"2017 Will Be A Tipping Point" - Why Some Think This Is The Next "Big Short"

Tyler Durden's picture

One week ago we reported that "Mega-Bears Smell Blood As Mall REITs Tumble" in which we wrote 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, so now too some are starting to short CMBS through the CMBX. They are betting against securities backed by malls in weaker locations where stores could close in quick succession, triggering debt defaults."

This morning Bloomberg has followed up our post with a not-so-subtly-titled "Wall Street Has Found Its Next Big Short" in which it writes that "Wall Street speculators are zeroing in on the next U.S. credit crisis: the mall.... It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. But now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much the way many homeowners did nearly a decade ago."

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.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing.

To be sure, as we first noted last week and as Bloomberg confirms, the activity surrounding CMBS shorting has soared:

In recent weeks, firms such as Alder Hill Management -- an outfit started by protégés of hedge-fund billionaire David Tepper -- have ramped up wagers against the bonds, which have held up far better than the shares of beaten-down retailers. By one measure, short positions on two of the riskiest slices of CMBS surged to $5.3 billion last month -- a 50 percent jump from a year ago.


The trade itself is similar to those that Michael Burry and Steve Eisman made against the housing market before the financial crisis, made famous by the book and movie “The Big Short.” Often called credit protection, buyers of the contracts are paid for CMBS losses that occur when malls and shopping centers fall behind on their loans. In return, they pay monthly premiums to the seller (usually a bank) as long as they hold the position.


This year, traders bought a net $985 million contracts that target the two riskiest types of CMBS, according to the Depository Trust & Clearing Corp. That’s more than five times the purchases in the prior three months.

Further, 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."

“These malls are dying, and we see very limited prospect of a turnaround in performance,” according to a January report from Alder Hill, which began shorting the securities. “We expect 2017 to be a tipping point.”


Cracks have started to appear. Prices on the BBB- pool of CMBS have slumped from roughly 96 cents on the dollar in late January to 87.08 cents last week, index data compiled by Markit show.

For now, there is little hope of a recovery on the horizon as more and more retailers continue to fail, leaving even more vacant, and thus non-rent collecting, mall space.

Just this morning, Gordmans Stores, the century-old discount department store chain, filed for bankruptcy with plans to liquidate its inventory and assets. According to Bloomberg, the company, which posted losses in five of the past six quarters, listed total debt of $131 million in Chapter 11 papers filed Monday in Nebraska federal court. Gordmans said in a statement that it has an agreement with Tiger Capital Group and Great American Group “for the sale in liquidation of the inventory and other assets of Gordmans’ retail stores and distribution centers,” subject to court approval or a better offer.

Omaha, Nebraska-based Gordmans, which operates over 100 stores in 22 states and employs about 5,100 people, is the latest victim in a retail industry suffering from sluggish mall traffic and a move by shoppers to the internet. 


The shift has been especially rough on department stores, including regional chains like Gordmans that once enjoyed strong customer loyalty, but even national concerns like Sears Holdings Corp. and Macy’s Inc. have had to close hundreds of locations to cope with the slump

Gordmans, founded in 1915 by Russian immigrant Sam Richman, was acquired by PE firm Sun Capital in 2008 which took it public two years later. Funds managed by Sun Capital hold about 49.6% of Gordmans’ equity, according to a court filing. Growth slowed in 2014, and losses began to mount. Same-store sales fell more than 9 percent in the most recently reported quarter. The company announced job cuts in January, citing the “sluggish retail environment.”

“Like many other apparel and retail companies, the debtors have fallen victim in recent months to adverse macro-economic trends, especially a general shift away from brick-and-mortar to online retail channels, a shift in consumer demographics, and expensive leases,” Chief Financial Officer James B. Brown said in court papers.

While Gordman's decline was long in the making, its financial conditions deteriorated rapidly in March, when vendors began to refuse to ship new inventory, Brown said. After entertaining various offers, the company concluded that its best recourse was the liquidation deal with Tiger and Great American.

To be sure, Gordman's is hardly the last retailer to shutter and while many of its comps have yet to default, the pain is tangible: retailers had one of the worst Christmas-shopping seasons in memory, J.C. Penney said in February it plans to shutter up to 140 stores. That echoed Macy’s decision last year to close some 100 outlets and Sears’s move to shut about 150 locations.

