A Former Lehman Brothers Trader: It's Time To Buy Brick And Mortar

Tyler Durden's picture

Authored by Jared Dillian via MauldinEconomics.com,

Everyone thinks it is only a matter of time before Amazon puts every department store, every mall, every brick-and-mortar retailer out of business. Amazon gets an infinity market cap and everyone else gets zero.

Sound familiar?

That’s the accepted wisdom.

Is Amazon a great business? Yes.

Is a department store a bad business? Probably.

Does Amazon get 100% market share, with department stores getting zero? Probably not.

Amazon has over 80 million Prime subscribers in the US. It’s not quite saturated, but it’s getting close.

Source: Business Insider

I admit to being a Prime member, a late adopter.

It is pretty cool. Stuff shows up on my doorstep in two days, for free. The huge poker chip set I just ordered probably weighs about 40 pounds—free shipping! And I get all the Prime movies and TV shows.

But here is my thesis: Amazon will grow and grow, but there will always be a role for physical retailers. A reduced role, for sure, but there will always be a role.

From a capital markets standpoint, now might be the time to put on the trade.

The Bottom of Brick and Mortar

This is when I started thinking that we've reached a bottom in physical retailers.

Last week, ProShares—a $27 billion ETF manager—registered to list some double short leveraged ETFs on brick-and-mortar retailers! 

Ding!

In my experience, specialty ETFs like this are usually listed at the worst possible times. Plus, you know my thoughts on leveraged ETFs. When 2x short leveraged ETFs are being listed on physical retailers… it is probably time to buy physical retailers.

The graphic from AEI below is a couple of months old. Since then, Amazon’s market cap has soared to $481 billion. Meanwhile, Macy’s market cap has fallen to a little under $6.5 billion.

Source: Yahoo Finance

Amazon is worth around 75 times more than Macy’s? That doesn’t seem right.

I hope by this point I have you thinking.

I am no Macy’s fan. It is a pretty terrible business, it sells middlebrow stuff in middlebrow locations. Although its online business is actually not bad.

I used to buy ties at Macy’s, back in 2001. People laughed at those ties. I no longer buy ties at Macy’s.

But look—at a $6.5 billion market cap, Macy’s is reaching distressed levels…

That means we have to put our distressed investor hat on, pick this business apart, and see if there is value—in all parts of the capital structure. Maybe we don’t like the stock, but maybe we like the bonds, for example.  

And, Staples was bought by private equity recently for about 0.4 times revenue. Apply that standard to Macy’s and you get to a $10 billion valuation. They’re still kicking.

Plus, there’s an argument that this whole Internet retailing thing is just a giant bubble, according to the chart below.

Source: @bySamRo

How Do You Play It?

This is a smart trade, but it is also a dangerous trade unless you are smart.

There are two ways to do this:

1Be a distressed investor: Look at the worst-case scenario, look at all parts of the capital structure, and find value.

2) Be a quant:  Buy a basket of physical retailers, sell a basket of Internet retailers, and wait for them to converge.

The worst way to play it is just to naively buy Macy’s (or another retailer) and hope for the best.

Furthermore, I think it’s time to go dumpster-diving in mall REITs.

One final remark. As you look around for ideas, invest in things that would get you laughed off the set of CNBC. I assure you, if I went on Fast Money and pitched Macy’s as a long idea, I would get laughed off the set.

Those are the best trades.

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Sages wife's picture

Because Lehman said so?

nuubee's picture

Brick and Mortar, sure, but not retail, anything but retail. They're doomed. Macy's and their like are doomed.
Either buy part of some local business filling a need, or some utility with known infrastructure assets. Buying anything of big name retail outlets is financial suicide at this point.

I'm thinking of places like local brewery's, small-to-medium sized local manufacturers, utility companies, etc.. No sales, no retail, no advertisers, and no dot-coms right now.

T-NUTZ's picture

this is why he is a "former Lehman trader".

Erek's picture

"Stuff shows up on my doorstep in two days, for free."

What a crock of shit. The fee for Amazon Prime IS the delivery charge.

Nothing is ever free.

 

AVmaster's picture

This dude is insane...

 

Or he got a batch of "the good stuff" recently...

