Carl Icahn’s Beautiful Trade
The derivatives market is vast imbroglio of different futures contracts, some deriving their movements from changing levels of inflation, others pure gambles on the weather.
One derivative contract has attracted more Superinvestor attention this week than all the rest. It’s not WTI oil or the VIX volatility index; it’s the ‘CMBX Series 6,’ a wager on shopping malls.
Specifically, the CMBX Series 6 is linked to the quality of debt issued to shopping malls. The index goes up when traders think Macy’s and Dick’s Sporting Goods will enjoy lots of footfall and pay their dues to creditors. The index goes down when traders think these brick-and-mortar giants will never return borrowed money again.
The CMBX boasts a who’s who of buyers and sellers, jam-packed on both sides with talent from Wall Street’s biggest funds. It’s billionaires’ row! Activist investor Carl Icahn has shorted the malls with Deutsche Bank and Morgan Stanley. AllianceBernstein and Putnam Investments are taking the opposite side; betting malls will recover soon.
Icahn made an incredible 50% on his short bet through coronavirus, calling it a “beautiful trade on a risk-reward basis.” It’s more expensive to short something as it falls in price because more investors are trying to do it, and you need a buyer to borrow from. When unemployment hit lows, faith in the index grew, and Icahn moved in as a lone bear.
According to First Insight, a retail analytics firm, two-thirds of the US population say they will feel unsafe shopping in a mall when lockdown lifts. The coronavirus impact has probably already sealed the fate of a good chunk of debt, so the CMBX could go lower. This being said, retail is tipped for a fast rebound. Major mall operator Simon Property Group is reopening dozens of malls already, and the index is finding resistance.
You can bypass the CMBX Series 6 and head straight for the underlying retail stocks to get in on the action. The Invstr community is on Icahn’s side when it comes to tenants like Macy’s, currently 30% bearish. Its landlord, Simon Property Group, is only 16% bearish. Could this mean bullish sentiment will trickle down to Macy’s soon?
