The Next "Big Short" Tumbles To 13-Month Lows As Dept Store Sales Crash

Tyler Durden's picture

This arcane financial instrument appears to be quickly becoming 'ground zero' for the "next big short" of this bull cycle.

Last week we introduced the CMBX Series 6 as potentially the next 'big short' - a credit derivative contract that allows betting against securities backed by malls in weaker locations where stores could close in quick succession, triggering debt defaults. 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.

And now a few days later, we see Department Store sales crashing by the most on record. One particular chart revealed in the latest monthly Bank of America debit and credit card spending report shows that things may be about to get a whole lot worse for America's department stores, as well as malls where they are for the most part the anchor tenants. 

And today's official retail sales data confirms the collapse - department store sales down 5.6% YoY.

And, as we would expect, CMBX S6 BBB- tranche prices have tumbled further - to their lowest since February 2016...

Bloomberg 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.

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."

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SomethingSomethingDarkSide's picture

REIT's up over 2% - nothing fucking matters

NidStyles's picture

People still use brick and mortar stores?


I can never find anything I want in them that is not Chinese garbage, so I buy almost everything through the internet or through "flea markets and farmer's markets".

buzzsaw99's picture

they have UG(ly) boots and stretchy pantz bitchez.

froze25's picture

Its a dying industry, the mall. You know why? Because its loaded with the people that don't work and just "chill" or are "holding it down" there all day and don't spend any money. Who the hell wants to be around that? Today's malls aren't the malls of the 80's by any stretch, if I have to buy some Chinese manufactured garbage then I might as well do it from the comfort of my own home. If welfare isn't going to be cleaned up and illegal immigration and welfare fraud aren't dealt with you might as well short malls all day long.

Ignatius's picture

Add to that the cash being taken out of people's pockets via the ACA tax penalty and put into the bloated and corrupt healthcare lobby.

Jim Sampson's picture

There will be many "Big Shorts" before the end.

NidStyles's picture

None of which I have any use for, because I'm not some trollop twerking dindu hoe.


About the only time I go to any store that doesn't specialize in food is when I need something from a project, and Walmart has a cheap version that I have no issues with tearing apart for the project.



Yes, most of my projects at home involve repurposing things to see if I can make something work. I'm "that" guy.

froze25's picture

I am also that guy, May your "projects" bring you joy brother! Make sure you check things like Salvation Army and other Thrift Stores, I find great material, cheap as hell for my projects. Was able to build a electric distiller for 15 bucks, makes about 140 proof white lightning.

NidStyles's picture

A distillery is on my list of things to do too....


No local Salvation Army stores, I generally try to volunteer for them during the holidays, and usually get good tips on materials when I am working for them. I grew up a Thrift Store master. Half of my first vinyl collection was from Thrift Stores. Including some first print Black Sabbath, Ozzy, Led, and Jimi. They are not my favorites personally, but for the right collector they are my favorite investments. Sometimes, you have to buy something you will never use if you know it will be worth more.



SmedleyButlersGhost's picture

"A distillery is on my list of things to do"

I brew 25 gallons of beer per batch. 1 week turn around as I keg it and carb in the keg   Stout, IPA, Wheat beer.  Cider now and then  cost per pint - about 12¢.  Now a distillery is a whole new thing. Other than gin or vodka, you're talking years of lead time and then you might have it wrong.

hawaiian waverider's picture

For those like to make stuff and re-purpose things, check out your local makerspace if you are lucky enough to have one.  It is a place where people who make stuff can go, use all the tools, maybe take classes, learn and benefit from other smart people.  Killer environment for those who of us who make stuff but don't have a wood/metal/welding/machine/fiberglass shop,  electronics lab, many tools and machines in our garage.

Giant Meteor's picture

I'm guessin you really meant to say, stretch pantz britches  !

zagzigga's picture

Well, the internet sells chinese made garbage too. I myself avoid malls and buy mostly online, btw. I am not a fan of those glaring lights, mall rats lurking here and there, and air full of some cheap cologne sprayed by some of the stores.

Abbie Normal's picture

Anybody that isn't using Chinese-made garbage to read this post, raise your hand..........thought so.


GUS100CORRINA's picture

Nothing ever goes down. But if there was a possiblity of a BLACK SWAN event, then REITs are one place to look.

I went to a MALL recently and NO ONE was there .... unbelievable how any store in the mall is able to make enough money to be open for business.

zagzigga's picture

In this perverted market, I won't be shocked if the financial media decalres the retail sector as "bottomed out, the only way to go is up" and breakout chasers send these stock higher because "it's all priced in". 

Seasmoke's picture

I almost want to get a job in one of those stores I never see anyone in. I want to see for myself if they really go the whole day without making a sale.

IronSights on'um's picture

the office building I work in is right beside a mall.  It's one that macy's closed shop in over a year ago.  Its primary use now is a hangout for old mall walkers.  The Capri jewlery store and Famous Daves outside the mall are also vacant and overgrown with weeds.  desolate.  but at least unemployment is under 5%!   

Osmium's picture

When I was in school, I had a job at a department store.  On the weekends, we would pick out the ugliest pair of shoes and have a contest to see who could sell them first.  

People really will buy anything.

Silver Savior's picture

I work in retail but not a department store per se. I would love doing nothing and not waiting on dumbass people. I swear the public is diseased.

knukles's picture

Skateboarders would LOVE to get access to those abandoned malls.

Consuelo's picture





Those malls are only closed to shoppers, not us...

Arnold's picture

High school field houses they never knew they had.

NoDebt's picture

They're letting all the bullshit data they were pumping before the election roll off now.

The whole world didn't suddenly fall out of bed last month.



Rainman's picture

It just like Freeshitter says, all the niggas is broke.

Consuelo's picture



They ain't be broke until EBT dries up.   

Silver Savior's picture

Most people broke as fuck but they live on credit so they don't know the cold hard truth that they have less than nothing. A slave in a third world country really has more money.

Silver Savior's picture

Why would anyone shop at a department store when you can get everything cheaper somewhere else? Department stores are a 1970s and 80s model. I personally enjoy finding a pair of jeans marked down to four dollars.

itstippy's picture

The strip malls are next.  During the past 20 years they built thousands and filled them with nail salons, tanning spas, tattoo emporiums, baseball cards & comics stores, greeting card outlets, tobacco bars, Bean Bag Baby stores, etc.

The liquor stores, check cashing stores, and dollar stores will remain; all else are doomed.

Fester's picture

As in Tippy the Turtle?

aloha_snakbar's picture

What is a department store?

aloha_snakbar's picture

I remember being in a mall in Omaha about twenty years ago, before any of the stores opened, and apparently they opened the doors for a bunch of polyester clad seniors who were 'fast walking'. The sound they made when they came around the corner was frightening, sort of like an amplified "swish swish swish"...