It may have been relatively easy pickings, the so-called “mall short.” But on Wall Street, crowded trades can become traps, when sentiment turns and people rush toward the exits.
To that end, reports Bloomberg News, analysts at Citigroup have been stating that the “next big short” may lie in picking individual retail stocks and betting they will fall in price. But rather than short the equities themselves — or short CMVX indexes — the analysts stated that, as Bloomberg described it, investors would do well to buy default protection via derivatives, creating a “basket” of bonds. The analysts, Anindya Basu and Calvin Vinitwatanakhun, said that targets could include, well, Target, Macy’s and others.
“A more appropriate way to express a short view on the retail sector is to go directly to the source,” the duo wrote, where the bet is on credit quality rather than, say, earnings (or stock prices). The default swaps on individual names is a more “precise” method of shorting than might be seen with CMBX indexes, which have roughly 10 percent exposure to malls — and much greater exposure to relatively less economically sensitive or consumer-dependent properties like office buildings. The trade can also be longer lived, with, ostensibly, greater downside potential (which is upside to those holding the short sale).
“It is difficult to assign a timeline around when the retail sector begins to capitulate and defaults start to occur,” wrote the analysts. “We are more comfortable using the CDS market where maturities are longer — even go up to 10 years — versus the options market, where maturities are much shorter.”