The future's so bright ... don't break out the shades just yet

Working on Wall Street, I think we will indeed get a bump this year.

But what you need to understand is that the euphoria that Wall Street is experiencing now amounts to no more than a "sugar high".

The profitability that is being generated on Wall Street larger derives from an excess of cheap liquidity, again a temporary burst of high fructose corn syrup courtesy of the Fed and Treasury. Look for that to be reversed gradually starting in 2010. On top of that, despite their other competing objectives, the Fed continues to encourage banks to be more cautious in their lending. Hence, even in this blissful state, borrowers still face challenging capital markets.

And that speaks to unemployment, which remains high. And will stay high. Unemployment in NYC is still particularly high. I would say 20-30% of the erstwhile financial industry remains unemployed. Wall Street is not rehiring aggressively, and will not be rehiring in droves until it sees whether the economy and capital markets can continue to grow after the government turns the taps off.

If that significant portion of the financial industry remains unemployed, then the IBO's numbers seem even rosier to me, actually. I.e. if those job loss numbers were close to half of what was expected with the financial industry still in distress, then we are less dependent on Wall Street than I thought.

And, yes, bank profits are crazy now because of the blown out margins based on the fed policy decisions. Though they're not lending much, they're using those profits to little by little write down their bad assets ... which I'm hoping will get well underway by the time the government "turns the tap off" as you say.

Ana Maria - the IBO's bonus figures have nothing to do with employment numbers. The bonus pool is not a function on employment. It is simply revenues*comp ratio. The fact that there a fewer heads doesn't matter really (from a tax standpoint), just means more $$ for fewer people. Two conclusions: (1) If employment improves, doesn't affect NYC tax revenues if the banks are no longer having outsized years because the govt shut off the taps. In fact, this is why I don't expect massive waves of rehiring. (2) NYC of course is massively dependent on Wall Street revenues (fact that the $$ is spread across fewer people is irrelevant).

Yournamehere - interesting; I actually was not connecting bonuses and unemployment, so we're on the same page there (though the IBO attributed higher expected tax revenues to bonuses). I meant that the unemployment picture appears less dire than I would have thought.

With respect to your conclusion that if employment improves it doesn't affect tax revenues, that's hard to reconcile. We may not return to boom years, but it certainly is a start, no? And it has to be better than last year, so an improvement from those low levels seems like a given.

I agree with much of what yourname here says on a macro level. Some non-scientific anectodal micro-economic observations: The City has been jammed with tourists this season but they have reportedly been of the domestic variety and are not buying much (NY Times). I think the dollar's weakness must be having some positive impact on tourism so this is a little surprising. I understand that high end restaurants, while jammed on the weekends were until the recent seasonal bump, hurting during the week. I also saw a recent Crain's article commenting on the weakness in Broadway ticket sales. So I'm not sure all is rosy outside of financial markets. Those bonus payments may also end up being saved rather than spent thus cutting down on their multiplier effect on the incomes of those not directly working on The Street..... and may mean that apartment rental payment delinquencies in NY City which are reportedly soaring may continue on the high side.

I think the space to watch during bonus season is the $2mm to $4mm range. The real problem for real estate is not that jobs skipped town, but that the entire financing structure crumbled. So what we have today is a very financeable segment (sub $1mm or so) and a completely illiquid inventory above $2mm. I liken the action today as the last waltz before the higher end is forced to keep cutting until a cash buyer feels it is safe enough to step in. Once these price cuts start to dip into the sub $2mm range, those 1,200 SF pre-wars with old bathrooms will have to discount further.

Also, the bond party is over and most of the bonuses this year came from the debt trading side. It was very easy money but anyone who trades, knows that it's over. Unlike recoveries past, growth is not going to be centered in the US - it will be emerging markets.

Having started shopping, I am increasingly convinced that the $800 PSF ask on a decent, but small and in need of work typical pre-war, is worth $500 PSF on average. I know it sounds extreme but intuitively, I have a hard time seeing the newer stuff remaining at $1,500+ PSF, and when it comes back to reality, the lower end will be forced down. The big question is will there be a stampede or not and I am starting to think that we could in fact get one by 2Q 2010.

Fred - when you say a stampede, do you mean lots of buyers chasing properties or a stampede of pricing adjustments downwards?

