Current Events Archives

May 7, 2008

Yield Curve Steepens / Hoenig Hawkish

Posted by Noah Rosenblatt on May 7, 2008 at 9.18 AM

A: Amazing how things change. Remember late 2006 all the talk about the bond market and the inverted yield curve predicting a coming slowdown in the economy; forcing the fed to eventually cut rates? Well, the fed did so about 10 months later and cut the FFR by 325 basis points to stimulate the economy and credit markets. Now, the yield curve is steepening again and Kansas City Fed President Thomas Hoenig may have something to do with it.

First, some econ 101 about a steepening yield curve:

Steep Yield Curve: Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises relatively higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a recession). Here, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity. A steep yield curve is generally a bullish indicator.

StockCharts.com has a great little Dynamic Yield Curve tool that time lapses the yield curve with the S&P 500 Index since 2000! By hitting animate, the yield curve tool will dynamically change as time goes on, and you can see what equities did as the yield curve flattened, inverted, and steepened! Current yield curve snapshot to the right.

The yield curve is not a perfect indicator, so don't go betting your $$$ on it so fast. I have my doubts about the recession ending so soon and a new economic boom coming; in my opinion, the steepening yield curve is pricing in future inflation concerns and not a new economic boom! I'll go on record for that one, as I am still cautious about the strength of the consumer given a tight credit market, correcting housing market, limited equity for withdrawal (spending) from homes, and irresponsible use of debt/leverage for so many years. In short, I just think the consumer is tapped out and this is not something that turns around so fast; lets not forget that 70% of the US economy is driven by the consumer and the reason why the Bush stimulus package was passed to give Americans more money to spend!

However, as someone who loves to learn and understand 'why' things happen the way they do, it's hard to ignore what is going on in the bond market. It signifies a few things:

a) heightened inflation expectations/concerns
b) rates expected to rise in medium term
c) US dollar support
d) economic slowdown/recession expected to be mild

Whether or not this turns out to be the case is the $64,000 question! Future economic data will certainly drive the yield curve over the next few months; if economic data deteriorates, you will see the yield curve flatten (long end come down more drastically than short end flattening the curve) signaling the fed may need to cut rates a bit further to stimulate the economy. In this case, the US dollar will likely fall further and commodities priced in US dollars will rise further, creating more pipeline inflation pressures.

Hoenig's statement is interesting because it has to do with INFLATION EXPECTATIONS! The psychology of living in a world of rising costs/prices may force businesses and consumers to alter their investment/spending patterns! Businesses will get cautious and look to cut costs to retain profits while consumers will cutback on spending and perhaps even save a bit to afford the higher costs of living.

According to Bloomberg:

The dollar strengthened versus the euro as Hoenig of the Kansas City Fed said in a speech in Denver yesterday that "serious" inflation pressure in the U.S. may compel the central bank to increase interest rates.

"There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it," said Hoenig, who isn't a voting member of the Federal Open Market Committee this year. Consumers are gaining an "inflation psychology to an extent that I have not seen since the 1970s and early 1980s."

The reference to the 1970's and 1980's is when fed chief Volcker had to raise rates to insanely high levels to give the nation the inflation medicine it needed to fight the disease of 'the worst tax of them all'.

Below is a chart that Hoenig refers to in discussing the rise of inflation expectation (Federal Reserve Bank of St. Louis via Calculated Risk)

As I said April 15th, by talking tough on inflation we can remove the speculative currency trade in commodities and ease pipeline inflation pressures without action at this point. Thing is, commodity inflation is similar to fed rate cuts; it takes time to funnel through the system! So, $120 oil today, will have a lagging effect on corporate profits down the road! I can see it already!

2009 Fight of the Year: Inflation vs Economic Recovery

May 3, 2008

Inventory Rises Above 7,000; New Charts Coming Soon

Posted by Noah Rosenblatt on May 3, 2008 at 9.34 AM

A: As most of you probably know by monitoring the Streeteasy.com powered Manhattan inventory widget on UrbanDigs.com, total inventory in Manhattan seemed to rise above 7,000. The trend is clearly rising, and the reason is clearly sluggish demand. As buyer confidence started to decline late in 2007 as a result of the credit crisis and lagging effect on the equity markets, we started to see a consistent rise in inventory trends. The thing to note is that while this bonus season certainly will go down as a slow one, inventory is by no means at levels that would exemplify fierce seller competition.

First off, here is a preview of the new enhanced charting system that I am custom designing for readers of UrbanDigs.com! The chart below is 1 of 3 charts that will be at your disposal, and compares NEW LISTINGS & CONTRACTS SIGNED data.

The chart you are previewing is about 65% complete. You may notice that the line graph is very choppy/spikey. The reason is because Streeteasy updates their data systems during the wee hours of the morning, when web traffic is lightest. UrbanDigs sends a request to Streeteasy at around 8AM everyday to collect the updated information from the day before. So, there is a 24 hour lag, sometimes a bit longer, between when a listing is first displayed publicly and when it is captured by the Streeteasy systems. In an in-perfect world and a real estate market without a standard MLS listing system, this is the best data at my disposal. So far, it has proven to be fairly accurate.

Moving on, very little updating/editing/adding of new listings is done over the weekends. Since there is a 24 hour lag in data collection, the light data of SAT + SUN is collected by UrbanDigs's widget on SUN + MON! That is why you may notice very low data for contracts signed, price reductions, and new listings on Sunday's and Monday's. This is what is causing the spikes on the above graph. Needless to say, we will probably average the data from the week or come up with a different formula to 'smooth out' the line graph so that you can better interpret the trend without sacrificing data accuracy.

Feel free to offer your suggestion on fixing this in the comment section! The entire purpose of these charts is to get a sense of the general trend! Data will never be perfect or 100% real-time w/out a standardized MLS system, so please understand that these tools are for your general knowledge of trends! In this capacity, it really doesnt matter if a contract signed takes an extra few days to get noticed, or a new listing takes 2 days to get captured; as long as it is captured we can get a more real-time sense of what's going on in Manhattan real estate without waiting for lagging quarterly reports!

Back to the current Manhattan inventory data, it seems to me that listing inventory has:

a) risen about 54% since low in mid-December of 4,600 total listings
b) risen about 10% in the past 4-6 weeks or so; when we were hovering around 6,500 total listings
c) risen about 30% since May 2007; when we were at 5,500 total listings

To me, there is nothing wrong with publicly discussing our housing market; even if that means discussing rising inventory due to slower buy side demand. The trend that I consider worth noting is that at this time last year, we were coming off a very active wall street bonus season where total inventory was DECLINING going into the generally slow summer months. Right now, the trend is clearly RISING inventory coming off a slow wall street bonus season heading into the generally slower summer months.

Here is Jonathan Miller's Manhattan Co-op/Condo Listing Inventory Chart that I am basing these observations on:

NOTE: JM's chart was up until March, 2008. So, I added in green bars to plug in April and today's total inventory number; with this data provided by Streeteasy. It will help you visualize where we are at right now, and the trend.

Click on the chart for the larger version. Note how in the past 6 years, total inventory hit a high just below 8,000 in mid-2006. It seems we are on a path to these levels. Now, when I think back to the summer of 2006, I recall it being slow and hard to get top dollar for my sellers; but in no way were prices falling significantly! It was strange, as traffic was slow and listings took longer to sell (days on market definitely rose during summer of 2006), in the end the price paid was pretty strong and didn't dip as low as one might think given the sluggish activity. The reason I mention this is because it seems we will be close to that inventory high in a few more months, if sales volume continues to be light.

