WTW: Thoughts Into the Print (2Q14)

Takeaway: WTW's issues are secular, and it doesn't have many options to work with. We're riding the short through the print, and keeping it on.


  1. POTENTIAL UPSIDE, DOESN’T MATTER: WTW could sneak out a small top-line beat; our Google Trackers suggest y/y declines in demand moderated somewhat into 2Q14, but not by any material margin.  Short Interest remain elevated, while the sell-side has turned on the name.  So any potential upside could lead to another short-squeeze, but would likely be limited (WTW lost all its gains from the 1Q14 print).  We would fade any upside into the print; remember 2014 will be one of its worst years on record in terms of revenue growth dating back to at least 2005, marked by its weakest winter selling season since at least 2007 (that includes the Great Recession).  There isn't a value play here.
  2. WHAT WE’RE KEYING IN ON: The entire model is driven off its winter selling season and the seasonal attrition rates thereafter.  The attrition rate in 2Q14 will give us a glimpse of what is required in terms of a 1Q15 selling season in order to achieve consensus estimates.  The only thing that would save WTW (in terms of its 2015 prospects) is a marked reduction in seasonal attrition.  As it stands now, WTW would require one of its best winter selling seasons on record to achieve 2015 revenue estimates, and that will not happen without a serious investment in marketing expense (see below)
  3. HEADS THEY LOSE, TAILS THEY LOSE: We believe WTW’s issues are secular.  It’s not the existence of these free apps, it’s rising access to these apps that's the bigger issue.  Member acquisition costs have risen substantially alongside the rise in smartphone penetration.  WTW is in a precarious position of trying to revive its business, which will require investment (particularly in marketing), while trying to preserve profitability on a highly fixed-cost business model in order to service its debt; WTW’s interest coverage ratio is roughly 2.5x.    



WTW: Thoughts Into the Print (2Q14) - WTW   Tracker vs. Attendence

WTW: Thoughts Into the Print (2Q14) - WTW   Selling Seasons 1Q14

WTW: Thoughts Into the Print (2Q14) - WTW   Annual Attrition 2013

WTW: Thoughts Into the Print (2Q14) - Smartphone penetration 3Q13

WTW: Thoughts Into the Print (2Q14) - WTW   Revenue vs. marketing

WTW: Thoughts Into the Print (2Q14) - WTW   Member Acquisition Costs 1Q14




Let us know if you have any questions, or would like to discuss in more detail.


Hesham Shaaban, CFA



Thomas Tobin


LEISURE LETTER (07/30/2014)



  • July 30: 
    • MGAM 2Q call:
    • MAR 2Q call 10am : , pw: 59383825
  • July 31:
    • HST 2Q call 10am:
    • BEL (OEH) 2Q call 10am: , pw: 68627603
    • H 2Q call 11:30am:  , pw: 21721745.
    • BYD 2Q call 5pm:  , pw: 2654057
  • Aug 1:
    • HLT 2Q 10am: , pw: 67361605
  • Aug 5:
    • BEE 2Q 10am: , pw: 73605986
    • RHP 2Q 10am:
    • MGM 2Q 11am: , pw: 1985444
  • Aug 6:
    • HT 2Q 9 am:
  • Aug 7:
    • MPEL 2Q 8:30am: , pw: MPEL
  • Aug 8:
    • DRH 2Q 10am: , pw: 153358818
    • SHO 2Q 12n:


27:HK Galaxy – On Tuesday, more than 500 Galaxy hotel and casino workers signed and delivered a petition to Galaxy's corporate office requesting/demanding an increase in salaries.

Takeaway: This labor discord follows a similar move from casino dealers and floor workers at Sand China Limited.  Both labor protests are supported by the Macau Gaming Industry Frontline Workers union.


577:HK Louis XIII – received approval from the Macau government for its building plans for a boutique casino hotel on the Cotai-Coloane border. Louis XIII will include 66 gaming tables (50 premium mass and 16 VIP) and 236 hotel rooms and villas all of which are at least 2,000 square feet (186 sq. m.) or larger.  The property, scheduled to open in mid-2016, will also include a 38-seat L’Ambroisie restaurant.  At present, the company believes it has sufficient funding to complete the project based on the April 2014 loan facility of up to HKD3.05 billion with a mainland Chinese bank and the HKD3.2 billion gross raised in its initial sale of shares in February 2013.  Louis XIII will operate under an SJM subconcession.

