The Retail “Big Short” Goes Mainstream As WSJ Touts The CMBX 6 Trade

Well, it’s official.

The CMBX 6 trade has gone mainstream. And predictably, just in time for it to be all played out. Or at least it certainly seems that way.

You’ll recall that we’ve been talking about this for months. You can read our most recent posts on this here:

As a reminder, the CMBX 6 short was attractive for one very obvious reason: mall exposure:



On Wednesday, the Journal ran a piece detailing the trade called “The Hedge Fund Manager Who’s Shorting America’s Malls.” Here are a few excerpts:

As a youth Eric Yip spent weekends working in a small shop at the bustling Burlington Center Mall, where his parents sold housewares and rock band T-shirts. That has given Mr. Yip the insight to make one of the most talked-about trades on Wall Street: a “short” wagering that many malls across America are doomed.

These days, Burlington Center is a silent place. Of around 100 stores, only about a dozen remain open. Macy’s and J.C. Penney are gone, leaving Sears as the last anchor tenant. Vacant properties surround a dry fountain whose centerpiece, a life-size bronze elephant, used to spout water onto its back.

The mall’s ghostly presence has spurred a financial wager that Mr. Yip, now a New York hedge-fund manager, is pitching to investors many times his size. Starting in late 2015, he began visiting shopping centers across the U.S. to take their vital signs. Concluding that dozens faced a fate akin to Burlington Center’s, as internet shopping becomes more dominant, he placed a bearish bet on an obscure index linked to the performance of bonds that are backed by commercial mortgages. 

So far, so good. A slice of the index, which Wall Street calls the “CMBX 6,” has tumbled 6.3% since the start of this year, according to IHS Markit. The decline is good news for anyone shorting the index, or betting on it to fall, as he is.

Mr. Yip’s hedge fund, Alder Hill Management LP, gained 8% in the first quarter of 2017, said people familiar with its performance, fueled in part by the bearish bets on two index slices.

Yes, “bearish bets on two index slices.”

But as you’ll recall from the two posts linked above, the BBB- and A trades have already run pretty far, which is at least partially a reflection of the fact that, as WSJ goes on to note, “the volume of outstanding bets on the index has swelled by more than $2 billion since Mr. Yip began shopping his trade around.” Have a look:



Which is why more than a few analysts are suggesting that this is no longer the way to play this if you’re interested in betting on the death of brick and mortar. Specifically, look at CMBX 7, where the underlying deals probably aren’t differentiated enough from series 6 to warrant tighter spreads:



All of this helps to explain why the likes of Citi have suggested that the better way to go about this is simply to go straight to the source and buy protection on individual brick and mortar retailers. Here’s the Journal again:

The index Mr. Yip is betting against has a higher concentration of shopping centers than similar financial instruments, but still only around 40 of the roughly 1,500 loans underpinning the index’s performance are mall debt. Debt of weaker malls makes up less than 15% of the index, according to Bank of America Merrill Lynch.

Many of the mall-based loans would have to default, and their properties be liquidated, before investors with bearish bets could collect a windfall. Skeptics say mall owners have tools at their disposal to improve their properties before they spiral into default.

“The CMBX is a very blunt tool” for betting against malls, said Alan Todd, head of commercial mortgage research at Bank of America Merrill Lynch. While retailers are downsizing at a faster clip, not every mall will be similarly affected, and the time between store closures and ultimate mall failures can vary significantly, he added.

Note that last bolded bit. That’s probably a decent argument for the CMBX 7 trade because, as Goldman wrote earlier this month, it has “one more year of remaining maturity until the deals mature, giving more time for an adverse mall scenario to play out.”

Whatever the case, if you’re a retail investor (there’s a double entendre there), it probably doesn’t matter because none of the above applies to you and even if it did, by the time you read something in the Journal it’s already too late, as is clearly evident from the charts shown above.

Good luck.


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