In order for asking prices to show a significant move down (as has occurred in many local markets across the nation), you need to see fierce seller competition at a time when buyer demand is very light. That just has not happened yet. I am still seeing buyer demand here in Manhattan, albeit lighter, and inventory is not at levels where sellers are competing with each other via sharp price cuts to move property. Of course you may find pockets of seller competition in buildings that have 15+ listings for sale (the Trump buildings on Riverside Blvd come to mind), in general the competition has not gotten nasty as of yet.

The new charting system should be ready in a week or so, barring any unforeseen programming issues, and should allow all of us to get a much better glimpse into this very mysterious but fast paced Manhattan housing market! I hope you guys like it!

May 2, 2008

Analyzing The REAL Jobs Report

Posted by Noah Rosenblatt on May 2, 2008 at 10.43 AM

A: We got some good news this morning on the jobs report between a less than expected loss of jobs, and a ticking down of the unemployment rate. Stocks are understandably rallying on the lack of a doomsday report. While I enjoy seeing the stock market rise, as it provides a positive wealth effect and helps to support confidence in general for other types of investments (i.e. real estate), I do not enjoy being told something that is a bold mis-representation of the truth. For all those that understand the BLS B/D adjustment model, you will see why this report was paints such a misleading bullish picture. You may wonder why this report seems to contradict reality; it does.

I've discussed this before, and Barry Ritholtz has been one of the biggest voices trying to bring the B/D adjustment crapola to light. Here is the quick definition of the B/D adjustment in the jobless claims report, before I go into today's discussion of fantasy (what we are told) and reality (what is really happening):

B/D Adjustment - There is an unavoidable lag between an establishment opening for business and its appearing on the sample frame and being available for sampling. Because new firm births generate a portion of employment growth each month, non-sampling methods must be used to estimate this growth.

Here is the B/D adjustment for April's Non-Farm Payroll's report, directly from BLS.com:

I am NOT making this up, this is REALITY and the report published to the public actually calculated in an ADDITION of 267,000 jobs! Are we really to believe that our economy actually added this many jobs? Let's just look at a few sectors and compare the fantasy vs reality!

CONSTRUCTION

Reality ---> Lost 61,000 Jobs

B/D Fantasy ---> Added 45,000 Jobs

PROFESSIONAL & BUSINESS SERVICES

Reality ---> Added 39,000 Jobs

B/D Fantasy ---> Added 72,000 Jobs

MANUFACTURING

Reality ---> Lost 46,000 Jobs

B/D Fantasy ---> Lost 10,000 Jobs

LEISURE & HOSPITALITY

Reality ---> Added 18,000 Jobs

B/D Fantasy ---> Added 83,000 Jobs

If we only look at these sectors, we will see the following discrepancy between reality and the B/D fantasy adjustments that are added to the report that we see:

REALITY ---> We LOST 50,000 Jobs
B/D ADJUSTMENT FANTASIZES ---> That We ADDED 190,000 Jobs

Right there, we have a swing of 240,000 jobs that was bullishly embedded into the jobs report; using the seasonally adjusted b/d adjustment! AM I MISSING SOMETHING HERE; If I am please do tell me!

This frustrates the hell out of me, and explains why things seem much worse in the real world when stocks and economic reports show otherwise. For the first 4 months of 2008, and using the fantasized data & b/d adjustment model, we STILL LOST ABOUT 260,000 jobs! In a normal growing economy, we should be adding about 150,000 jobs per month. Yet, with all these jobs lost and the smoke & mirrors used to minimize the REAL PAIN that is going on out there, the unemployment rate ticks down to 5%! The reason: the number of part-time workers who wanted to find full-time work but couldn't, surged to 306,000.

I just don't buy it! BR correctly points out:

• Private payrolls have fallen for five straight months. Weakness in the goods-producing sector is intensifying;

• Employees working part time jobs is +306k this month to 5.2 million. This increase is either because a) Hours have been curtailed; or B)They cannot find full-time employment. Note that if your hours get cut back, you do not show up in the NFP or layoff data.

• As noted earlier, the Birth/Death model was a major distortion. (in several months, we will get the revisions). Lets look at how the B/D has changed from April 2007 (+262) to April 2008 (+267):

+45k construction jobs v 37k April 2007
+8k jobs were added in financial activities versus 1k last April.
+72k in professional/business services versus 48k last April.
+83k in leisure/hospitality (95k last April).

I am certain that some country on some planet in our galaxy is adding more jobs in construction and finance versus one year ago, but it ain't the USA on planet Earth, that's for sure.

April 30, 2008

Fed Cuts 1/4; Growth Risks Remain

Posted by Noah Rosenblatt on April 30, 2008 at 2.22 PM

I did NOT read the statement yet, and simply heard the statement read on CNBC...my gut reaction, this is a much LESS hawkish statement than I thought would come out. Still a comment about risk to economic growth and to inflation, but certainly nothing that SHIFTS the focus from growth to inflation. Thats my gut reaction. More to come later. It seems a pause is in the works for a while now!

ADD-ON @ 2:33PM - After reading the statement here, I find this statement to be WAY LESS HAWKISH than I originally thought it would be. I see the following statements that are associated with growth concerns:

*Recent information indicates that economic activity remains weak.
*Household and business spending has been subdued and labor markets have softened further.

..and the clearest statement:

*Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

The 'downside risks' phrase was left out. Take it for what its worth, but this statement coming along with the rate cut, makes me think they will pause, with the full intention of ACTING if economic data continues to come in weak. I think many expected a strong stance in the wording against inflation. The fed still expects the slowing economy to help moderate inflation, so they aren't budging yet in taking the offensive against rising commodity prices and pipeline inflation threats. I think:

a) future rate CUTS are still a very real possibility
b) the fed will be data dependent again on the economic data side
c) the fed just doesn't know if the worst has come in yet, but also knows its way too early to abandon the focus on growth concerns

The street got what they were looking for, I just think is a lot less hawkish than some markets were pricing in. I wouldn't expect that strong dollar induced selloff in commodities just yet!

Manhattan Downshift, Yes or No?.......Let us Know

Posted by Jeff Bernstein on April 30, 2008 at 9.26 AM

So someone has finally come out and said it. Business in New York City has slowed down. According to an article in this week's Crain's, Is there a cheaper bottle?, "across the city restaurants and hotels are noticing a significant falloff in what is traditionally a major cash cow: corporate parties and banquets."

Maybe three months ago my partner tells me, "when I take the subway home at night after working late, there's nobody on it, people aren't going out like they used to". He stops me on the street in front of Grand Central as we are walking to lunch last month and says "I used to work around the corner from here, and you could barely get down the block this time of day, there were so many people on the street....take a look around". "You're right," I say, "it's dead" (relatively). I launch into a story (something I'm infamous for...and although they are usually way too long, they often have a point): "So a buddy of mine calls me from San Francisco just after the tech bubble collapsed and tells me, I just drove back from seeing a company in the (Silicon) Valley and there was no traffic in either direction...business is dead." At the time I laughed and said "that dosn't mean anything"......but it sure did.

A couple of weeks ago I hear through the grapevine that a well-trafficked New York eatery, known for its power lunches, that happens to have a diverse clientele representing New York's major industries - Wall Street, media, real estate and supporting professional services like law and accounting - had seen a sharp slowdown in traffic. I stopped by and inquired...So how's business? The answer..."Don't tell anyone else, but it's slow." I contemplated this admission, which only made sense, and thought about trying to gather information for an Urban Digs piece. But let's face it, who would go on the record saying business was rolling over.....unless it was already so bad that everyone knew....sort of like asking brokers about a real estate slowdown or the President about a recession. I shouldn't have let it stop me....mea culpa. But I had trouble finding much corroborating evidence in the media. There was the hotel manager for an unnamed four star brand quoted by the blog HoweStreet.com saying ""business is down across all of our hotels in Manhattan. When the finance industry isn't doing so well, we aren't doing so well either." There was a quote by a manager at Delmonico's "You definitely see a little decline probably in the lunch crowds because I think the companies have cut down on their expenses." Offsetting the slowdown is the obvious surge of tourist money making its way into the coffers of New York businesses.