Takeaway: The first and only destination casino and hotel reserved for "by invitation only" guests. This probably means management got the wink wink that they will be allocated tables.


ISLE – Jim Perry, a former CEO of Isle of Capri Casinos, has resigned as a board member from ISLE.  Until recently, Mr. Perry was Executive Chairman of ISLE's Board of Directors. 

Takeaway: Pretty quick news after Perry stepped down as Chairman.




NCLH – introduced an all-inclusive program at $899 per person.  This could potentially double agent commissions on 7-day cruise trips.  The all-inclusive package includes the Ultimate Dining package, the Ultimate Beverage package, shore excursion credit of up to $200 per person, pre-paid daily service charges, a 250-minute Internet package per person, 20 photos of any size, chocolate-covered strawberries, a bottle of wine, one bingo session, and up to 12 bottles of water.  The promotion, which starts August 4 and runs through August 29, is valid for all sailings in 2015 except Pride of America cruises.


CCL (SeaTrade)  Holland America Line brought back 'Explore 4' savings program with benefits including a free Signature Beverage Package and free Pinnacle Grill dinner for passengers booking an ocean-view or higher category stateroom, free or reduced cruise fares for third and fourth guests in the same stateroom on select sailings and 50% reduced deposits.


RCL (TTG Digital) –  Royal Caribbean has announced a new agent incentive, giving away a £250 Jamie’s Italian restaurant voucher every day throughout August.  The incentive is designed to celebrate the launch of the line’s new all-inclusive campaign, with guests who book a cruise between August 1 and September 30 on applicable sailings enjoying free select drinks packages, soda packages for kids and free gratuities.


Hapag-Lloyd  As an introductory offer for all international guests, Hapag-Lloyd Cruises has announced an ‘on-board beverage credit’ of up to €200 for alcoholic and non-alcoholic drinks.  The credit will be graded according to the length of the cruise.  It will apply to all new bookings on board luxury ship Europa 2 and expedition ship Hanseatic, starting August 1, 2014 and applies to cruises operating after October 1, 2014.



PENN - COO Jay Snowden purchased 9,920 shares at an average price of $10.32/share and an additional 2,580 shares at $10.45/share. Mr. Snowden now owns 21,306 shares.


LHO - CFO Bruce A. Riggins sold 11,000 shares on Monday, July 28 at an average price of $36.13 per share and now owns 36,020 shares.


RHP - CEO, President & Chairman Colin Reed acquired the final 23,193 shares at $16.47/share sold the same shares at $49.007/share on July 28 from his stock option award compensation. This was the final transaction related to both his stock options and the 10b5-1 trading plan.  Mr. Reed now owns 790,017 shares and units as well as an additional 225,793 shares via family trusts and partnerships.


WYN - EVP and Chief HR Officer, Mary Falvey sold 22,233 shares on July 25, 2014 at average price $78.0634 per share and now owns 51,291 shares as well as 57,810 restricted stock units granted under the Wyndham Worldwide Corp 2006 Equity & Incentive Plan.


RCL - Director William L. Kimsey sold 10,075 shares of stock on Monday, July 28th at an average price of $63.00 and now directly owns 13,037 shares of the company’s stock.


Macau Package Tours and Hotel Occupancy Rate for June 2014 DSEC

Visitor arrivals in package tour increased by 15% YoY to 908,000 in June 2014. Visitors from Mainland China totaled 723,000, up 17%, with 244,000 coming from Guangdong Province.  Visitors from Taiwan (59,000), Hong Kong (36,000) and the Republic of Korea (27,000) recorded year-on-year increase; besides, visitors from Japan (16,000) surged by 81%.  There were 99 hotels and guesthouses operating at the end of June 2014, providing 28,000 guest rooms, down by 1% YoY; 5-star hotels accounted for 66% of the total supply, with 18,000 rooms.  The average length of stay of guests held stable as June 2013, at 1.3 nights.

