Wednesday, August 02, 2006

Where did the Wall Street bonuses go?

From the NY Daily News:

Hamptons in slump

Those fat Wall Street bonuses haven't found their way to the Hamptons.
The number of homes sold in the recreation zone of the rich and famous fell to 958 during the first half of the year, down 21%, according to a soon to be released report from Hamptons brokerage firm Town & Country Real Estate of the East End.

The slowdown came despite record bonuses paid out to Wall Streeters who bagged $21.5 billion this year, up 15.5%.

"Normally with record bonuses, people buy," Town & Country president Judi Desiderio told the Daily News. "It didn't happen this year."
...
All the talk of the bubble bursting, coupled with rising interest rates, had Wall Streeters sitting on the sidelines waiting for prices to go down. But sellers are continuing to hold firm on price.

Instead of buying homes, the big-money guys decided to take some of their bonus bonanza and plow it into rentals.

"We've seen the best rental market in five years," said Rick Hoffman, regional vice president of Corcoran's East End offices.
...
Hoffman is seeing a glut of homes priced between $1 million to $3 million, with inventory up 60%.

But some say Wall Street execs will start to pounce on deals after Labor Day, as demand builds and interest rates stabilize.

Brokers are hopeful buyers will give in in the fall.

89 Comments:

Anonymous UnRealtor said...

But some [realtors] say Wall Street execs will start to pounce on deals after Labor Day, as demand builds and interest rates stabilize.


Keep dreaming realtors!

8/02/2006 08:50:00 AM  
Blogger X-Underwriter said...

Brokers are hopeful buyers will give in in the fall.

I'm hopefull Santa Claus drops off a bag of gold in my fireplace too

8/02/2006 08:59:00 AM  
Anonymous Anonymous said...

Buyers give in.

Don't hold your breath. Qualified buyers value their hard earned money. Not some dunce that has none using a creative loan.

8/02/2006 09:02:00 AM  
Blogger grim said...

Here is a piece from out in Colorado. The concept of "borrowed buyers" seems to be gaining popularity..

Home building plunges

Economists and home-building industry officials attributed falling housing construction to a growing number of foreclosed homes coming back on the market and the low mortgage rates in 2004-05 that lured buyers into the housing market earlier than they planned.

“We are paying the price for borrowing buyers from the future,” said Dave Bamberger of Bamberger & Associates, a local economic research firm. “The pool of buyers is smaller now, because many who would have bought now, instead bought in the last year or two.”

8/02/2006 09:07:00 AM  
Blogger thatbigwindow said...

It is the MTV way: Look successful on borrowed money

8/02/2006 09:08:00 AM  
Anonymous Anonymous said...

Brokers are hopeful buyers will give in in the fall????????

Everybody I know is also hoping that some day they will win the lottery.

JDSU has an all time high in the 150's. It is currently $2.10, are they also waiting for this to come back???????

Wall Street saw this last year. H-Builder's stocks toped out 8/05. If anybody understands markets, bubbles and manias, it is wall street. They realize that what is unraveling here is no different than the crash of 29 & 87, the dot com bust,the nikkei, the 1924 RE bubble in Fla and of course tulip bulbs. Wall Street understands more than anybody that when a market rises way above it's historical values with zero economic fundamentals to support it that there is major trouble ahead. Wall Street realizes all all markets correct back to their norm. Wall Street knows this will be nasty and will be looking to buy at 30-50% lower than present day prices. If this occurs around Labor Day, then these realtors will be correct in their assumption.

PATIENCE,PATIENCE,PATIENCE

BC Bob

8/02/2006 09:32:00 AM  
Anonymous Anonymous said...

just my opinion... but... everyone... remember, the spin in the beginning of this year... oh, the real estate market really starts after the super bowl... oh, well it really starts after valentine's day... oh, it starts in late march, when the weather gets a bit better... etc., etc.,,,... this is the same garbage... wall street excec or not, people are not going to pounce on deals after labor day... they're going to sit and wait for this market to go down more... i think the crux of this story really is that no matter who it is, no one wants to over-pay for a depreciating asset in a slowing market... because you'll be stuck with a bloated mortgage for years!

8/02/2006 09:33:00 AM  
Blogger Richie said...

Perhaps the Wall Street execs know what's coming their way. They see the inflation. They see the rates. They see home builders getting plummeted.

