 8




BBBY - Bed Bath & Beyond Inc. Board of Directors Authorizes New $2.0 Billion Share Repurchase Program



  • "The Company expects that the new share repurchase program will commence after the completion of its existing share repurchase program, which, as of May 31, 2014 had approximately $861 million remaining."


PETM - PetSmart Shareholder Longview Joins Call for Company to Consider Sale



  • "Longview Asset Management LLC, which owns about 9% of PetSmart and has been an investor since 2005, asked the company to consider a potential sale or other strategic alternatives in a letter to PetSmart's board Monday."


CA - Carrefour to Close Stores in India



  • "Carrefour SA said Monday it would close its five cash & carry stores in India, effective at the end of September."
  • "Carrefour, the world’s second-largest retailer behind Wal-Mart  Stores Inc., has been represented in India since 2010."


LEISURE LETTER (07/08/2014)

Tickers: MGM, CZR, WYNN, BEL


  • July 15-17 Pre-RCL earnings Hedgeye Cruise pricing survey


MGM:  Macau Growth Under Threat as Chinese Travel Farther: Ho Bloomberg

"I'd say the slowdown in the economy and the fact that now the foreign destinations might become competitors" are the biggest risks to Macau's growth," said Pansy Ho, co-chairwoman of MGM China. As Chinese tourists travel more frequently and farther afield, the city could gradually lose its appeal, said Ho, who's nicknamed "casino queen" by local media. "We're already beginning to see that the customers coming through our doors are more demanding, they now know how to differentiate."

Takeaway:  As more Asian destinations open up to casinos in the future, Pansy's point makes sense.  The Chinese macro concern is also warranted.


1680:HK Macau Legend – (Apple Daily) reported that the company's application for 50 to 100 new tables for Macau Legend was submitted in December last year, and that the company’s management had expressed confidence to fund managers and stock analysts that approval could be gained within the first half of this year - however, so far there has been no news on the approval.  Back on October 8, 2012, the company in consultation with Sociedade de Jogos de Macau SA submitted a request to the Gaming Inspection and Coordination Bureau to increase Macau Legend’s table allotment from 146 tables to 500 with the initial 50 to 100 new tables as the first batch of the 350 tables that Macau Legend would like to apply for from the government. 

Takeaway: Slower than expected table game approval process...this could be a foreshadowing of the difficulty in securing new tables for the properties that are expected to open in 2015 and 2016. 


CWN:AX Crown Resorts – the company today secured a restricted gaming license for its Crown Sydney development, Barangaroo. As a result of receiving probity clearance, Crown will pay $95 million to the state government within five days. A $5 million deposit was paid in July 2013. The Crown Sydney project it still subject to planning approvals and negotiations with Lend Lease and the Barangaroo Development Authority. Crown’s restricted license allow visits by only members and their guests, prohibition of poker machines and minimum bet limits on table games. The features are designed to tailor the casino to high rollers.

Takeaway: The approval was widely expected and once operational the property could generate more than half of Crown Resorts revenues and profits.


CZR – A consortium including Caesars, OUE and Lippo Group paid into an escrow account the initial US$10 million deposit toward the cost of land for a major gaming resort near South Korea’s Incheon International Airport.  The investors hope to complete the approval phase within eight months, with a possible first phase opening in 2018.  A condition before moving to the development phase will be that the consortium gets approval from Incheon Development & Tourism Corp – the body charged with urban redevelopment and economic growth in the area – for the design of the resort

Takeaway: A positive step in the ultimate development process.


IKGH (Macau Business Daily) According to IKGH, “any opening of additional casinos and hotels is likely to result in a significant increase in the number of VIP gaming rooms, intensifying competition in Macau’s VIP gaming business and for VIP gaming promoters.”  Iao Kun has VIP gaming rooms in the StarWorld Hotel and Casino, the Galaxy Macau, the City of Dreams Macau, Sands Cotai Central and L’Arc casino.  

Takeaway:  So trying to secure VIP rooms in the new properties might be a good strategy?


WYNN & 1128:HK (Macau Business) The International Union of Operating Engineers has asked the Macau government how certain mainlanders came to hold rights to land in Cotai where Wynn Resorts Ltd means to build a casino-resort.  International Union of Operating Engineers representative Jeffrey Fiedler said: “The Macau government should provide an explanation about how this group from Beijing acquired this initial commitment for the land in Cotai.” Wynn Resorts Ltd paid the holders US$50 million (MOP400 million) for the rights to develop the land.

