The popular 2015 film, "The Big Short," starring Christian Bale, Steve Carell, Ryan Gosling, and Brad Pitt, told the true story of how a handful of traders collectively made billions of dollars betting against subprime mortgages in 2008.
How it could happen should be clear from our conversation yesterday...
Real estate is the single greatest creator of wealth in the history of mankind.
But it's not about just buying and holding or buying and flipping.
The most money is actually made - and in the quickest time - when real estate prices crash. And they do so in perpetual cycles. In the past 15 years, there've been three booms, two busts, and we're nearing the third bust as I write.
Today, we're going to cover lessons learned - and money made - from the second boom and bust. It'll no doubt be familiar to you.
I call it "The Big Short 2.0". And, just like the first, which we reviewed yesterday, investors who played it smartly made a lot of money.
This is vitally important because their methods forecast what you should be doing with your money today.
Here's the true story of how "The Big Short 2.0" came about...
Who profited from it...
And, most importantly, how its sequel is being written now, and how this time, everyday investors can profit from the Biggest Short coming this summer, if you know how to trade it.
Making a fortune on The Big Short was predicated on understanding the residential housing bubble, how leveraged everything and everyone was, knowing when to take action, and understanding what to trade.
The big winners in that trade saw what was coming, as did a lot of other traders and investors, they just took action when there was time to set up their trades. And that took a lot of guts.
In the case of The Big Short 2.0, which was all about making money on the decline of shopping malls, traders had less time to set up their trades but still had crumbs to follow.
Big Short 2.0 traders, who raked in their gigantic profits in the late spring of 2020, saw clearly that e-commerce, specifically online shopping, was impacting malls as foot traffic was demonstrably slowing and big anchor stores were suffering sales declines while online platforms were selling everything at better prices; that's because they didn't have the physical footprints and overhead expenses bricks and mortar stores in malls had.
That was obvious coming out of the 2019 holiday shopping period when for the first time in history online sales exceeded sales at traditional retail outlets.
That's when 2.0 traders added to their bets against shopping malls.
However, not unlike the timing headaches and big paper losses experienced by Big Short traders waiting for their trades to shine, traders betting against mall real estate endured paper losses by getting into their positions early.
They looked early, and some of them feared they might be wrong, when after the holiday news of exploding online sales, shopping mall mortgage-backed securities ticked up with hope landlords would figure out how to better incentivize tenants and shoppers by adding more "experiential" and entertainment features.
But the short 2.0 crowd had conviction, had done their homework, and knew they would make out eventually, so they stuck with their positions and some even added to their shorts.
Then something horrible happened, not for the shorts, for the world.
The Global Panic
Pandemic protection called for everything to shut down, and of course that included shopping malls.
What would have been a good short became an epic trade, literally overnight.
One outfit shorting CMBX-6, the pool of commercial real estate backed (malls) securities loaded with already stressed mall mortgages, MP Securitized Credit Partners, turned a 119% profit on their $100 million bet in fewer than four months. MP Partners portfolio manager Daniel McNamara, the architect of the firm's winning bet, dubbed the trade "the Big Short 2.0."
Billionaire investor Carl Icahn made $1.3 billion on the trade and when asked about his gains said, "We periodically do shorts, and this is one of the best I've ever seen."
The New York Times reported Apollo Global Management made $100 million on the trade. Mudrick Capital and Deer Park Capital reportedly made about $100 million each on the same trade.
The trade was so successful and future opportunities so ripe trading the ongoing downfall of commercial real estate, especially since the pandemic's push to work-from-home and its impact on increasing vacancy rates and commercial mortgage refinancing woes, MP Partner Daniel McNamara started another hedge fund he's calling Polpo Capital.
Polpo, which means octopus, expects to profit, or capitalize as McNamara calls it, from the coming distress in commercial real estate (CRE) as forbearance agreements expire, landlords' reserves dwindle to nothing, and loans reach maturity and need to be refinanced at higher rates.
In other words, he and a lot of successful traders are already setting up trades to profit on what I'm calling "The Biggest Short."
Only this time everyday investors can make out on teetering CRE.
That's because this time mom-and-pop retail traders, who could never have shorted subprime MBS, bought credit default swaps or shorted CMBX-6, can position themselves in easy to execute trades to profit from The Biggest Short, not by shorting anything, by buying cheap positions sometimes for pennies on the dollar.
Tomorrow, I'll tell you how bad things are in CRE-land and how to make money on The Biggest Short.
The post What To Do When "The Big Short 2.0" Leads to "The Biggest Short" appeared first on Total Wealth.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.