It's pretty clear, however, that corporations are cutting back on parties and banquets and trying to rein in hotel expenses, and this is impacting lodging and restaurants in the Big Apple. The Financial Times notes that Duetsche bank execs are being told to wash up at the airport frequent flyer lounge after an all-night flight instead of getting a hotel room to use to clean up before a morning meeting.

At the lower end of the economic spectrum, the strains of the slower economy are already being seen. The New York Daily News notes today that people in New York City receiving money from Uncle Sam's stimulus package expect to use it to pay existing bills.

I suspect that even the wealthy, sophisticated and good looking Urban Digs readership....LOL.... may be going out less, springing on fashion items and accessories less and maybe even driving your car/SUV less or generally keeping a lid on expenses. You may also be noticing that there are fewer people frequenting your local watering holes and eateries......although they can't be saving that much grabbing a slice of pizza instead. Anyway, we want to know. Tell us if you perceive that business in New York has slowed, whether it's your business, business at establishments you frequent or just how much money you are spending or plan to spend. Inquiring minds want to know!

April 29, 2008

Contract Re-Assignments: A Sign of the Times?

Posted by Noah Rosenblatt on April 29, 2008 at 10.58 AM

A: For all you guys that want front line reporting. I just went through my first contract re-assignment closing for a buyer client of mine; so basically, a buyer goes into contract for a property but for whatever reason CAN NOT close on the deal. Likely culprit is inability to get financing. Instead of going through the headache of litigation over the down payment and who can claim it, the original buyer attempts to assign the contract to a new buyer. The positives for the new buyer include getting a deal that was in a previous pricing amendment or a unit that was in a sold out line. The negative is that the terms of the deal with the sponsor are non-negotiable and will be the same as the original deal; but that doesn't mean you can't work something out with the assigner on incentives for taking on the transaction!

Lets go back 5 1/2 months when I published a post titled, "New Dev Closings: A Potential Problem?", where I stated in an unbiased discussion:

"I want to discuss something that has NOT happened, is not even in the very near term horizon, but very well may impact the Manhattan marketplace at some point in 2008; buyers with expected new development closings amidst the new credit world.

What happens to all those new development buyers that are currently in contract, waiting for building completion to close, if the jumbo credit markets continue to be in distress and there is a much different lending world than when the original contract was signed?

What if the buyer doesn't have the doc's to get the commitment, if lending/underwriting standards have tightened so much in the past 3-6 months? What if the buyer gets a much higher interest rate than was originally anticipated? What if the bonus doesn't come in as expected? What if they lose their job? What if the property becomes unaffordable?"

The post back in October is a great example of me discussing my true feelings on what could be on the horizon, that was not a trend yet, but due to the macro fundamentals that were building at the time seemed a likely result for our marketplace. Its all about being one step AHEAD OF THE CURVE!

Anyway, back to the assignment. What I discussed back in October is now reality; albeit a rare one at this point in time. There are actually a few other assignment requests in the same building that we just completed our deal for a few days ago. This was confirmed by the attorney who has done a number of deals in this building, and by this different ad in craigslist that I found this morning (all details, building, etc. were not included for privacy):

In an environment of tighter underwriting standards & credit quality based lending rates, contract assignments become a very real option for those that can't secure financing due to the credit crunch. I would expect this trend to continue, especially for those financially borderline buyers & speculative investors who signed new development contracts of sale BEFORE the credit crisis began in July 2007. Quite simply, it was a different world back then.

Now this is very important, I do NOT view this as anything that will take down our market; and is likely to be more of a rising 'pockets of distress' trend since contract assignments occur in strong markets too. It is just another sign of the times and tells you that the world we live in today is quite different than the world that existed during the boom times. For my client, they got to purchase a desired unit that was part of a sold-out line as of many months ago in a nearly sold out desirable building; plus a minor incentive by the original buyer to take on the assignment.

Anyone else hearing about contract re-assignments in their neighborhood/building? I would be interested to see how widespread this trend is at this point in time.

April 28, 2008

Fed Set To Reveal Poker Hand; LIBOR vs FFR

Posted by Noah Rosenblatt on April 28, 2008 at 1.15 PM

A: With the fed meeting this week and announcing their next move on Wednesday, plus the first glimpse of Q1 GDP, it seems the fed is set to reveal their hand and let us know if rate cuts are in fact ending soon! The current consensus on the street from people I talk to tends to be a 'one & done' move, with a change in the issued statement. With 3-Mth LIBOR still 65+ basis points above the fed funds rate, we are left to wonder whether the credit crisis is over or just in a the so called 'eye' of the storm.

Lets start with the fed. We will get a glimpse of Q1 advance GDP on Wednesday, before the fed announces their decision; so clearly that information is playing into the next fed move. However, with oil trading at $120/barrel, and other commodity prices surging to the 'weak-dollar' policy we have seen in the past, consensus is for a change in bias! I doubt the fed will disrupt market expectations, so instead of looking at their action (I'm expecting a 1/4 point cut, along with the street's expectation) focus on the issued statement for changes to the following passages from the previous statement:

a) 'inflation has been elevated and some indicators of inflation expectations have risen'
b) 'outlook for economy activity has weakened further'
c) 'financial markets remain under considerable stress'

Personally, I expect an increase focus on inflation and a decrease focus on 'considerable stress' in the financial markets; thinking this way since April 18th when 2YR treasury yields were about to go above the fed funds rate:

"Take a look at the 2-YR treasury yield over the past month (chart on right), up almost 70 basis points. In fact, yields are up across the board for treasuries, as the stock market rallied over 4% this week. The most dramatic action in the bond market was in the short end; 3mth, 6mth, 2yr & 3yr yields causing the so called 'flattening' of the yield curve. This gives investors more incentive to cash out of longer term treasuries, and put that money to work elsewhere (stocks?). It also could be a sign that expectations are rising for less action from our fed, probably resulting from pipeline inflation pressures."

It's highly possible the markets rally on a positive fed statement in the sense that considerable stress is no longer seen! Time will tell. Certainly, there are signs of easing in a few sectors of the credit markets. Specifically:

1) spreads in CDX indices have narrowed
2) spreads in CMBX (commercial re mbs) have narrowed
3) investment grade corporate debt spreads narrowed

What isn't improving is:

1) money market rates
2) LIBOR rates
3) ABX indices

These are just a few sectors that I follow and discuss with friends I know on front lines. There are many other areas that I am not as real-time updated on. Lets focus on LIBOR for a moment. LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. So, it's a worthy indicator of stress amongst the banks; are they aggressive or reluctant to lend to each other?

One way we can determine this is by comparing the LIBOR rate to the fed funds rate, and looking at the spread between the two rates. In normal markets, 3-MTH LIBOR is within about 15 basis points, or 0.15%, of the fed funds rate, which currently stands at 2.25% going into Wednesday's meeting! Below is a chart (courtesy of Financials.com) showing you the spread between 3-MTH LIBOR and FFR for the past 30 days; notice the widening of the spread in mid-April!

This is the simplest way to show you, what I like to look at for a glimpse into bank's willingness to lend to each other. Now, there could be a number of reasons for this abnormal spread of about 65 basis points:

1) credit worries remain
2) banks are capital constrained as they correct balance sheets
3) recent concerns about LIBOR reporting
4) expectations of rising fed funds rate in near term

I'm sure there are more. But fact is, this wide spread tells you that banks are still reluctant to lend to each other! It's a signal of continuing distress. Which leaves us wondering, who is right? Is LIBOR lagging and behind the curve in its behavior to narrow closer to the fed funds rate OR is LIBOR leading and telling us that more stress is yet to come in the credit markets?