Takeaway:  Hotel visitors remain steady


Macau ETGs, slots or tables – A Macau Professor, Zeng Zhonglu of the Gaming Teaching and Research Center at Macao Polytechnic Institute, suggested Macau gaming operators may wish (need) to consider using more hybrid, electronic table games which feature more seats (player stations) as a means to challenge the table cap limit. He also indicated such devices should be counted as slot machines.

Takeaway: Table caps versus ETGs.  It only makes sense to us that  electronic/hybrid games must play a great role on gaming floors. 

Colorado Racino Expansion – This November, Coloradans will vote on a State referendum to allow racinos in Mesa, Pueblo and Arapahoe counties. If the referendum passes, one casino with 2,500 slots would be allowed in each of the three counties.


Mohegan Sun Commentary – during the financial review call, the group offered a number of interesting comments we thought we'd share with our clients

  • Competitors have become less rational. Foxwoods has increased free I slot play by 44 percent, while Mohegan increased its free slot play 3.7 percent. Etess said marketing
  • July EBITDA is up very nicely from last year.
  • Massachusetts repeal referendum. Polling shows the referendum to repeal casinos will not succeed.
  • REITs. Emergence of the REIT structure in gaming is good for Mohegan Sun as Mohegan could be a good operator for a REIT-owned casino. It fits into Mohegan’s asset-light strategy.

Takeaway:  More evidence of a better July performance


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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Takeaway: The MBA Purchase Applications Index sits at 172 3QTD, down 4.2% QoQ and the lowest quarterly reading since 1996.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point. 


A LOWER LOW FOR 3Q14 MORTGAGE DEMAND - Compendium 073014


Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended July 24. 


* A whole lotto not much sequentially as a -4% decline in refi activity and a +0.2% increase in the Purchase Index drove a -2.2% decline the composite index.


* So, where we care on the Purchase demand side, we remain just north of the YTD (and 10Y) lows recorded during peak weather distortion in February.  We are currently tracking -12% YoY and -4.2% QoQ.


* Rates on the 30Y FRM remained unchanged for a 3rd consecutive week at 4.33% and continue to hold near TTM lows.


Big picture, the tide of housing data remains red and this morning's Purchase Apps +0.2% w/w print doesn't change that. We remain bearish on the housing complex until the slope of HPI deceleration inflects. 



Why You Should Care:

We flagged the chart below last week, but as a reminder, it's our contention that HPI continues to decelerate through the end of 2014 and potentially well into 1H15. Historically, HPI trends and inflections have correlated strongly with the movement in housing-related equities. Consider the chart below, which shows the YoY rate of growth in HPI in green and the price of the ITB exchange traded fund for homebuilders. 


Hpi vs itb normal






A LOWER LOW FOR 3Q14 MORTGAGE DEMAND - Purchase LT w Summary stats 


A LOWER LOW FOR 3Q14 MORTGAGE DEMAND - Composite LT w Summary stats 






About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake

VIDEO | Darius Dale: Beware of Forked Tongue Fed Messaging

Hedgeye senior macro analyst Darius Dale discusses what to expect from the Fed to Fox Business Host Liz Claman on "Closing Bell" ahead of their latest meeting.

Sleep Training the Markets

This note was originally published at 8am on July 16, 2014 for Hedgeye subscribers.

“And a young prince must be prudent like that,

giving freely while his father lives

so that afterwards in age when fighting starts,

steadfast companions will stand by him and hold the line.”



As many of you know, I recently joined the ranks of fatherhood after a solid run as a bachelor. Fatherhood is great on so many levels, but also very intriguing intellectually. As my daughter emerges on her 6th week, her mother and I have started talking a lot about sleep training, or lack thereof.


It seems there are many different (and really divergent) views on how to encourage a baby to fall asleep on a timely basis and, also, how to to ensure she gets the right amount of sleep.  On one extreme, there is the "cry-it-out method," in which the infant figures out how to sleep on their own. On the other extreme is "attachment parenting" in which the infant is basically brought into the familial bed.