Meanwhile, delinquencies on retail loans have risen to 6.5%, one percent higher than CMBS as a whole, according to Wells Fargo.

* * *

So does that mean that shorting malls is now accepted as the next "big short"? Some are not convinced.

Take for example Credit Suisse who said last month non-CMBS specialists - perhaps an apt name is "CMBS tourists" - are helping drive the recent run-up in demand for credit protection. That raises concern too many people are chasing the same trade. Of course, it may simply be that Credit Suisse analysts are being paid in CMBS

The short feels crowded to us,” said Matthew Weinstein, principal at Axonic Capital, a hedge fund that specializes in structured products. “If these defaults start happening soon, the short will work, but if the defaults do not occur quickly, the first guy out could drive the market meaningfully higher.”

Others, such as TCW, say CMBS sold in 2012 and 2013 might fall as low as 20 cents on the dollar, however the firm isn’t betting against them because it’s hard to know when the wagers might pay off. "

Plus, the contracts aren’t cheap. It costs about 3 percent a year to short BBB- rated securities and 5 percent to bet against BB notes, plus an upfront fee to put on the trade.


Consequently, it’s “more speculative than it is the next big short,” according to Sorin Capital Management’s Tom Digan.

Whatever the case, here’s what the endgame might look like. About two hours north of Manhattan, in Kingston, New York, stands the Hudson Valley Mall. It used to house J.C. Penney and Macy’s. But both then left, gutting the complex. In January, the mall was sold for less than 20 percent of the original $50 million loan. Mortgage-bond holders exposed to the loan were partly wiped out.

“When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss."

* * *

Ultimately, whether or not this is indeed that next big short as we first hinted one week ago, or the skeptics will be proven right, will depend on one thing: access to capital. Ironically, it was that variable that ended up crushing OPEC's plans to wipe out shale, which despite a dramatic downturn in oil prices managed to obtain enough funding and capital from generous, yield-starved creditors, to survive the past year while technological advances caught up and pushe the breakeven point to $50, or in many cases lower.

For now, banks and hedge funds have proven far less willing to be "last resort" sources of distressed funding to retailers, and malls, (perhaps with the notable exception of Sears where Eddie Lampert has expressed a desire to go down with the sinking ship) both of which continue to deteriorate as the US consumer is either tapped out, or simply resorts to online retailers like Amazon. Should that not change any time soon, and should the cash flow profile of retailers continue to deteriorate, it is virtually assured that those who are now rushing into the next "big short" will be rewarded.

Finally, as we noted last week, here is a brief note from Horseman Capital's Russell Clark laying out the latest dangers inherent in the mall space:


Shopping mall REITS have been a fantastic investment over the years. Not only have they provided investors with large capital gains, they have also typically offered above market dividend yields. My interpretation of the REIT model is that the operator collects rents from a diverse number of retailers. This is then passed on to the end investors after costs and financing. The REIT manager reduces risk by diversifying the retailers paying rent, and by also spreading the risk geographically. If the REIT manager can acquire more real estate assets at a yield higher than what it needs to pay out as dividend yield, then the REIT can issue more shares and grow indefinitely. Mall REITs have generally done well, except during the financial crisis.

However, it seems to me that North America could well have too many shopping malls. On a per capita basis, the US has twice the space of Australia and 5 times that in the UK.

One source of REITs revenue growth comes from acquiring more malls. Intriguingly we have started to see volumes of real estate transactions for shopping malls fall. This means that the number of transactions to buy or sell properties is beginning to decline. Last time this happened, rents began to fall a year later. Perhaps it’s a sign that buyers believe rents have some downside risk?

Many people in the market are aware of the problems that the large department stores in the US are currently facing, and their resultant plans to retrench. This affects two of the largest shopping mall REITs that have the department stores as tenants. The reality is that the shopping mall REITs charge extremely low rents to the department stores. The large shopping malls use the department stores to lure traffic, and then make their money from higher rents charged to speciality retailers. Often the per square foot rent of the specialty retailer can be 30 times or higher that paid by the anchor tenant. Looking at the top 2 shopping mall operators, they disclose their top rent payers. Recent share prices performance of 8 shared tenants has been poor, and management commentary has seeming implied that they may also be looking to reduce store count.

