Credit Distress Easing; Spreads "Screaming In"

Noah,

I do not have any audio of the Yale Club presentation but yes I do remember your statement that the worst of credit distress is nearing end. You also said that the TARP plan was not a bailout, will be viewed as a bailout, and that it is a bank rescue plan that will see the banks sell their assets at prices well above what the market would have priced them at on their own. The whole thing interests me although I do not quite understand it.

Question for you.

I am a broker in Manhattan and I want to know how you would get through to a seller that still thinks their apartment is worth exactly what the last comp sold for in the building? I tried everything, articles, your site's discussions, stock market moves, but they dont get it? What would you do because this fits in with the 'anchoring' statement you made, and I worry I will not sell this place before listing expiration?

Thank you.

Linda

Hey Linda! Did I speak to you after the panel about your seller, were you the one that asked whether they should sell now, during a stock panic, or wait 1-2 years?

When does expiration expire?

PS to all!

I started writing this piece this morning when stocks were down about 250 points. I got word that credit spreads were coming in big time, from highly distressed levels.

Please do NOT day trade stocks based on anything you read here. I take positions and I am in and out very quickly. I have been trading professionaly for about 11 years, and I understand my risks at all times.

Never trade stocks based on any one discussion and make sure you understand the risks you take. It just so happens that about a few minutes after I finished writing this piece and posted it, markets started to fly, probably as a result of easing credit spreads.

I try to pass on all info I hear from front lines as soon as possible, but it takes me time to write the post and link out to add some meat to the discussion.

"I understand my risks at all times."

You should have been running AIG!

I'm sure stocks flew high because people read your piece here. hah What are your thoughts on international? Are they lagging or leading US? Someone this week said on Charlie Rose that other countries have a much better plan than ours, or at least they're not afraid to inject lots more money in, and that we'll have to inject much more than the $700B too.

"You should have been running AIG!"

HA! Well I only take on 7-10 positions at a time that are 500-1,000 shares each! A bit different, but very funny.

My listing expires in about 6-7 weeks. And no, that was not me, although I do remember that question being asked. Thanks!

Bee dub - another funny! Hmm, I think their economic slowdown is lagging ours, and that they were not as overly exposed to toxic MBS as our firms were. But they are exposed.

They do not intent to purchase toxic assets at marks significantly higher than what market value is to recapitalize. I think their plan is to inject funds directly into the banks, and when we did that $250bln, we took that from them.

I haven't looked to deep into what foreign gov'ts are doing to bail their banks out, but there are many I know that do not feel 700Bln is enough to fix our banks.

Linda - some sellers just dont want to accept that the market is much lower than what they want for their place; hence the anchoring. Like a drug addict, they need to hit the bottom/crossroads and realize on their own.

If they havent realized the risks over the past 4-6 weeks, I dont know what will knock them out of denial.

Your not going to like this, but perhaps offer a slight commission incentive if they lower their price closer to reality? I know you will hate me for saying that. But in the end, you both want a sale. They just need to get their head out of the sand that the market today is not what it was 8-12 months ago!

Good luck! Keep working on that reduction though.

today, for the first time in a while, i saw a lot of term activity in the interbank market. the big banks hit a lot of bids, driving rates down by about 1% this morning.

banker boy - yes I am hearing same thing. Thanks for commenting!

for the first time in a while, there was a good amount of activity this morning in term money in the interbank market. the big banks hit a lot of bids and drove down rates by about 1% prior to the market's opening.

I think it is unfortunate that Buffet's views on buying stocks were published today, because I believe that, but for his views, the market would have sold off nicely on today's very weak economic news.
That being said, there is now doubt in my mind that there are tremendous opportunities out there to start building positions in companies with a fiver year and beyond time horizon. I started building positions over the past three weeks, and today I added a new company to my portfolio CAT. My objective, over the next 12-18 months is to be in acquisition mode, I will be averaging in every time the market dips and tries to test its "bottom". I have absolutely no idea what the bottom will be, and I don't care. What I do care about is buying stocks at prices that I find attractive based upon my aforementioned time horizon.
I view it as very positive that the dollar has continued to strengthen and that commodities have been dropping. If ever there was a time for gold to be rising, one would think it would be now based upon the risk/inflationary environment that we are in. However, I suspect that Central Banks are actually selling gold to pay for their interventionist policies, and I don't believe anyone is giving serious thought to the risks of inflation based upon the recent actions of our Fed and other Central Banks. Once it dips below 700, I will buy some to keep as a permanent part of my portfolio.
As of now I have started to build positions in V, GE, MSFT, CAT, BAC, NWL and MHP. There are other companies that I am studying and that I will begin to build positions in when they get a bit cheaper.