One thing is for sure, and that is by end of day Wednesday we will know a lot more information regarding our economy, the potential recession's beginning, and what the fed is likely to do with rates over the next few months!

April 24, 2008

Pizza Inflation Drives Brokers Crazy

Posted by Noah Rosenblatt on April 24, 2008 at 2.07 PM

A: Lets change it up a bit. When I'm out all day with clients, and very little time in between appointments, pizza is the way to go! Which is why I get reminded of food inflation daily, and don't need the gov't to tell me that its under control because the core datasets are not showing anything yet. Passing my favorite UES pizza joint (Patsy's on 118th & 1st still is my all time favorite), Anna Maria's on 83rd & 1st, shows me how they are passing on rising flour costs to customers! $2.75 a slice, talk about dough!

The price you pay for living in Manhattan! What's a slice going for around you guys?

A Different Recession?

Posted by Jeff Bernstein on April 24, 2008 at 11.53 AM

seder%20plate%2008.jpg On the Jewish holiday of Passover one of the highlights of the seder meal is when the youngest child capable of doing so asks the four questions. The first question has become world famous (at least in New York...and probably Miami.) Why is this night different from all other nights? And so it only seems appropriate this week to ask a similar question about the economy, with the general consensus having become that the U.S. has tipped into recession. Why may this recession different from all other recessions?

The current downturn was not sparked in the usual way that economists have thought about business cycles since World War II. The standard model, if there is one, is that the economy gets up a good head of steam, causing inflation pressures to build, and causing hoarding of some goods, over-production of others and over-investment in production equipment. The assembled excess inventories become fuel for the downturn, once a slowdown hits. The slowdown is usually catalyzed by the fed raising interest rates and thereby crimping growth at the margin. It may also be accompanied by a negative wealth effect of a declining stock market, also catalyzed by higher rates. As businesses start to realize that they have too much inventory, they cut investment and production, which hits both jobs and wages and we start the vicious downward cycle of a recession. This continues until inventories are cleaned up and incipient inflation pressures have abated. By then easier credit conditions begin to start an expansion again. Okay, so much for the perfect world. Of course recessions never happen exactly this way as there are always more secular business and social as well as political factors at play as well. It is still instructive to think about the current economy from the perspective of this model. Let's take a look at inventories.

biz%20inven%202000.jpg

As you can see from the table above, which comes courtesy of the U.S. Census Bureau, the ratio of inventories to sales in the economy was creeping up from late 1999 to late 2000 and by mid-2001 it peaked. There was a strong downturn in this ratio in both 2002 and 2003 as businesses cut back on inventories even faster than they saw their sales decline. Note that the inventory to sales ratio continued to fall until late 2005. Part of this is due to a very strong secular trend toward better management of inventory. Technology employed in the late 1990s really allowed this so called "collapsing of the supply chain" to where the Wal Mart's and Target's of the world have become so efficient that they rarely have inventory pile up on their shelves and even their suppliers are able to run very lean. Also note, that while the stock market was declining by the second half of 2000, signaling the upcoming recession, inventory to sales was still climbing. In fact the official beginning of the recession did not arrive until March 2001, according to a chronology of the recession from the U.S. Office of Management and Budget. It was only after 9/11 that the inventory disgorgement really hit. So unlike, the economic model mentioned above, in the 2001 cycle inventory cutting and slowing production didn't kick off the downturn. Importantly, there was never any real build in the inventory to sales ratio in the current economic cycle. There was a bounce off the bottom in late 2006, but that quickly was brought back down. Cap%20Ex%202000%2B.jpg It has since crept up a little in 2008, as inventory grew .9% and .6% in January and February, sequentially, while sales grew 1.3% from December 2007 to January 2008, but fell 1.1% in February. So basically, like the last recession, this one was not started by an inventory cycle. Importantly, and in contrast to the last recession it seems very unlikely that this recession will be pushed along to any great degree by a future inventory disgorgement cycle.

In the last economic cycle, capital investment did appear to peak right at the economic peak in 2000. What is fascinating is that information technology spending, which one would have expected to plunge, merely slowed. However, the prior rise in capital expenditures was more than 100% accounted for by high tech spending. Cap ex for all other industries had already been declining significantly, way before the economy peaked. So it looks like the slowdown in high tech capital investment was one of the triggers of the recession last cycle....no duh. But it took a while for this decline to result in job losses, as is evident from the chart below. Note that overall employment did not begin to fall until the economy was already "in recession".

The contrasting pictures of employment across sectors after the last economic peak are also informative. Non%20Farm%20Employ%202000.jpg

Despite the Wall Street job losses associated with the last recession, overall financial employment (including banks, leasing companies, money managers, mortgage brokerage, insurance), didn't even flinch in the downturn and powered ahead through to the recovery. Little did we know that the emerging housing bubble significantly supported financial employment. In contrast, manufacturing employment was in a downturn going into the recession and never had an up tick. Business services and trade, transportation and utilities areas saw job trends closely track the overall economy as did jobs overall.

fin%20employment%202000.jpg

manu%20employment%202000.jpg

biz%20serv%20emp%202000%20cycle.jpg

Perhaps most telling of the employment data I looked at with regard to the current downturn was construction employment. It peaked in the last economic cycle, about when employment overall did. Interestingly, despite a supportive residential real estate market, construction employment didn't really take off until 2004, at which point it really flew. It is instructive to note that construction employment peaked last summer and started to roll over with the financial markets. Just like capital spending did in the last cycle.

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So let's review. Inventory liquidation was a lagging factor in the last downturn, and may not be a factor at all in the current recession. Employment declines overall lagged the peak of the stock market last time and didn't get going until the actual recession started. Employment in most sectors turned up co-incident with the stock market recovery of early 2003.

Ground zero for "over-activity" in the last economic cycle was capital expenditures. It peaked as the stock market peaked. This time ground zero for "over-activity" was in construction. Construction employment peaked with the financial markets and is now headed down.

With these observations in place, I will make a couple of guesses about what the future might be. I think construction activity and employment will get worse as commercial real estate activity cools in addition to residential. Interestingly, employment in the financial sector has been in a secular uptrend in this country and the 2000 recession did not even touch employment growth in the financial arena. I believe that that is due to the longer-wavelength credit cycle, which drives financial employment(see my piece The De-leveraging Cycle Will be Televised). With the fed still easing, in financial institutions may hang in there for a little while. However, as the debt cycle turns down, I expect this sector to be a source of job losses for several years to come. The good news is that manufacturing employment is about 70% bigger than financial services employment (according to the data I looked at), so although wages are probably lower, there should be some cushion to the overall economy here. In the last cycle, construction growth replaced tech investment growth as an economic driver....just when everyone thought all new jobs would be outsourced to India or China. This time the deleveraging cycle seems likely to be a drag on employment in the financial and construction areas for some time to come. Manufacturing, agricultural and energy related work, seem likely to be a cushion, but what will the big motor of an employment recovery be? That's still an open question. From the looks of it, we may wander in the desert for some time before we are led into the promise land of growth again - be sure to bring some Matzoh along for the trip!

Employment Charts Courtesy of the US Bureau of Labor Statistics and Guild Partners

Yields Rising: Fed Expectations Changing

Posted by Noah Rosenblatt on April 24, 2008 at 10.15 AM

A: Follow up, from my post last week on Fed nearing the end of rate cut cycle. It's one crazy world we live in, and the coming months and quarters will certainly be very interesting indeed when looking at how the Fed handles runaway commodity pipeline inflation threats at the same time they navigate through the credit crisis. I told you guys last November that mortgage rates were "...no longer tied to bond yields" as the markets re-priced risk and the bond market started to price in a slowdown and bring down yields; which didn't bring down mortgage rates! But now, the bond market seems to be pricing in a near term end to fed rate cuts! My question is, if lending rates rose while the fed eased because of the re-pricing of risk in the mortgage markets, what happens when bond yields rise on expectations of a more hawkish fed?