Takeaway: While considered a gadfly by most Macau observers, Mr. Fielder is trying to make life difficult for Mr. Wynn.


BEL – announced that it has signed a management agreement with Cadogan Estates Limited to operate The Cadogan, a 64-key hotel on Sloane Street in the heart of Chelsea, London, as part of the Company’s collection of luxury hotels and travel experiences.  The property will close at the end of July, undergo a $48 million investment project and the Belmond Cadogan will open in summer 2016. The re-conceptualization will include the complete refurbishment of all public areas and the reconfiguration of 64 rooms to 54 in order to accommodate demand from luxury travelers for larger junior suites and suites.

Takeaway: A great property addition in a great location and city, which we believe will command a super-premium ADR.  



Japanese Gaming Expansion (Kyodo News) Following the recent Universal Studios Japan announcement that it would seek to add a casino to its property in Osaka, Japanese theme park operator Huis Ten Bosch Co Ltd announced it is searching for a partner to develop a casino resort next to its Nagasaki, flagship property if casinos become legal in the country.  Huis Ten Bosch President Hideo Sawada indicated “We’re seeking a sophisticated and elegant European-style facility next to the Huis Ten Bosch theme park," while also noting  his company would not directly operate the facilities – at least on the short-term – due to lack of know-how on gaming operations.

Takeaway: Local companies taking the public relations lead in Japan for companies which look to enter the gaming business.


Japanese Gaming Expansion(Japan Times) MGM Resorts International and Macau-based Galaxy Entertainment Group Ltd are the front-runners to win a licence for an Osaka casino resort, if casino gambling is legalised in the country, the Japan Times reports.  The newspaper said Osaka Governor Ichiro Matsui and Osaka Mayor Toru Hashimoto on Tuesday reacted negatively to the idea of USJ Co Ltd, the operator of Hollywood-themed entertainment park Universal Studios Japan in Osaka, bidding for a casino license. Japan Times quoted Mr Matsui as saying: “USJ has no experience at all in the casino sector.”

Takeaway: We believe this story is merely noise in the intensifying public relations battle.


Massachusetts Gaming (Boston Globe) Mayor Marty Walsh and Mohegan Sun have reached an agreement in principle regarding a deal in which the casino developer will pay the city to make up for a Suffolk Downs casino. In accepting the casino company’s offer, Walsh would give up on his insistence that East Boston vote on the project as a “host community” under the 2011 casino law.

Takeaway:  Mohegan in the lead but too many interested parties.


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.

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 80.46%
  • SHORT SIGNALS 78.35%

Living the Dream

This note was originally published at 8am on June 24, 2014 for Hedgeye subscribers.

“The very substance of the ambitious is merely the shadow of a dream.”



I’m in the throes of the Nevada desert with some colleagues and friends of Hedgeye. Later today, we will be attending the 2014 NHL Awards at the Wynn Casino.   For the hockey players receiving awards, this is the epitome of their success and acknowledgment of their ability to fulfill their lifelong dreams.  They have reached the pinnacle of their chosen profession. In hockey speak, they are #LivingTheDream.


Incidentally, Las Vegas, as much as any city in America, also epitomizes a dream - the American dream.   From 1940 to the last census in 2012, the self-proclaimed “entertainment capital of the world” grew its population from some 8,000 inhabitants to almost 2 million, for a CAGR of north of 8%.  This growth rate well outpaced the overall population growth rate in the United States, which increased by only about 1.5x during the same period.


Living the Dream - wl5


As a function of this massive growth, 18 of the world’s largest 25 hotels are now in Las Vegas, the strip is the brightest place on earth that can be seen from space, and almost 40 million people annually visit Clark County (the home of Las Vegas).  Despite these staggering statistics, on many metrics Vegas actually peaked in 2007.  In that year, according to the Las Vegas Visitors and Convention Bureau, total gaming revenue in Clark County was $10.9 billion versus $9.7 billion in 2013.


Admittedly, gaming revenue in Clark County has recovered a fair bit off the recent bottom when it troughed at $8.8 million in 2009.  Regardless, the fact remains that Las Vegas gaming revenue is still well off the peak and hasn’t grown since 2005.  So, is this Las Vegas dream dead? Is the American dream dead?


