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Is Next Big Short Sale in US Retail Industry?

FinancialTimes  |  Rob Williams

“We think the magnitude of this short could be bigger than subprime,”

Short Sales

Hedge funds on the prowl for the next big opportunity since the collapse of the subprime housing bubble are placing bets against the U.S. retail industry, according to the Financial Times.

Ten retail chains have filed for bankruptcy so far this year, while other companies are closing unprofitable stores as consumers shift their spending online.

“We think the magnitude of this short could be bigger than subprime,” Stephen Ketchum, the head of Sound Point Capital, a hedge fund that manages more than $13 billion for investors, told the newspaper. “Go to the Amazon website and type in ‘batteries’. What you see is just the tip of the future iceberg. And retail is the Titanic.”

His fund is selling short companies that are on the verge of collapse. A short sale is when an investor borrows shares from a brokerage and sells them on the open market with the expectation of buying them back at a lower price. The short seller loses money if the stock rises.

“Because it is such a slow bleed, it is important to get both the direction and the timing right,” Ketchum told the FT. “We are focused on shorting the companies that have reached a tipping point for one reason or another.”

The U.S. retail industry rapidly expanded in the past nine years since the financial crisis as the Federal Reserve provided record-low financing to banks. Department stores and shopping malls need to close locations and retrench to set the stage for future growth

“This created a bubble, and like housing, that bubble has now burst,” Richard Hayne, chief executive of Urban Outfitters, said in a conference call earlier this year. “We are seeing the results: Doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”

Credit Suisse said as many as 8,640 stores could close down this year, exceeding prior records during the financial crisis and the bursting of the dot-com bubble in 2000. Retailers have shed 9,000 jobs a month this year, according to the Bureau of Labor Statistics, compared with average monthly job gains of 17,000 last year.

The S&P 500’s retailing index has risen more than 10 percent this year, most because e-commerce giant Amazon makes up a third of the benchmark. Its stock is up 33 percent this year, and the company has growing ambitions to expand its footprint in brick-and-mortar stores. The Seattle-based company last month offered to buy Whole Foods Market for $13.7 billion, which triggered a selloff in supermarket stocks.

“There’s a big shakeout in how people consume goods,” a hedge-fund manager told the FT in a separate story. “It will have a massive economic impact . . . It is already a bad year, and it feels like it has the momentum to become something bigger.”

Blackstone Group, the world’s biggest investor in real estate warned that the outlook for America’s enclosed shopping malls is darkening quicker than experts expected as the growing online retail threat hammers their valuations.

“The retail industry is clearly facing headwinds. And it’s the first time we’ve seen secular rather than cyclical headwinds,” Nadeem Meghji, head of North American real estate at Blackstone, told the FT. “We’re now seeing pressures even on luxury retailers, which I didn’t expect to happen as fast as it has.”

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