According to Bloomberg:

Yields on Treasury two-year notes rose to the highest level relative to the Federal Reserve's target rate in almost two years as traders pare expectations for additional reductions in borrowing costs by the central bank.

"Stocks are down, and no one wants to buy the front end if the Fed is done," said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 20 primary government security dealers required to bid at Treasury auctions. "The market is clearly thinking more about a 2 percent fed funds than a 1 percent fed funds rate", said Jason Brady, a managing director in Santa Fe, New Mexico, at Thornburg Investment Management, which oversees $4 billion in fixed-income.

Traders see an 18 percent chance the Fed will keep its overnight rate unchanged on April 30, up from no chance a week ago, futures on the Chicago Board of Trade show.

This is a very important dynamic to watch for in the coming quarters: will the fed shift their focus from growth to inflation? We know that fed policy is lagging and takes time to work through the economic system; so, we have 300 basis points of cuts yet to fully show their effects! The fed clearly is noticing the stimulatory effects of these cuts on commodity prices and its debasing effects on the US dollar; it may be time for a change!

Because of the credit crisis, fed rate cuts did NOT have any effect on jumbo mortgage rates over the past 7-8 months or so. The chart on the right, courtesy of bankrate.com, shows the relationship between Fed Funds Rate (red) vs 30YR Jumbo Mortgages (blue) & 30YR FHA Mortgages (green) over the past year. Notice the separation between the jumbo rates in blue and the conforming rates in green since the start of the credit crisis: this shows you the re-pricing of risk in the mortgage markets for non-GSE backed loans and the rise in jumbo rates even as the fed eased.

Right now, the fed is nearing the end of their rate cuts but jumbo rates are still high! The point of acknowledging this is the very fact that the bond market is now pricing in a 'nearing of an end' to rate cuts due to commodity inflation pressures, bringing yields higher!

KEEP AN EYE ON HOW HIGHER BOND YIELDS MAY AFFECT LENDING RATES IN THE NEAR TERM!

I'm thinking they will. What if 10YR yields rise from 3.8% to 5% in 6-8 months time? In the world of 'repricing of risk', it was possible for bond yields & fed funds rate to come down WITHOUT lending rates following; it was because of the dysfunctional secondary mortgage markets at the time and the higher risk associated with larger non-guaranteed loans. But, if bond yields & fed funds rates start to rise in response to a more hawkish fed, it will be highly unlikely that lending rates will not follow suit higher as well!

Hence, the importance of discussing this. We never got the drop in lending rates after all the fed's actions, but will likely see the rise when rate cuts are taken back!

April 22, 2008

Credit Easing or Credit Short Covering?

Posted by Noah Rosenblatt on April 22, 2008 at 9.43 AM

A: Sorry for the lack of content lately as I have been very busy with buyer/seller clients in the field, and working on the new charting system for you guys! Since Manhattan real estate does not change day to day, I want to discuss something that I have talked about with those I know on the front lines of the credit markets earlier this week. Reality is, that when the credit storm really got rolling many hedge firms and brokerages became risk averse and hedged their long positions by going short on the credit markets; a logical move. While it was a profitable trade for months, when the fed bailed out Bear Stearns they basically removed the systemic crisis that these trades were meant to profit from. Upon this realization, there has been a major short squeeze in the credit markets to cover some of these hedges, causing bids to come in on what otherwise were illiquid markets. What we hear as signs of easing in the credit markets via bids coming in, may simply be short covering! Add on to that the usual speculative in-the-know crowd riding the wave and we may have some false signs of hope.

The motivation to write about this came when I read Yves post on Naked Capitalism this morning, that included an excerpt from Doug Noland's article in the Asia Times, who hits it perfectly:

"When the Fed and Washington radically altered the rules of US finance last month, they placed in jeopardy huge positions that had been put in place to hedge against and profit from systemic crisis. With the end of stage one arises a major short squeeze in the credit, equities, and derivatives markets. And when it comes to contemplating the scope and ramifications of today’s hedging activities, we’re clearly in uncharted waters. It is not beyond reason that a disorderly unwind of bearish credit market positions could incite a mini bout of liquidity, speculation, and credit excess that exacerbates global monetary instability while setting the backdrop for stage two of the crisis."

Lets go back to basics. What got us in this mess in the first place was irresponsible lending + buying that led to the busting of the housing bubble. That resulted in the seizing up of the secondary mortgage markets which led to distress in other credit markets. What started as subprime, quickly spread to auction rate securities, alt-a, student loans, etc..It is still spreading and losses and write-downs continue to mount. Through funky accounting and creative fed swap programs, much of the garbage is either being hidden or transferred from balance sheets to the fed.

Here are some of the recent headlines in creditville, where fund raising (as I discussed April 9th) is the name of the game!

RBS To Sell $24 Billion in Shares To Shore Up Capital

Citigroup Sells $6 Billion in Preferred Shares

National City Follows Wachovia, WaMu in Rush For Cash

Why raise cash? Because loan loss reserves are dwindling and regulators require at least a 7.5% reserve in Tier 1 Capital! As Mish accurately points out in regards to Citigroup's Tier 1:

Citigroup raised capital in December and January by selling stakes to investment funds controlled by foreign governments including Abu Dhabi, Korea and Kuwait. The infusion helped boost Citigroup's Tier 1 ratio to 8.8 percent by Jan. 22 from 7.1 percent at the end of the year. Citigroup's so-called Tier 1 capital ratio -- a measure of its ability to withstand loan losses -- fell to 7.7 percent at the end of March, the New York-based bank said yesterday. Citigroup says it needs a 7.5 percent ratio to provide a margin of safety and preserve its credit ratings.

Mish's Comment: 8.8% is now 7.7% and shrinking. Citigroup will soon need to sell more assets or cut its dividend or both. I predict both.

Mish was right and the very next day Citigroup announced a $6Bln preferred share sale! Look at it this way, why borrow cash if you don't need it? If you need the money, then you MUST raise cash, and right now there is massive capital raising going on reflecting the weak state of balance sheets; if it were any other way they wouldn't need to dilute by issuing more shares!

Housing is still correcting, the consumer is tapped out, credit is being withdrawn as evidence by the pulling of lines of credit (HELOC's), homeowner equity is declining and unable to be accessed as an ATM anymore, credit costs have risen, and we are likely in a recession that will cause job losses. Since 70% of the US economy is driven by the consumer, its hard to discount all these macro stresses that the consumer must deal with. If the recession hits, how in the world will there be enough buyers to take down housing inventory?

So, it is just illogical and wrong to accurately predict how or when this credit crisis will end at this point in time. You can't have decades of debt building and very poor lending standards leading to the sharpest 5-6 year rise in housing prices nationwide unwind in a 8-month period of time! It will take time to heal these wounds, and right now I strongly believe in what Doug Nolan is saying and have discussed this exact scenario with friends that I consider to be very smart on the front lines of the credit markets. If the credit markets were fully healed, LIBOR wouldn't be so much higher than our fed funds rate! Time will tell.

Economic Calendar May Reveal Recession's Birth

Posted by Noah Rosenblatt on April 22, 2008 at 8.38 AM

A: On April 30th, we get the Q1 Advance GDP data. The NBER generally defines a recession as two consecutive quarters of declining GDP; although there are many arguments how a recession should be defined. Many believe that Q1 GDP will be the final nail in the coffin to define when the recession officially started. If you recall, Q4 GDP came in at 0.6%, down sharply from a 4.9% growth reading registered in the previous quarter. So, if next Wednesday's initial reading of Q1 GDP comes in below 0.6%, that would mark the 2nd consecutive declining quarter of growth. If it comes in above, well then you will see equities surge on hopes that the US may avert a recession, at least this time around.