It should also be pointed out that many tenants have a clause in their lease to reduce rents should an anchor close a store. Thus, even though the loss of rent due to an anchor closing is minimal, the knock-on effect of reduced rents from the remaining tenants is a serious concern for the REITs.

One of the other problems that shopping mall REITs face is that the size that the large department stores take up is more than 400 million square feet. The largest and most successfully specialty retailer is TJ Maxx which currently has 100 million square feet. It is difficult to see any single retailer quickly being able to fill the space made vacant by department store closures.

Back in the lead up to the financial crisis we found that the share prices of REITs and their tenants were very closely related. Recently we have seen tenants share price weaken again, but REITS remain relatively strong.

Investors are advised to exercise caution with the shopping mall REITs

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Belrev's picture

If they think this year is tipping point, then they should load up on shorts and not tell anyone. When it crashes they will clean the table.

Reminds me of people who earn money by writing books on how to become millionaire.

CJgipper's picture

They already have the shorts.  They're trying to draw attention to it to make it happen.  It's a whisper campaign.


If malls want to survive, they need to diversify - grocery store, businesses (e.g., doctor's offices), hardware store, while also keeping the in person stores that will always survive - shoe stores, jewelry stores, bath and body (you want to smell it before you buy it, right), etc.


The problem is that the REITs that own these things don't care.  If it goes under, the bank is holding the note, and they'll just dissolve, and the .gov will bail out the banks.  If they drop rents, then the bank terms won't be met, and it'll be an underperforming security that has to be renegotiated (huge PIA) so the banks will constantly fight for full payment.  In short, it's easier to let them sit and die than actively address the fact that rent is way, way, way too high, and they need to amend leases to allow nontraditional anchor tenants.

Ramesees's picture

This is the most crowded trade right now.  The opposite of "the big short".

DownWithYogaPants's picture

They are going to get ( sound track "REIT REIT REIT")  malled.  

Would it not be a huge joke if THIS is why Trump got elected because he would be sympathetic to the builders / owners?

No more bail outs.

Ghost of PartysOver's picture

If the Malls go bust then where will all the SnowFlakes gather to plan their next tantrum?  Inquiring minds want to know.

Ramesees's picture

"Amazon is driving brick and mortar retailers out of business, and mall investors and lenders to mall investors are likely to suffer because of this. A trader might profit by shorting the CMBX!"

Does anyone think this is a novel idea or breaking news?  

Pretending like this is cutting edge information is something Goldman would do to its customers, ZH.

CJgipper's picture

PS:  if malls want to survive, get rid of the rats.

flicker life's picture
flicker life (not verified) Ghost of Porky Mar 13, 2017 10:18 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... http://bit.ly/2jdTzrM

The_Juggernaut's picture

What everyone thinks is the next big short is really the next big short squeeze.  Bullish.

Douche McGoosh's picture
Douche McGoosh (not verified) The_Juggernaut Mar 13, 2017 10:48 AM

I did okay shorting the markets in Aug 2015 when everything was turmoiling but it got me thinking... you can't transfer any winnings until 5 business days after you close out your last trade. In other words, good luck with that when everything is falling apart around you! Your digital winnings will be stuck inside a dead bank.

any_mouse's picture

Five day settlement. Great point. I pictured this as being somewhere in that mass of people leading up to the roof of the US embassy in Saigon watching the last chopper lift off.

Then after settlement, the three business day ACH transfer to a local bank. Then getting it out of there.

All the more reason to trade/invest/play with limited exposure.

Shocker's picture

We are at a tipping point..... after 10 Years of complete economic collapse. We have 2 choices, help to try to  turn this economy around, or let it all fall.

Layoff List: http://www.dailyjobcuts.com



xythras's picture
xythras (not verified) Shocker Mar 13, 2017 12:08 PM

I don't know about the "tipping point" since Trump becomes more wimpy by the day. Seems that he can't clean the Gov Obama left him 

The Government is Still the Enemy of Freedom




Manthong's picture

Gosh, all those empty malls could be repurposed into spaces that could be valuable in the era of the Amazon effect and the Soros/Obama disruption society.  

How about a long distance indoor rifle range in the end-to end space?