 

^.^

rado_watching's picture

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... www.jobproplan.com

economicmorphine's picture

Actually, the reason he is a former Lehman trader is BECAUSE LEHMAN NO LONGER EXISTS!  Here are two hints.  1.  Hank Paulsen.  2.  Bush famiily.  Awww, what's the use...

economicmorphine's picture

Contrarian mindset suggests that when people like you post comments like yours, it's time to go long whatever it is people like you are contemptuous of.  I'd explain it, but I really need you to believe what you believe and to bring others along for the ride, so carry on.  Thank you.  You're awesome.

Yen Cross's picture

  What a fucking clown.  I'll be selling AMZN long before I'd consider buying Macys.

  We're at point in this cycle where the train has no brakes, and is steaming full ahead towards the cliff.

Peacefulwarrior's picture

LOL the operative words being "Former" and "Lehman"

peopledontwanttruth's picture

Bingo

Desperation is the rule of the day

Green2Delta's picture

This trader isn't taking into account one of the biggest advantages the internet has over malls where Macy's is located. The chances that you're going to be annoyed, assaulted or shot by a Dindu while shopping on Amazon from home are slim to none. There are 6 malls within 20 miles of me and every single one of them is guaranteed to have Dindus swinging from the rafters and flinging feces at one another. 

Crypto Kevin's picture

The guys probably right but it's going to be Walmart, Costco, and Target that will figure out how to take on Amazon. Macy's will end up like Sears and Kmart..

economicmorphine's picture

Winner, Winner, chicken dinner. 

Yen Cross's picture

  At some point in the not too distant future, AMZN is going to be dealing with anti-trust and monopoly issues.

Sonny Brakes's picture

You, fuckin, first. And when you buy it use your own goddamn money instead of the taxpayers'. Folks, stay away from bricks and mortar. You'll be having to tear it down and good luck trying to find a greater fool. In essence, you'll be buying a tax liability, an annual insurance payment, and utility and security bills.

Rick Cerone's picture

Pump and dump article.

xrxs's picture

Very brave. Mall REITs? Let me know how that works out. The basket pair trade idea I like, especially if regulators and legislators start taking a harder look at the Internet players.

cognitive dissident's picture

For a '' trade''?

And thats the problem, there REALLY aren't ANY investable retail companies, not even the REITs that own the dying malls. That consumer Is FUCKING TAPPED, STRAPPED, & DROWNING in a sea of debt.

And thats just the way things stand right now.

Ink Pusher's picture
Amazon's acquisition of Whole Foods doesn't get my motor running.
ToSoft4Truth's picture

Amazon's prepared meals is going after the EBT crowd.    What does Walmart have other than a fixed crowd using EBT every month.

GoldHermit's picture

CNBC is complete and utter bullshit bush-league. We used to laugh at them in the trading room!

83_vf_1100_c's picture

Lehman as in The Big Short Lehman? Yep, you can trust those guys for sure. His fund is stuck with a shit ton of failing malls and he is looking for muppets to offload it on.

Bunga Bunga's picture

Macy's should just start drone shipping.

TheABaum's picture

Macy's products overpriced. JUst because Amazon is overvalued doesn't mean Macy's is undervalued.

Hikikomori's picture

"It's free" - no, you pay a Prime fee every year.

markar's picture

If you buy $1300 worth of product each year, it more than pays for the shipping costs. Plus the free video, music, etc. It's a pretty good value. I wonder when they will raise the price of it at which time I will rethink it.

steelhead23's picture

Yes, sure, make sure the market cap is well below the value of the retailers you purchase, but the real trick is to buy a wide array of retailers' bonds, securitize them into a structured debt obligation, sell it in tranches where the riskiest (and thus highest paying) get sold to those eager for high yield, while the senior tranches are buffered by the juniors.  Then you and I could purchase default insurance on the whole mess and .... Oh, been there, done that?  

empire explosives's picture

Amazon used to be great, just buy $25 worth and you got it in two days.  Prime fucked it all up.  They will not even sell to you"reserved for our Prime suckers only".  So now there is a $100 premium to shop at Amazon, Oh but you get free videos that have such low resolution they look like my grandpas old zenith.  

economicmorphine's picture

THey're what, 20 years old?  Still haven't made a dime?   I can't remember the last time I bought something via Amazon.  

DeathMerchant's picture

I'll pass on advice from anyone associated with Lehman Bros, past or present

Apocalicious's picture

Macy's is junk, no thanks.