Hi, I decided to voice my opinion as well. It is in reference to
"Fewer than expected job losses of 157,200 versus the predicted 254,500"
This reminds me of how important is the way the food is presented at the table and what a huge difference makes if the pork chop comes by itself in an empty plate, or maybe garnished with a side of mash potatoes and vegetables. With other words, how much more sorrowful it would sound if we only have the news for those who have lost their jobs; however, now we have the data of what it could have been in order to compare and feel good about it! our perceptions get so easily entangled on a way the reality changes so now we can perceive our situation as a better one!

Hi Ana Maria - I meant a stampede for the exits.

So, what I'm hearing from you all is that your outlook of the macro picture of NYC is not in a position to improve any time soon; is that accurate?
I'm guessing this is over the next 1-3 years.

Considering that a general time-frame that buyers look to as a holding period is now a minimum of 5-7 years, aside from the general demographic trends I mentioned in the post, what thoughts have you all over this longer time frame?

I'm thinking along the lines of taxes, services, carrying costs, safety, business headquarters, schools, cost of living, tourism, demographics ... the big picture.

In my opinion, the only thing holding up the real estate market is the expectation of future inflation when the money printing goes into overdrive.

Yet it is hardly clear that we will avoid a Japanese-style deflation.

Ana Maria,

5 -7 year predictions are way more dangerous than even 1 or two year predictions. For the record some of the wisest men in the land as far as economic growth is concerned (or we should hope they are considering the mess we are in) who populate the Federal Reserve Board, have habitually gotten even their short-term economic outlooks wrong as far as economic growth and inflation go. As far as the future of New York City 5 - 7 years from now goes....your guess is likely as good as any of ours, and they are probably pretty bad. I would note that my piece located here:

http://www.urbandigs.com/2009/02/how_big_was_the_big_apple_bubb.html

has data on the shape and duration of the last New York City real estate cycle if you believe that history is any kind of guide.

Apologies. i realize that old piece only shows the run-up since 1998, not the prior downcycle, so i will have to write a new piece showing the shape of the last downturn.

I am a contarian by nature and when the herd is running in one direction I look for clues to take the other side of the trade. I think we are in that sweet spot right now. The stock market has had an amazing run off it's lows but everyone hates this rally. They don't trust it, hence lots of money still on the sidelines. We have been basing out for 2 weeks as leadership changes but I think we go higher. Same is true for the economic predictions out there. Most are unrelentingly negative, especially regarding employment. The employment bears got a jolt last friday and will probably keep getting surprised for a few months. Most of these economists are just crystal ball gazers and gladly repeat what their brethren say in the press. If they're wrong, well so was everyone else. As with investing/trading they want to do what everyone else is doing.
Anecdotally here is what I see in NYC: open houses in W'burg have been packed and these people want to buy, hailing a cab in Manhattan is tough again, trains are definitely more crowded as are restaurants of all price ranges. I have also noticed many of the empty store fronts filling up with new tenants that aren't banks. I think the bottom is in but fear pervades. Alot of money can be made hanging on while we climb a wall of worry. When complacency sets in again-sell!

As long as Washington continues to support Wall Street bailouts then NYC will have a supporting floor for tax revenues.

The impact on luxury retail, high end real estate, fine dining, and other areas that require a steady inflow of wealthy customers remains somewhat muted.

For one thing, I am unsure how much of an effect tax abatements are having on the demand for real estate. What happens when the programs expire?

I think we should consider that the government giving $165 billion or more to AIG to pay out the credit default swaps had a lot to do with it. It would not been a profit at all without it. The Government did not negotiate it but paid out 100cents on the dollar. Sorry if I seem a killjoy.

You know what would be a great comparison stat Jeff? The number of non-conforming mortgages as a percentage of total sales pre-crisis versus current and projected. The concentration would obviously be in the $1.5mm+ segment but I wouldn't be surprised if it didn't go from 70% to 20% or something extreme like that.

If the issue is the new normal for credit whether or not the macro meets, beats or falls short of expectations, matters much less.

Jeff,

I definitely see your point about long-term forecasting, but sometimes long-term is actually easier than short-term. Think of Warren Buffett whom has no opinion on today's stock market, but is entirely comfortable making bets on it far into the future. Short-term fluctuations can average out over time. However, I would agree much of the time, forecasting longer term is perilous.

cfranch,

I'm a contrarian too, but I don't see a consensus in either direction. Just as many optimists seem to be out there as there are bears. Many people think that the recession being technically over means that improvement is on the horizon. So I think it is hard being contrarian in this market given the mixed views. However, one thing that I look at is what the upside v. downside is. Many asset markets seem to have a limited upside relative to the downside.