Due to the almost 10 month old credit crisis so far, a recession almost feels expected at this point. It shouldn't scare anyone and is a healthy process to ensure longer term sustainable economic growth; it cleanses the system! So, when next week comes around and we get the first glimpse at how the Q1 GDP number is, it really is a matter of how slow we were in the months of JAN - MARCH. Consensus calls for a range between 0.4% - 0.7%; with the key number being 0.6% from the previous quarter. In my opinion, we can easily go to 0% growth, and possibly a bit negative for Q1 GDP. Chart on the right courtesy of The Big Picture (via Econoday)

Now, if the number comes in below Q4's 0.6%, the media will start the recession story and headlines will be everywhere. Depending on how low the number is, I wouldn't expect it to cause that much of a headline shock for buyers in general because we have been thrown into a credit fire storm for months and came out a bit tougher because of it; I mean we lived to see a Bear get shot & killed. Call it the teflon effect if you will. It doesn't mean that consumers will go nuts spending again or that buyers will start bidding over ask for Manhattan real estate; it simply means that the psychological effect likely will be muted and not one of surprise & shock!

In a recession, corporations cut costs in any way possible to adapt to the slowing economy. With brokerages & banks at the epicenter of the storm, we know that job losses will mount over the coming quarters; we are at about 35,000 right now and that is expected to rise to about 100,000 by this time next year. So, for the next two quarters we should see pressure on GDP as the result of the credit hurricane and the lack of available credit/higher costs for consumers and small businesses. After that, you will start to see the effects of Fed policy and the $168 billion stimulus package that sends out checks to tax payers in June. Clearly, the gov't passed this stimulus package to, drum roll please, you guessed it...STIMULATE the economy! The hope is that Americans take their free money and go shopping for goods and services! Not me though, that money will wisely go towards paying off my highest costing credit card's! I apologize for not playing the game that I am supposed to play to stimulate the American economy; but to me, we are not out of the woods yet so stimulus money = debt paying money!!

April 18, 2008

Bond Market Starting To Price in End To Rate Cuts?

Posted by Noah Rosenblatt on April 18, 2008 at 4.28 PM

A: Something that Rick Santelli over at the CME has been pointing out for days now on CNBC, is fairly significant. The bond market, and specifically the 2-YR Treasury yield, has been pricing in LESS ACTION from our fed lately which may signal we are nearing the end with rate cuts. With commodity prices surging and oil over $116/barrel plus good earnings news rallying the street, the street is awakening to the possibility that the fed's mindset will begin to shift from growth to inflation. If the fed gets more hawkish, which would encompass a range between only cutting by 1/4 point to a change in the statement to no cut at all in the next meeting, we would see a surge in the dollar and a likely drop in commodities priced in dollars. The question really should be, when will we see a rate hike?

Take a look at the 2-YR treasury yield over the past month (chart on right), up almost 70 basis points. In fact, yields are up across the board for treasuries, as the stock market rallied over 4% this week. The most dramatic action in the bond market was in the short end; 3mth, 6mth, 2yr & 3yr yields causing the so called 'flattening' of the yield curve. Now, while the curve isn't flat, it is flattening! This gives investors more incentive to cash out of longer term treasuries, and put that money to work elsewhere (stocks?). It also could be a sign that expectations are rising for less action from our fed, probably resulting from pipeline inflation pressures. Here is the general definition of a flat yield curve for all those that don't know.

Flat Yield Curve: When short- and long-term bonds are offering equivalent yields, there is usually little benefit in holding the longer-term instruments - that is, the investor does not gain any excess compensation for the risks associated with holding longer-term securities. For example, a flat yield curve on U.S. Treasury would be one in which the yield on a two-year bond is 5% and the yield on a 30-year bond is 5.1%.

Give Rick Santelli credit for calling this one earlier in the week, and telling viewers to watch out for the rising 2YR treasury yield; as when it got close to the rate of the fed funds rate of 2.25%, you will start to see confidence return to equities. Now its becoming a top story on business channels.

Whether this rise is a result of the re-adjusting LIBOR rate or from better than expected earnings which is rallying the stock markets, I don't know. But the 2YR is almost above the fed funds rate of 2.25%, and that means traders are betting on a more hawkish fed down the road. That is the angle I want to focus on here. I spoke often (here, here, and here, 4th comment) that when the fed sees less of a risk to economic growth, whether it be from all the stimulus thus far or that the economy is holding on better than expected, that they will 'take back' rate cuts rather quickly to combat inflation. Well, the bond market is starting to bet this way too. Since fed policy works at a lag, they may want to see how efforts so far fully affect markets and the economy.

If I were to look into the future, some questions that come to my mind if the bond market is right are:

Will the fed be forced to hike rates if lagging economic data is bad?

Will the fed cut less than expected OR not cut at all OR combination of rate cut but change in verbiage regarding future more hawkish policy?

What happens if housing/credit markets are not fully healed when the fed is forced to combat inflation by hiking rates?

How will equities react?

Something to keep an eye on! If the bond market is right on this, then we could be heading into a rate hiking campaign sooner than we originally thought! We may be risk adverse to keeping fed funds rate too accommodative for too long; especially after seeing the lessons learned from the Greenspan sponsored 1% fed funds rate for so long; that many now blame for causing the housing bubble. The fear is in the way the fed ultimately handles inflation pressures, given the housing/credit crisis; in other words, what if they tighten too soon hurting the eventual recovery!

April 17, 2008

Credit Woes in Europe? BoE Gets 3X Demand For Auction

Posted by Noah Rosenblatt on April 17, 2008 at 9.30 AM

A: I don't want to rain on yesterday's equity parade, but I want to point out something. Have you noticed over here that when the fed holds one of their auctions, say for $50 Bln, and the demand comes in lighter than expected only requesting $30 Bln, the analysts and economists go out of their way to point out that this is a POSITIVE sign that distress in the credit markets may be easing; as there is less of a need for borrowing from the fed. Well, look at what is going on in Europe; the exact opposite! Keep an eye out if housing and credit woes may be moving across the Atlantic! What would happen to the foreign demand argument for Manhattan real estate; how may this ultimately affect foreigners who already purchased units? Lets discuss starting with the macro signs.

Credit markets are still not fully healed over here, as the fed and their emergency team of surgeons, successfully stitched up the Bear Stearns artery that tore 4 weeks ago. There is still a little blood leaking out, evidenced by LIBOR rising (in part due to the oversubscribed BoE auction that I will go into) in the past week and TED spreads widening as well. The continuing disconnect of equities to credit markets (read my "Stocks Lagging Credit Markets" piece) was covered today on the Wall Street Journal:

Stock and credit markets are once again singing from a different hymnal. One closely watched measure of credit-risk worries, the gap between three-month Treasury bill rates and the three-month London interbank offered rate -- the "TED spread" -- widened Wednesday to about 1.6 percentage points, the highest since late March. Before the credit crunch, the spread was about 0.35 percentage point.

The TED spread is a measure of the difference between buying a relatively safe government bond and making a riskier loan to a bank. This spread widens when lenders want to avoid risk.

Always look ahead of the curve; short term money is still very tight! But what concerns me a bit more is what happened when the Bank of England had an auction that yielded bids from financial institutions totaling 3X the amount being offered! Thats exactly the opposite scenario from the light auction we saw & cheered over a few weeks ago as a very positive sign! So, the laws of some form physics would say that the BoE auction is a very negative sign; as the need for fund raising surges in Europe!