Then all of the cubby hole small vendor spaces could be a paintball or 9 mm training round experience.

I could easily write a screenplay for a dystopic vision of that.


Stuck on Zero's picture

As we speak many empty malls are being repurposed into refugee centers.

lexxus's picture

The coming financial CATACLYSM will be UGLY and BLOODY.


techies-r-us's picture
techies-r-us (not verified) lexxus Mar 13, 2017 8:56 PM

I'm moving DOWN UNDER.

kavlar's picture
kavlar (not verified) techies-r-us Mar 13, 2017 8:57 PM

Asia's where it's at.

xythras's picture
xythras (not verified) any_mouse Mar 13, 2017 12:08 PM


JRobby's picture

There will be death everywhere.

God will triumph over Lucifer and the "masters of finance" that live so well will burst into flames.

The lower level "masters" who will escape in their $90,000 "subscription boats" will be chased down and shot to death.

And that is just in the first 15 minutes.

Deathrips's picture


The taxpayer will eliminate the risk of fiat drunk neofuedalists.

.gov only has as much as you give them or in todays world how much they steal from you.

Baltic Dry is showing historic lows....nothing to ship, no buyer on the other side...why else are we seeing these 50% off black friday sales in march?

Consumers tapped.


Long high speed lead defense.



The_Juggernaut's picture

If they're going to inflate away the debt, might as well own something valued in dollars.  Long gold, silver, lead, and stawks.

Deathrips's picture

No counterparty risk assets are the antithesis of Keynesian fiat.




*beware of leaky boats

JRobby's picture

Remember when they could not build these things fast enough? Before people realized that their incomes had plateaued and the internet? Special tax breaks, new ownership vehicles. The pension funds piled in on it.

Fortunately, now that the internet has made it so easy to shop, they don't have to leave home which works out great because they are now much, much too obese to "walk the mall".

Death of a species.

All Risk No Reward's picture

You highlight why the Debt-Money Monopolists love to run up the markets just before the collapse.  They wipe out the shorts and they make even more money on the way down.

A wicked ramp job may well comeright before they collapse this debt-money bubble of beyond epic proportions.

fx's picture

A crash is very, very rarely caused /starting in the same asset class twice within a few years. markets do NOt work that way. Tepper has always been a highly overrated high-beta clown masking as an alpha-producing hedgefund guy. I rather think that a crashing oil price or in general a new deflationary shock may be the next thing that gets people burnt - in the commodities, equities and credit markets alike. Oh, and the govt bond bears, too, obviously.

TheRideNeverEnds's picture

I'm making over 7k a week "working" part time shorting VIX futures, you should look into it.

Professorlocknload's picture

Send me your credit card number and I'll give your plan a try.

noless's picture

I honestly forgot shopping malls still existed..

Douche McGoosh's picture
Douche McGoosh (not verified) CJgipper Mar 13, 2017 10:46 AM


BabaLooey's picture




"_____ Will Be A Tipping Point" - Why Some Think This Is The Next "Big Short"


SPONGE's picture

...or the week?

How many people here think, as I do, that this week will be pivotal in human history? I know that sounds like hyperbole but, IMHO, this is the week. Too many coincidental major events.

There will be many false flags around the world to distract us.

We are witnessing (or at least <1% of us), the end of our era. The Age of Rothchild is OVER! 300+ years of western rule and now they are all on the run.

The cabal is dead.

And, no, I won't try to prove this to anyone. It will be clear to all soon enough. Hold the right currencies and everything will be ok.

markpower49's picture

No, if malls want to survive, they have to keep blacks and Mexicans OUT.

JRobby's picture

They don't "drop the rent"

Vacancies have been sitting for years. Years.

crossroaddemon's picture

They've been calling collapse since 2009. I think they grossly underestimated and STILL grossly underestimate the collusion between the major players. 

adr's picture

Do you honestly think that the whole thing hasn't been collapsing since 2009?

In my space of the market over 1000 small independent companies have disappeared over the last decade. The retail space we can sell to has collapsed by 2/3rds. The small companies who were left have been decimated by the bankruptcies of three major retailers and now have been notified by the one mega retailer left that they no longer wish to carry product from any vendor that isn't a mega publicly traded multinational.