On both questions, the answer is likely no. But whether we use the term the “new normal,” or some other cutesy name to describe the prospect for American domestic economic growth, the next five plus years will likely continue to be a normalizing of the excesses of the early 2000s.  In many ways, Las Vegas remains the poster child for the boom and subsequent bust of that period.


Of course, as investors, we can always dream of a rampant reacceleration of economic growth, but as Shakespeare also wrote:


“And this weak and ideal theme, no more yielding than a dream.”




Back to the Global Macro Grind...


In the category of “more nightmare than dream” is the under-allocation of corporate pension funds and university endowments to the U.S. equity allocation rally that began in 2009.  According a report out late yesterday, the average college endowment had a 16% allocation to equities in June 2013, versus 23% in 2008 and 32% a decade ago. Meanwhile, corporate pension funds on average had 43% of their portfolios allocated to equities versus 61% in 2003.   Given the outperformance of U.S. equities over that time, it is likely that many of these institutions have been notable laggards in performance.


One clear threat to the equity bears is the potential that these large institutions begin to chase performance in unison.  For a broad based allocation to equities to occur, these institutions would generally have to be of the view that GDP growth is set to accelerate and likely meaningfully so. If history is any indication, this is unlikely to occur. 


In the Chart of the Day below, we’ve looked at annual GDP growth in the United States going back to 1950 charted against the 10 year rolling average of growth. The takeaway from the chart is simply that U.S. GDP growth has been steadily coming down over time, and has had a sharp step down following the last recession. The U.S. economy seems to have now entered a phase of lower growth.  Absent any evidence of acceleration of this trend, it will be difficult to compel large asset allocators to over allocate to the growth asset class of equities.


Speaking of not normal, according to Xinhua yesterday, noted Chinese economist Li Yining, “refuted the notion the Chinese economy is in decline saying that the previous high growth rates were not normal”.  According to Yining’s analysis, China’s GDP should be higher than the released figure based on the fact that housing construction in rural areas is not included in the Chinese GDP calculation while it usually is in other regions.


Perhaps the Chinese government will take a page out of the U.S. government’s playbook and change the calculation as the economic statistics becomes less suitable to its needs.  This is, of course, a page right out of the U.S. government’s playbook as the U.S. government has changed how the Consumer Price Index is calculated several times over the last few decades. (Ironically, this was also a period when the U.S. government had increasing obligations that were tied to inflation / CPI.)


To her credit, this ever changing methodology of changing inflation may in fact be the reason that Federal Reserve Chair Janet Yellen said last week, “recent readings on, for example, the CPI index have been a bit on the high side but the data are noisy.” 


“Noisy” is an interesting characterization as the government’s own measure, CPI, actually jumped above 2.0% last month.  Meanwhile, what is not noisy to those of us who eat, fuel our vehicles, or consume goods that have commodity inputs (read: most goods) is that the CRB Index is now up almost 12% year-to-date.  We tend to agree with Yellein, that is noisy!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.64%

SPX 1924-1971

VIX 10.11-13.12

USD 80.16-80.43

Brent 113.11-116.67

Gold 1288-1332



Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Living the Dream - Chart of the Day


Client Talking Points


Both the EuroStoxx50 and the DAX are breaking our immediate-term TRADE lines of support this morning (3265 and 8999, respectively). Pay attention, because it’s new.  


The RUSSELL 2000 wandered on up to its March 2014 closing high of 1208 and stopped there, abruptly (-1.7%) – since the SPX hasn’t had a +/- 1% day in 55 trading days, we are certain that risk exposure mattered to many yesterday.


One up day on a lagging indicator (jobs report last week) does not a TREND @Hedgeye make. UST 10YR drops straight back down to 2.59% and had no immediate-term support to 2.50%, then 2.42% - we remain Bond Bulls.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


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.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


Semiconductor dividend & buyback investor theme reinforced this morn as $KLAC raises dividend by 11% and authorizes $1B buyback.



“Pearls don’t lie on the seashore.  If you want one, you must dive for it.”

-Chinese Proverb


125, the number of years ago the Wall Street Journal published its first issue. That was all the way back on July 8, 1889.

July 8, 2014

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