According to Bloomberg's article, "BOE Received Most Bids in Three Months at Auction":

The Bank of England said financial institutions bid for 50 billion pounds ($99 billion) in its weekly auction, the most in three months, as a worsening shortage of credit increased the need for central bank funds.

Financial institutions are struggling to raise money and refusing to pass on the Bank of England's interest rate cuts to consumers. The cash shortage has already ended the U.K.'s decade-long housing boom and threatens to push the economy into a recession.

You know, the foreign demand argument has been a favorite for most brokers in the past few years, as the US dollar continued to plunge in value. I never denied the existence of foreign demand in Manhattan on the currency trade, I just didn't buy into the depth of the phenomenon that some brokers tout. I mean, is there any real means to quantify what percentage of our buy side demand are foreigners anyway? No! Which led me to write, "Does A Weaker Dollar Accelerate Foreign Demand?", five months ago:

"As the US dollar continues to fall against other major currencies, people mis-interpret the trend to mean that X number of additional buyers are pouring into Manhattan real estate! In my opinion this is an incorrect assumption! It is not that cut and dry and to dismiss macro economic events, confidence, and near term expectations as part of this currency trade equation is a mistake. There is no anecdotal evidence to support a re-acceleration in foreign demand; its mostly theory and we are left to ask the brokers what they are currently seeing for a clearer picture. In my opinion, confidence trumps the weakening dollar in the mindset of foreigners."

My Point: If the Manhattan real estate marketplace used the foreign demand argument for years (me included), as a reason why our market is so strong, then at least we must be open to the possibility that this source of buyers may be contracting. If this is not a possibility in a brokers mind, well, then I guess that's why there is the old 'having your head in the sand' saying. I would expect foreign new dev sales, with many closing during the course of 2008, to contribute in some way, shape or form to our rising inventory trend. This is part of the natural cycle, and there should be nothing wrong about discussing it openly. Time will tell, and I could be dead wrong.

April 16, 2008

The Importance of Views

Posted by Noah Rosenblatt on April 16, 2008 at 10.44 AM

A: I want to re-iterate just how important views are when trying to get top dollar at resale. In my opinion, its #1 and ahead of location as the permanent feature worth going for when you look to buy; with the focus being on finding motivated sellers with a view apartment who doesn't have time to 'test the market' with a steep premium! Whenever I have a buy side deal that involves a property with spectacular views, I always am concerned that another bidder will come out of nowhere before we get a fully executed contract. I worry about this, because it has happened to me before.

The four permanent features that all buyers should focus on putting their money towards when deciding which product of the group to bid on continue to be:

a) views
b) location
c) natural sunlight
d) raw space

...as these property features generally do not change! The only item that can be changed is natural sunlight and views if you happen to buy a property with a view of a lot that may ultimately be developed; and therefore eliminating or altering your view and natural sunlight. Other than that one risk, your pretty safe. These are the features I focus on when I do consulting for my buyer clients.

But one feature stands above the rest in this fast changing marketplace: VIEWS, especially really good ones! I'm talking central park or river views here, as there is a larger concentration of properties that offer open city views. Having that park or river view really does put your property above the rest in terms of luxury and should allow you to price the apartment a bit higher than the group. The fact that it isn't easy to find these properties tells you something!

Now, this doesn't mean that views should demand $300/sft more than comparable listings in the building on a different line without views, it shouldn't. It does mean that a premium will be paid for the views and that marketing efforts should allow the selling broker to procure a much bigger and more serious audience; which in and of itself is something for getting more money in the end.

Your focus should be on finding these types of view properties that seem to be priced 'in-line' with other comparable line apartments in the building that do not have views! If you do find one, its a sign that the seller is probably ready to go, and advised the broker to skip the premium that is normally associated with view apartments because they want a quicker timeline to sell.

For example, lets say that the building has two main exposures:

Exposure A ---> gets park views
Exposure B ---> gets interior building / courtyard views

Now, lets say that there are similar property types (say a 1BR unit w/ same floorplan) on both sides of the building! One has Exposure A and the other has Exposure B. Now lets assume that these comparable, yet opposing units are around the same floor in height, thereby eliminating any significant premium for being on a higher floor. Pricing should be as follows:

1BR w/ Exposure A (park views) ---> aprox $900,000
1BR w/ Exposure B (interior views) ---> aprox $825,000

These numbers are for argument only to prove the point that the 1BR unit with park views should demand a premium over the similar 1BR with interior views. Your focus should be to find a property type that enjoys park views, but whose asking price is more 'in line' with the last comparable sale that did NOT have the luxury of that gorgeous view! Not an easy task, but a sign that the seller is motivated!

With that said, here are some apartments that I think exemplify what I mean by view apartments; yet don't necessarily mean they are priced to move! Having open city views are nice, but should be given a less favorable premium due to the higher concentration of apartments that enjoy this type of view. Add in more premium for river and park view properties! It's up to you to determine exactly how much premium is deserved.

635 West 42nd Street

PRICE: $1,850,000
SIZE: 1,017 sft
DAYS ON MARKET: 62 Days

45 East 89th Street

PRICE: $1,995,000
SIZE: N/A - 2BR/2BTH unit
DAYS ON MARKET: 7 Days

80 Central Park West

PRICE: $1,445,000
SIZE: 900 sft
DAYS ON MARKET: 13 Days

As always, if you want to see one of the above noted apartments, please contact the listing broker directly. Before bidding on any apartment, you should have your buyer broker do an analysis of where the building trades so that you can assign the proper premium to the property with views, in line with the most recent market values.

April 15, 2008

Wait...So Your Saying Rate Cuts Fuel Inflation?

Posted by Noah Rosenblatt on April 15, 2008 at 9.23 AM

A: As Bernanke & Company did what they had to do to save wall street and 'forestall future adverse effects to the economy', you are seeing the side-effects of this type of policy. Our fed has clearly moved from a dual mandate of price stability (inflation) & economic growth, to one solely of economic growth! Now, I'm reading headlines like 'Food Shortage Rises With Prices' and 'Food Prices Rising Fastest in 17 Years'. Now that the fed used up much of its arsenal, I'm wondering when the time will come that they will have to combat inflation by hiking rates; and whether we will be out of this housing/credit mess by that time?

Can you imagine rates rising when housing is still pressured and loans are still hard to secure? There is no such thing as a free lunch and right now, the fed has poured a rainstorm of stimulus onto wall street in the hopes of easing the credit crisis (seizing up of credit markets resulting in the inability to offload assets on the secondary mortgage markets) that resulted from natural market forces related to the housing/debt correction. We are no longer a society that allows a market to go down, for fear of the consequences. Instead of taking our medicine now, we have to deal with the side effect of commodity inflation as housing continues to deflate. Will we need to take the medicine later anyway? The fed's actions, while understandable given the depth of the problems we face, may still not be enough and I am concerned that inflation will runaway from us; what am I saying, it already has!

According to Bloomberg:

Treasuries fell as a government report showed wholesale prices rose at almost double the pace forecast, while New York manufacturing unexpectedly grew, fanning concern that inflation will accelerate.

The producer price report is "a wake-up call that's there is still inflation pressure," said T.J. Marta, a fixed-income strategist in New York at RBC Capital Markets. "It's definitely bearish for bonds." Prices paid to U.S. producers increased 1.1 percent in March from 0.3 percent the previous month, the government said. The median forecast in a Bloomberg survey was for an increase of 0.6 percent.

Every time the fed cuts rates to cure one ailment, they make another scratch somewhere else. With each cut, the US dollar gets weaker and commodities priced in dollars rise. The speculative trade riding the currency wave isn't helping much either; leaving the fed hoping that a slowdown will be the driving force to bring down commodity prices. I've said this so many damn times on this site: commodity inflation + housing deflation is NOT A GOOD MIX! Pipeline inflation is bubbling and we can expect future inflation data to be very troubling indeed.