JJ - you bring up an interesting point - if we believe markets are inefficient over the short term but efficient over the long term, then technically long term macro bets should be safer than short term bets.

Then again, the further ahead we look into the future to make predictions, the greater the likelihood of being wrong, as present datapoints that are the basis of our predictions become less and less relevant.

CFranch, I, like you, consider myself a contrarian and have been positive on the market for many of the reasons you sited for the last 5 months or so. However as JJ notes, risk reward now seems more skewed to the downside as the 2nd derivative of stimulus/rate cuts has finished increasing and stocks are trading at historically high multiples of year-ahead earnings. Whether the public, who has not played this market to any degree gets back involved and pushes stocks to even less attractive risk reward levels, comes back I can't say. I will note that you may be right that the economy will continue to surprise on the upside (something I have written about before), but the risks if it dosn't keep me cautious for now. JJ's mention of Warren Buffett should be clarified to note that Buffett bets on earning assets (companies) that he believes have an unassailable franchise that will protect their ability to generate those earnings. He then acquires these assets at discounts that imply significant returns on his investment. He makes these purchases regardless of economic or stock market outlook. He bets on the stability of the businesses' cash flows and nothing else and only buys these businesses at a discount. I feel like stock prices here don't imply a high corporate cash flow return on my capital and further that the economic environment we are in makes cash flows generally less rather than more certain. I do think there are still some high quality stocks with high dividend yields that can be bought today under a Buffett-like approach.

CFranch, I, like you, consider myself a contrarian and have been positive on the market for many of the reasons you sited for the last 5 months or so. However as JJ notes, risk reward now seems more skewed to the downside as the 2nd derivative of stimulus/rate cuts has finished increasing and stocks are trading at historically high multiples of year-ahead earnings. Whether the public, who has not played this market to any degree gets back involved and pushes stocks to even less attractive risk reward levels, comes back I can't say. I will note that you may be right that the economy will continue to surprise on the upside (something I have written about before), but the risks if it dosn't keep me cautious for now. JJ's mention of Warren Buffett should be clarified to note that Buffett bets on earning assets (companies) that he believes have an unassailable franchise that will protect their ability to generate those earnings. He then acquires these assets at discounts that imply significant returns on his investment. He makes these purchases regardless of economic or stock market outlook. He bets on the stability of the businesses' cash flows and nothing else and only buys these businesses at a discount. I feel like stock prices here don't imply a high corporate cash flow return on my capital and further that the economic environment we are in makes cash flows generally less rather than more certain. I do think there are still some high quality stocks with high dividend yields that can be bought today under a Buffett-like approach.

Hi Jeff,

a side note: I agree with what you said. Just like to add that Buffet also made large bets on the S&P and the dollar, which is a break from his historical investment style, but also long-term in nature.

I'll keep it brief

1. Bonus season for all banks will be mostly stock
2. Nobody uses stock as a loan for a mortgage
3. Why? Look at Bear and Lehman, people wont do it
4. Lack of cash means buyers cant bid as high
5. Rich already own, are not upgrading
6. $1mil place = $300k down, who has this in cash?
7. Average buyer of $1mil place is young person
8. young people stuck with stock no cash cant buy
9. equity rally means $ into equity not apts
10. foreigners in trouble, look at greece/spain
11. trophy properties can still sell, 100% cash
12. Good luck at $1,000psf

I can go on further, but keeping it brief

wall street - couldnt agree more. You recall my post on this a few months ago right?

http://www.urbandigs.com/2009/10/euphoria_or_caution_over_upcom.html

"What I don't hear are terms like: distribution of cash component vs stock options, deferred stock compensation, clawbacks, ROE shares deferred, toxic asset bonus fund (credit suisse in 2008), other government tax policy on future bonuses, etc.. By last check, the Credit Suisse Toxic Asset Compensation fund was up 17% for 2009."

Some people tired form the real estate and move toward some other sectors.But they must keep in mind that the future of the New York and USA real estate is bright Investors are encouraged by the government