Certainly no one can pick a bottom. For me, Im just trading this market back & forth. For now Im long, with a tad of EEV to hedge in case of a selloff, and some puts in REITS/GOLD

I am also long gold though. Crazy some of the moves gold made, and you could be right. Someone/thing may be trying to peg a price.

All I know is we plunged big time in past 3-4 weeks, vix is crazy high, sentiment is crazy bearish, so I want to have some longs on.

However, there will be an opp to buy some quality LT plays up during these times! Thanks for your thoughts mh23..always a good read.

Im betting on a relief rally once these facilities get going, but it may start earlier. Clearly today's failure to hold is telling.

Who says apartments are not worth last 12 month comps?

Co-op resale is up 3-6 percent yoy psft.

Sounds like some really lazy brokers above.

Credit spreads are improving, and a meteor will not hit the earth. Cheer up folks. Seriously. Didn't you hear that Buffett's buying?

And anyone with a quality apartment with light in a good school district should make their broker work harder rather than cutting the price.

Buyer - tell that to these brokers

http://www.streeteasy.com/nyc/sale/357797-condo-1641-third-avenue-yorkville-new-york

SOLD JAN 1.225M
ASKING PRICE NOW 1.025M

Stupid brokers.

Noah - That is overpriced at 500k. You'd have to pay *me* to live in Rupert Towers. I specifically said co-op median resale. People with equity who passed a board review and can save money. Not some transient condo semi-rental place in the middle of nowhere.

Of course, prices may go down a bit on certain apartments post-Lehman if you are lucky enough to land a panicky seller with a short term thinking high-pressure broker whose contract is running out. Smart buyers will snap these up, just like smart buyers like Buffett are snapping up quality stocks.

I predict here that Q4 2009 surpasses Q4 2008 on median co-op resale ppsft by a teeny tiny bit. I was laughed at here when I said 2008 median co-op would surpass 2007. Looks so far like I was right. There may be a small dip as at the end of 2006. But Q4 yoy will be up. Buy when the foolish money is waiting for "things to clear up".

Plus you get a place for your family to live!

Buyer - go through the StreetEasy listings and take a look at both the price cuts and time on the market info. Just anectdotally.

My husband is a partner in a law firm. As such, he is self-employed with little monthly income and four substantial payments based on firm profits. His firm is up 15% this year (it's mostly litigation). We have become "risky" borrowers.

I don't need to buy to have a home.

Buyer - yea, Im not a fan of those towers either, but it goes to show you that everything went parabolic during the past 5-6 year credit/wall st fueled boom, and now, the generic/uninteresting non special apartments will be much harder to sell in times like these.

In terms of timing the price reports, which are VERY lagging by the way so I dont know why you really look to a report like that for what the market is doing now, I think 4Q of 2008 or 1Q 2009 will show the first most significant declines.

I could be off by a quarter or two. You cant time these things. Its tough out there, sales are way down, inventory is rising, and seller who have to sell know what they need to do to find a buyer and get a deal done.

This is NOT going to be a 1 or 2 quarter event Buyer. This is going to be a multi year event. We are yet to see the real distress, but one thing is for sure,

1) stocks are way down - negative wealth effect
2) wall street is done - many high paying jobs done & Bonuses are done for many years! HUGE impact
3) lending rates are UP
4) lending standards are way up; exotic products stretching affordability are gone
5) use of leverage is done
6) foreign demand is way down
7) confidence amognst buyers is way down
8) sellers are getting nervous
9) sellers are being forced to sell for personal reasons if they lost job, overexposed themselves, or are in financial straights for other reasons, like living beyond their means and cashing out most of the equity in their home and now dealing with high levels of debt service

You just cant deny these fundamentals. What about all those that bought in past few years based on wall street salaries and bonuses? How long until they can no longer afford their $2M pads? Prices rose big time, and we held on for a while, but the game is over and it will take time for those overexposed and distressed to get out of denial and face reality. Its happening already and know many sad stories that I wont share here. The hamptons is facing forced selling right now, but who is buying? Not many.

This will take time. You cant look at it day to day and expect to see what I am saying to you here. Talk to me in OCT 2010, and lets see how well Manhattan held up. I HOPE IM WRONG BUT I WILL REFUSE TO KEEP ME HEAD IN THE SAND.

The talk will be that 2007 went wild and was a RECORD YEAR and that we are correcting from that anomaly. Thats how they will spin it. Back to normal times.

Noah, thanks for the read.

While Libor and CP spreads have eased, other parts of the fixed income market have not. Heck, considering the CP market & inter bank lending are back-stopped, one would think Libor should not be anywhere near 4.10% and the 1 month T-bill yielding close to zip.

If one looks at the high-yield corporate market, it set a record (I believe) at 1400 bps over the treasury curve as of Friday. Investment grade corporate yields have also not budged and remain at historically high levels. MBS market liquidity is also remains impaired.