Sleep Training the Markets - baby1


After doing a survey of my friends, one suggestion that was most unique was to read Beowulf just before bedtime.  I’m not sure if we will employ the so called “Beowulf Method,” but admittedly if it didn’t put our little Emmy to sleep, it would certainly work with her parents.


Speaking of sleep training, global asset markets continue to be in deep REM sleep.  In our Q3 themes deck, we emphasized this with our theme: Volatility Asymmetry.  A few highlights from that theme include:


  • U.S. equity volatility is literally at an all-time low and well below the 20-year mean of 20.05;
  • Fixed income volatility is also literally at an all-time low and the current reading is 54.03, which is in the 1.5% percentile versus the long run mean of 99.7; and
  • Finally, the JPM Global foreign exchange volatility index is at 5.45 versus the long run mean of 10.6.

Yes, it is official -- the world’s central banks have lulled the markets to sleep, for now at least.


Back to the Global Macro Grind...


The interesting thing about global markets of course is that global risk can happen all at once.  Any of you that have invested and thrived over the last decade know this fact only too well.  As of late, so do those investors that have parked capital in Portugal.


No doubt most of you have been following the woes of Espirito Santo family of financial institutions in Portugal over the last month.  This morning the news actually got incrementally worse.  Specifically, Riforte Investments SA, a holding company in the Espirito Santo family, missed a $1.2Bn payment of commercial paper yesterday.


The Portuguese Central Bank Governor was quick to put on his super central banker cape and fly to the rescue.  In prepared comments, Carlos Costa indicated that shareholders of the parent were standing ready to inject more capital if needed.  In the short run, this has actually helped as Banco Espiritu Santo’s bonds and stocks have recovered a portion of their losses.


Nonetheless, as we’ve highlighted in the Chart of the Day below, Portugal has disconnected with Europe rather quickly in the last month or so.  Over the month, Portuguese equities are down more than 12% and are now down on the year just over 4.2%.  Of the major markets in Europe, only Russia is down more (for some obvious reason related to the Ukraine).


No surprise, Portuguese sovereign debt has seen a comparable spike in yields.  While the 10-year yield of Portugal is still at a reasonable 3.73%, the fact remains that this yield has widened dramatically versus its peripheral peers Italy and Spain.  We have also seen Portugal’s sovereign debt auctions have a much tighter bid-to-cover as of late.


The big question remains whether this is a canary in the proverbial global market coal mine, or, conversely, whether the bad news is priced in.  Our Financials Sector Head Josh Steiner likely put it best in his weekly Risk Monitor note when he wrote the following (emphasis mine):


“Portugal's Espirito Santo Group continues to dominate news flow on the banking front. Both EU and US global bank swaps are widening sharply, and TED Spread is beginning to widen as well. For now, there appears to be no reason to assume that Espirito Santo's problems are widespread, but there is a rising level of uneasiness as investors ask how could this bank, which was under so much scrutiny for the last few years, suddenly be now having such problems?”


His point is an astute one and time will tell whether this is the awakening of risk that seems to be broadly not priced into global asset classes.


Unfortunately for Europe, which remains under the strains of too much debt, the economic data coming out of Europe as of late, with the exception of the United Kingdom, has been less than robust.   Most telling this week was the reading from the German ZEW economic expectations index.


Expectations coming into the number were for a notable deceleration, but the actual number was much worse than expected. Specifically, July printed 27.1 versus expectations of 28.2 (29.8 prior).  In reviewing the leading indicators for May, industrial production fell for a third consecutive month, missing expectations, and factory orders also missed. The ZEW Current situation survey also fell sharply from June while consensus expected a slight deceleration. That gauge printed 61.8 versus expectations for 67.4 (67.7 prior).


Growth slowing and banks imploding . . . perhaps our call that the U.S. Federal Reserve will be more dovish than consensus (read Jan Hatzius) believes will happen sooner than expected.   But, hey, China just beat GDP by 0.1%, so there is that...


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.49-2.58%

SPX 1956-1985

RUT 1140-1170

BSE Sensex 24786-26149

VIX 10.32-12.94

USD 79.86-80.46

Gold 1293-1324 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research 


Sleep Training the Markets - 77

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