The 10th Man

Ding

July 13, 2017

I’m sure you’ve heard that malls are getting killed. Pretty soon there will be no malls. Except for those with a Planet Fitness!


Source: WZZM

There has been lots of ink (and electrons) spilled over the death of retail.

Everyone knows 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.

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.

Sometimes, when I reflect on what a good deal Amazon Prime is, I think that I’m picking Amazon off. But they’re probably picking me off! 80 million customers times $100 is a lot of money.

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

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! 

According to Bloomberg, “The ProShares UltraShort Bricks and Mortar Retail fund and ProShares UltraPro Short Bricks and Mortar Retail fund will seek to use derivatives to generate daily returns of two or three times the inverse of an index comprising the most at-risk US 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.

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

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

I hope by this point in the article I have you thinking.

I am no Macy’s fan. It is a pretty terrible business, they sell middlebrow stuff in middlebrow locations. Although their 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:

1) Be 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, which is what we’re going to do in the next issue of Street Freak.

One final remark. As you look around for ideas, invest in the 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.

Jared Dillian
Jared Dillian

 

Get Thought-Provoking Contrarian
Insights from Jared Dillian

Discuss This

0 comments

We welcome your comments. Please comply with our Community Rules.

Comments

F ALLEN MORGAN

July 13, 9:50 a.m.

This is the best 10th man email I got!  Not just for presenting a quick 2 minute investment thesis, but how to do it.  Thanks Jared…your da man!

bill_chenault@yahoo.com

July 13, 9:45 a.m.

Actually, I think shorting this new double leveraged short bricks and mortar ETF could be an interesting idea. Face it - most of the time, the market isn’t strongly trending in either direction, and just slowly meanders up a little one day, down a little another. All double leveraged (or triple leveraged) ETFs tend to lose value in these markets, as the derivatives used to manage and leverage the daily price swings tend to suffer from time decay and other peculiarities of the math (if a stock goes from 100 to 102 one day, and back to 100 the next, and you own the stock for the two days, you break even - if you own a double leveraged ETF that owns a collection of such stocks and the collection goes up 2% one day, and back the next, you lose money). Its why shorting double leveraged volatility has been such a wonderful trade for the past few years. And you don’t need the malls / stores to do great - just not collapse as fast as the ETF buyers hoped for (and most bankruptcies / store closings are announced in Q1 anyway, so should be OK for a bit).

bdepree@gmail.com

July 13, 9:31 a.m.

Trade off the half of the population that actually likes going shopping in brick and mortar with the fact that their credit cards are maxed out. 

Also,  probably need to factor in the growing obesity epidemic that might cause a significant portion of that half to be happy to stay home and shop online.  Amazon is making the situation worse by constantly offering Lane Bryant gift cards at a discount,  a deadly trap for the other half of the population who is totally unaware of the ramifications.

jmyers@pelotoncre.com

July 13, 9:12 a.m.

Good article and I agree with your assessment. The articles touting the demise of retail were alongside another article this week that shows Dallas/Fort Worth retail occupancy is at an all time high. Let’s tap the brakes a little bit on the whole ‘death of retail’ narrative.


Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, Just One Trade, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting the Dots, This Week in Geopolitics, Stray Reflections, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.ggcpublishing.com/. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© Copyright 2017 Mauldin Economics