The fix? Here's a thought: ANYTHING THAT WILL SUPPORT THE US DOLLAR! We MUST remove the speculative currency trade that has driven commodity prices higher; arguably there could be $30/barrel in speculative trade in oil as an example. Even if this means the fed changes verbiage to put their bias into the fight against inflation, then so be it! That would be interpreted by traders that future rate cuts are in serious doubt, the US dollar will be supported, and it would remove a good portion of the speculative trade in most commodities. It doesn't fix the supply problem that has resulted from fast growing economies like China & India, but it will help by removing the bets made simply on the premise of a weakening US dollar.

Barry Ritholtz, the ever present force arguing against the use of CORE datasets (for the simple reason that food & energy price rises have NOT been self defeating and have NOT been temporary in the past 4 years), provides this chart of March PPI; with the red dotted line showing the fed's target level:

If we let inflation runaway much further, because of the continued bias on growth and the current crisis, we will enter a period of rate hikes in the medium term future to combat the side effects that resulted from the management of this crisis. Think about how that will impact consumer debt payments, the bond market and lending rates and how healthy the credit markets may or may not be at that time! Inflation is a silent killer and as the saying says, 'is the cruelest tax of them all'!

April 14, 2008

China Update - Olympian Challenges

Posted by Jeff Bernstein on April 14, 2008 at 7.52 AM

olympic%20torch.jpg Misery loves company. So with GE's surprise earnings miss and guide down on its growth rate for 2008 hammering the stock market on Friday, it's only appropriate to spotlight some economic misery that is starting to impact 1.3 billion other souls; namely, the beginning of the slowdown in China. (Recall that back in October GE's Jeffrey Immelt had told the Financial Times that strength in China and India would insulate GE from any US dowturn). Now, I know China is still supposed to see strong economic growth this year. Its economy is estimated to grow 9.4% in 2008 vs. 11.4% in 2007, according to The World Bank - down from their 9.6% estimate last month and 10.9% being talked about a few months ago. Economic growth can be like heroin, though, you keep needing more and more and it gets pretty ugly when you get less. Due to imbalances in the Chinese economy, the country has grown to rely on high rates of growth.

Why does China need this super fast economic growth? While the country has made huge progress from the 1970s, when they had 250 million people living in extreme poverty, they still have 29 million or so who are barely subsisting. Additionally, the Chinese had a baby boom in the early 1960s and an echo boom in the early 1980s, creating demand for 25 million jobs or so a year, while the economy is only creating about 10 million per year. The situation is summed up well in this quote from the Tehran Times (no that wasn't a typo):

China is facing a very severe unemployment problem, says Labour Minister Tian Chengping. He said 20 million new workers entered the labour market each year, chasing only 12 million jobs.

While I have sympathy for the Tibetan people, who have been in conflict with their Chinese occupiers for many years, the latest strife seems to be equally motivated by relative economic inequity between the Tibetans and the more recently arrived native Chinese Han, who have moved into the area due to the new rail links from the east and seem to be prospering more than the locals.

This overview of the situation from the UK's Guardian:

In the past two decades, new railways have economically integrated China's remote provinces of Qinghai and Xinjiang, making them available for large-scale resettlement by the surplus population.

Similar strife is erupting between the native Chinese Han and the Turkic Muslim Uighur (Wee-gur) in Xinjiang. Is it just chance that these issues are coming to the fore as China's economy downshifts? Certainly, increased public attention to China being generated by the Olympics and the torch procession are a catalyst for visible protests, but so too have the Olympics been a major catalyst to economic growth in China these last couple of years. Don't be surprised that a little post partum economic depression is arriving early.

According to the Associated Press, Chinese President Hu Jintao made these comments to Australian Prime Minister Kevin Rudd recently at an economic forum in Hainan:

Our conflict with the Dalai clique is not an ethnic problem, not a religious problem, nor a human rights problem," the official Xinhua News Agency quoted Hu as saying, referring to supporters of Tibet's exiled Buddhist leader, the Dalai Lama, whom Beijing blames for fomenting the unrest. "It is a problem either to safeguard national unification or to split the motherland.

The commentary belies a full understanding of the economic forces at work here.

Stock markets are the crucible wherein all economic, social and political inputs are synthesized, and the implications of the recent Chinese stock market performance are not encouraging. The Shanghai Index has already suffered a bear market decline of about 34% this year, and the outlook is overshadowed by a massive supply of shares still looking to come to market. According to Forbes, the Chinese stock market has a massive share overhang problem:

Currently, about 74.4% of the Chinese domestic A-share market, worth 24.6 trillion yuan ($3.5 trillion), is restricted from trading. These shares, mostly held by different government bodies, will be progressively released over the next five years. According to the timetable set by China's State-Owned Assets Supervision and Administration Commission, 1.6 trillion yuan ($225 billion) worth of shares could be sold in 2008. Including the unsold A-shares carried forward from 2007, Morgan Stanley predicted the total disposable overhang this year would add up to 2.7 trillion yuan ($380 billion), accounting for 32% of the market free float.

Besides the shares being successively unlocked by different government units, institutional investors that have participated in China's new listings in the past few years are also poised to dispose of their shares. Morgan Stanley said there were $64.5 billion worth of new shares floated in 2007, and 30.4% of those shares are locked up as IPO investments subscribed by institutions for as much as three years. Those shares will be flooding the market from 2009 onwards.

But it's not just the overabundance of shares looking to come to market weighing on the Chinese stock market, according to The Wall Street Journal:

The National Bureau of Statistics' survey of large industrial companies showed their profit growth slowing to 16.5% in the first two months of 2008 from 43.8% for the same period a year earlier. Dragging down the figures were industries hit by rising energy costs they were unable to recoup -- chemical fiber makers, electric utilities and oil refiners. Mining companies, by contrast, showed enormous gains. Stuck in the middle are ordinary manufacturers, where growth is continuing but at a somewhat slower pace.

The article quotes Citigroup as forecasting that growth in earnings per share for the all the Chinese companies they cover will be cut in half to 25% from 50%. Still healthy growth, but be mindful of the deceleration trauma. When a company grows 50% in a year it covers up a lot of warts - many caused by the unsustainable growth rate - and when the slowdown comes the warts break out with a vengeance.

China's inflation issues are one of those warts, and the government now appears to be pursuing a strategy of a stronger currency coupled with the increasing interest rate regime that has been in place for some time, to try to bring inflation under control. These policies are starting to have visible impacts, as reported in this piece on the blog of the Socialist Party Australia.org

The renminbi’s accelerating rise against the US currency - by 4.1% in the last quarter alone - has led to some of the features of a recession in southern China’s export powerhouse, the Pearl River Delta (PRD), a region that accounts for one-eighth of China’s GDP. Based on some estimates, 1,000 shoe factories have closed down in this region in the last year, most of them moving to cheaper, less regulated inland provinces, or to Vietnam and other lower-wage economies. The local government in Dongguan, an industrial city in the PRD, recently announced a new fund to help foreign companies there upgrade technologically, to shift out of labour-intensive lines such as footwear and textiles, which have faced the brunt of the renminbi’s rise.

When the tide goes out you find out who is swimming naked. The tide in China has been rising for years. The ethnic strife that has lately come to a head in China may be the latest sign that the surf is no longer up. My bet is a lot of skinny dippers are about to be exposed - and it ain't gonna be pretty.

From The Internet & Blogosphere

Maybe Monks Hold the Clue to Future of the U.S. Dollar - really worth reading

China: Save the Stock Market Investor!

China's Economy The Sound of Bubbles Bursting - also really worth reading

Chinese Inflation: It's Money Not Pork

China Currency Stronger Than 7 to the US Dollar

Picture from the Deccan Herald