The key to corporate yields coming in (imperative for + stock market performance) will depend on corporate earnings (or lack thereof) and the ultimate depths of this global financial tsunami. Both of these variables are ahead of us and at this time, it may be a bit premature to declare the storm has passed.

Noah, thanks for the read.

While Libor and CP spreads have eased, other parts of the fixed income market have not. Heck, considering the CP market & inter bank lending are back-stopped, one would think Libor should not be anywhere near 4.10% and the 1 month T-bill yielding close to zip.

If one looks at the high-yield corporate market, yields set a record (I believe) at 1400 bps over the treasury curve as of Friday. Investment grade corporate yields have also not budged and remain at historically high levels. MBS market liquidity is also remains impaired.

The key to corporate yields coming in (imperative for + stock market performance) will depend on corporate earnings (or lack thereof) and the ultimate depths of this global financial tsunami. Both of these variables are ahead of us and at this time, it may be a bit premature to declare the storm has passed.

thanks for the comment Joseph! Keep in touch here

Joseph - Yes, at 1400 over treasuries high-yield is pricing in a 25%-plus default rate. Many performing junk bonds are trading only a little over default already. Unless a meteor hits the earth, risk has already been priced in.

Noah - Prices *could* go down 25-30 percent. Anyone buying should factor that *possibility* in and make sure they have a downpayment and 5 years. That's why I like co-ops in top school districts near transportation. I dislike condos with "investors" and rentals and "gentrifying" areas where you don't know what the quality of life and services will be long term. I also think real estate is a bad investment in general, and is simply a form of personal consumption and personal use as an alternative to rent. I buy stocks and bonds and hedge funds and such forth for investment and growth.

I work in finance. I bought my first NYC place 3 weeks after 9/11, fixed it up and made a bundle. Then I bought for cash a sunny 3-bed in the Village in PS41 last summer. This has done much better than my stocks over the last year. :) And I am having my second best year ever job-wise, although working a bit harder than I would like given the turbulance.

My friends and family who rent have asked me for advice. I am telling them to shop hard and buy sunny apartments near transportation in top 6 Manhattan school districts next year. Friends I am simply advising. Family members who are teachers and artists and so forth I am offering to co-guarantee their board package so they can pass and have a permanent place to live. Like Buffett, I am putting my money where my mouth is.

I think Manhattan will increase its dominance of the world economic order based on the greater dynamism of the US economy over Europe and the "emerging markets" dependent more on our buying their stuff than the other way around. Didja notice that the Lehman bankers hired by Barclays are staying in Manhattan and getting bonuses? I feel bad for the back office redundancies and I am voting Obama because I want them to get unemployment and job retraining, but never ever ever count Manhattan out.

I'll be happy to compare my strategy with brenda's renting strategy 5 years out.

Buyer,
I pay $4300 a month for a two-bedroom, two bathroom fully-renovated 1250 sf home with fantastic light. I couldn't come close to that purchasing in Manhattan. I have owned three apartments (two in Manhattan) and currently own a second home. I strongly believe in owning a home, AND I've made quite a lot of money in the process. I will buy, when it makes sense. Real estate in Manhattan goes through cycles, just like everywhere else. At the very least, I certainly won't lose out on anything by waiting. Unless somehow another bubble is created, I'm safe. Hell, if I never buy I'm safe.

Brenda - "I will buy"

Good. Glad to have you as a neighbor. Look at good apartments in the central Village. There are lots of people waiting in the wings to buy a piece of Manhattan when they are comfortable. That's why it may not go down much if at all. :)

Again, Q4 2009 beats Q4 2008, defined by co-op resale in Manhattan below 96th per sq ft. Heard it here first.

Noah - What would you say Hamptons prices are falling to in a forced sale? We don't own there, but visit friends, and were thinking of buying for personal use (not investment). Say a (formerly) 1 mill place in E. Hampton? We would be potential cash buyers of a modest place out there. I estimate from the websites about a 25 percent drop so far, but it is hard to tell. If you know of a good broker out there, drop the name.

Buyer - Im hearing numerous stories from people I trust that go out there very often, whose close friends are selling because they need the cash urgently. Traffic is not good.

I dont know anyone out there but perhaps I can find out the address of the properties that have to sell. I try not to get too personal or inquisitive on personal stories with friends I have on front lines that I speak to daily, because I dont want to insult them or be nosy so as to lose the contact

not sure, but hearing scary numbers where deals are happening at....say 25-35% below peak levels from record year

Buyer-
If co-op prices are higher next year we may be neighbors, but I'll still be renting.
Only time will tell. By the way, those neighborhoods with good schools? Well, with very few exceptions those decent school options disappear at middle school. Think about it.