The problem with only having three major vendors is that you only have three major vendors who employ anyone. Considering that 100% of the products are made outside the US, you have employment of a few thousand people max. Also because there are now only three major companies to work for, there will be far more people seeking a job than can find one. This means what was a $75k job becomes a $50k job.

In 1997 the starting salary for my profession was $65k a year. After ten years you could expect to be comfortably in the six figure mark. In 2016 the starting salary is $32k and in ten years you might be able to make it to $60k if you are lucky. I got offered a job at one of the big players in my industry. 18 years of experience and billions of dollars in sales to my credit, $70k a year. Considering that I'm making $90k for the small private company I work for, I took it as an insult. Problem is that to many people today, that $70k a year would seem fantastic.

dadoody's picture

Agreed. Reading Zerohedge is informative-sometimes, but if you actually read too much into the "advice" here, you would either have

1.) lost your ass on put options thinking the sky is always following,

2.) lost your life savings investing in silver and gold based on the horrible advice (my childhood friend's dad lost big this way), 

3.) or sat out of the market for fear of the crash, while everyone else in the markets have either doubled their savings or much more since the crash (many people here).

I'm not saying that people aren't *right* here about much of the corruption, collusion in the system, but instead of a paranoid mindset, you have to keep on your toes or else all you'll be doing all the time is cussing the sky, while movers and shakers get richer and richer.

CJgipper's picture

It's just like in the Big Short - "You bought into a rigged system, and exptected it to be fair?"

Giant Meteor's picture

I believe people are beyong thinking anything is fair. They merely want to find the exploit and get theirs  ...

Ergo, the Big Short ...

HRClinton's picture

In a Big Fiat Money system, it does not matter to the money gods if there is a Big Short, Big Long, Big Bull or Big Bear - as long as it's not a Russian Bear.

All that matters is Big Action. Unless there is physical destruction, like a war, wealth is not destroyed. It is merely transfered. From the working money worshippers, to the money gods. They bless you with Credit and Tokens, you give them... Everything. 

Keep working and serving your money gods.

Priestess Hillary.

HRClinton's picture

Improved FICO score?  I just can't take all this "Winning!" any more.


I'm "Good people",

GOOJF card,

no refunds to P2P donors "influencing American elections", 

no Weinergate, 

no Pizzagate

cash advance on new book


Seasmoke's picture

How have they've been able to avoid the commercial bubble popping these past 8 years ???

adr's picture

Private equity using free money to buy up retailers and take them public in order to cash out. Takes about five to six years to exhaust the channel stuffed bullshit until the light bills can't be paid.

Giant Meteor's picture

Generational theft, a re-run ..

Quinvarius's picture

I seriously doubt it.  Nothing has happened to change the amount of money injected into the system.  The same old same old is boring, but still valid.  I would expect the unexpected commodity surge to catch up to stocks.  Bonds are losing effectiveness as an inflationary reservoir.  Unless a takedown in stocks is planned purposely, I don't think we will see it.

ToSoft4Truth's picture

Once the malls slip below the ocean surface someone will have to pay-up the property tax shortfalls.


I bet it's the home owners who subsidized the malls in the first place. 

adr's picture

No, the property Jews are going to come with a fantastic plan for increasing employment and rebuilding the area. Of course with the deferred tax caveat.

We'll develop the eyesore and bring you a new state of the art medical center where thousands of EBT'ers can use their government medicaid cards. Of course the hospital board who will be cashing all the checks will read like the plaque of a law firm.

Offthebeach's picture

Local malls are too big local tax to fail.  Towns will borrow on bonds for "investing" in local malls with  "innovative smart planning".  After years of slithering tax dollars onto various crony planning companies that hire ex town managers, the mall will close.  Sub crew of local feral lawyers will bill for "recovery", but until then will need gov funds, or else previous "investments" will be totally lost.  (Fiduciary responsibility to taxpayers and all that,  yes its a sad state of affairs.  We were only trying to help.)

But still there is the mall hulk, now graffiti and ripped out copper and chiller units gone with rain coming through.  

A movie set is mentioned for zombie pictures,  or a regional live fire traning Academy for pratice against our Islamic guests or boys fried on Ritalin and feminist pap, or white Trump voters with pickup trucks mumbling about Jeckle Island.