Goldman Just Put On The Next Big Short Trade
At the start of March in a span of just 48 hours, several big names in the American mall industry announced they would be slashing store counts to the tune of over 300 stores. Gap said during its earnings call that it is going to shutter 230 locations over the next two years, just hours after JCPenney said that it would close 18 of its department stores. This news came after L Brands said they were going to close 53 Victoria’s Secret stores in North America this year according to Bloomberg. The icing on the cake was when "disruptor" Tesla recently announced all of its sales would be moving online, which was a nice way to say that almost all of its retail locations - many of which are located in malls - were going to close (since then Musk appears to have flip-flopped and as of this moment, the fate of Tesla's retail operation remains unknown).
These closures followed a number of high profile bankruptcies in the "bricks and mortar" space: Payless Inc. just went bankrupt for the second time in two years, bankrupt Sears was minutes away from liquidation, while perennial mall tenant Brookstone filed for chapter last August, slashing the size of their operations – and once American mall staples like Gymboree, RadioShack, Bon-Ton Shoes and Wet Seal all filed for bankruptcy over the last half decade. Payless is going to be abandoning its 2500 stores, while Things Remembered will also be closing most of its 400 stores.
Overall, since 2016, 35 major retail chains, and countless smaller ones, have filed for Chapter 11.
So, as a result of this ongoing default tsunami, malls are becoming increasingly mere vacant lots, a few scattered fashion retailers, Apple stores and food courts, primarily just feeding Apple employees. And while the idea of imploding malls is not new, as the industry did seem to stabilize at one point as the cost of gas fell and consumer confidence rose, it now appears that the eye of the hurricane may have passed, and the tide is heading out once again, as vacancy rates at US malls jumped to 9% in the fourth quarter of 2018, up from 8.3% the year prior.
And, as we said three weeks ago, this relapse in the sector suggests animal shorting spirits may soon re-emerge. Recall that back in 2017 we, and others, dubbed these U.S. retail store closures as "the next big short". We said that "just like 10 years ago, when the "big short" was putting on the RMBX trade, and to a smaller extent, its cousin the CMBX, some were starting to short CMBS through the CMBX, a CDS index which tracks the values of bonds backed by various commercial properties. We explained our reasoning for putting on this short through CMBX versus stocks:
The trade, as we discussed before, is not so much shorting the equities where a persistent threat of a short squeeze has burned the bears on more than one occasion, but going long default risk via CMBX or otherwise shorting the CMBS complex. Based on fundamentals, the trade indeed appears justified: Sold in 2012, the mortgage bonds have a higher concentration of loans to regional malls and shopping centers than similar securities issued since the financial crisis. And because of the way CMBS are structured, the BBB- and BB rated notes are the first to suffer losses when underlying loans go belly up.
The trade lost some of its vigor in early 2018, when it seemed that the lows in CMBX BBB- may have been hit with the tranche trading in a tight range for the past 2 years.
However, we concluded that "once the new wave of bankruptcies flows through the mall P&L (or rather, does not) and a new wave of distress hits the mall sector, we fully expect new lows to be observed in this trade which is basically an inverse bet on Amazon's continued success in stealing market share from pretty much everyone."
Just a few days later, we reported that one of the largest credit hedge funds, Canyon Partners, had put a $1 billion bet on CMBX blowing up in the coming months on expectations the commercial real estate bubble would soon blow up.
Now, three weeks later, none other than Goldman has decided to echo what we said at the start of the month, and is urging its clients join the "big short" bandwagon by going short CMBX AAA bonds (while hedging in a pair trade by going long five-year investment-grade corporate CDX).
Noting that US commercial real estate prices have reached expensive levels, with cap rates tight relative to real Treasury rates by historical standards.
https://www.zerohedge.com/news/2019-03-23/goldman-just-put-next-big-short-trade