Why the hell would they buy now?

Wall street'ers (try not) to buy anything on the way down.

-Richie

8/02/2006 09:50:00 AM  
Anonymous UnRealtor said...

"the crux of this story really is that no matter who it is, no one wants to over-pay for a depreciating asset in a slowing market."


Boooyaa!

8/02/2006 10:01:00 AM  
Blogger NJGal said...

I have a friend who just started trading in mortgage backed securities and he's working with guys who have done it for years. He and his wife were thinking about buying a house until every single person he worked with told him to wait at least 2 years because the market is about to tank. So yes, the people out there in the trenches on Wall St. know what's up.

8/02/2006 10:05:00 AM  
Blogger chaoticchild said...

Wall Street bonuses is a myth created by realtors.

It is true that Wall Street execs make more bonuses during good years. But it doesn't necessary mean they can spend it on million dollar beach house nor million condos on JC, Hoboken or ranch in Summit.

The extra 100k doesn't translate to "let's buy a 1.5 million 3bed 2 bath colonial in Summit". It is more like "Let's get a CLK or Let's spend a week in Paris!!! or ........"

The higher up big shots will also have $$$ on prime properties. It don't matter if it is a good year or bad year. Would a 1.5 million and 1 million bonus make a difference on a 2 million nice home in Summit????

Just an observation.

CC

8/02/2006 10:13:00 AM  
Anonymous Anonymous said...

"But some [realtors] say Wall Street execs will start to pounce on deals after Labor Day, as demand builds and interest rates stabilize."

HAH,HAH,HAH!!!!!!!!


Look at the most current Otteau report. Statewide absorption rates for property > 1 mil is at 16 months!!!!!!! The highest for any price category. Strains in the system start when this rate goes past 6 months. 16 MONTHS!!!!!!!!
Wall St. or any other individual with any common sense is not looking to buy!!!!!! Please get this in your heads. You are better off planning your Thanksgiving dinner than wait for these buyers to emerge after Labor Day!!!!!!!!

PATIENCE,PATIENCE,PATIENCE

BC Bob

8/02/2006 10:19:00 AM  
Anonymous Anonymous said...

My daughter's Occupational Therapist (a 60-ish Grandma originally, from S. Africa, too boot) told me this morning not to buy. Retired husband.

My 86-year-old mother-in-law [no, internet, NADA] said to me last weekend, "I hope you two aren't thinking about buying again, are you?" Which is her gentle way of telling us that she'll bust our butts if we buy now.

Think about that. An Occupational Therapist! Who is left that DOESN'T know?

Grim...are you simply here to smack DL and realtors around at this point?

Pat

8/02/2006 10:21:00 AM  
Blogger Alan P. said...

Executive compensation makes me wretch. They are always first in line at the trough.

8/02/2006 10:39:00 AM  
Anonymous Anonymous said...

I work on Wall St, and I rent. I have been watching this thing since 2003, and I admit its lasted longer than I thought. But the longer it persists, the harder is burts. Im thinking 30% more to go before I even think about sending in a lowball offer.

8/02/2006 10:43:00 AM  
Anonymous Anonymous said...

"Wall Street bonuses is a myth created by realtors.

It is true that Wall Street execs make more bonuses during good years. But it doesn't necessary mean they can spend it on million dollar beach house nor million condos on JC, Hoboken or ranch in Summit."

Its true that Wall Streeter make more, but the industry is not as large as its made out to be. There are just too many 1mm+ houses and apartments out there for the very limited supply of highly paid wall streeters.

8/02/2006 10:45:00 AM  
Blogger chicagofinance said...

Its true that Wall Streeter make more, but the industry is not as large as its made out to be. There are just too many 1mm+ houses and apartments out there for the very limited supply of highly paid wall streeters.
8/02/2006 11:45:43 AM

yes

8/02/2006 11:10:00 AM  
Blogger chicagofinance said...

I would also say that NYC is being bleached and whitewashed.

We have seen ZERO shocks to the system. Too much liquidity. Even 9/11 was perceived to be a "buying opportunity".

Nothing lethally bad has happened around in over 10 years.

Something wicked this way comes.......

8/02/2006 11:14:00 AM  
Anonymous Anonymous said...

Homebuilders stocks down 50% +.
A good indicator of what's to happen to home prices.

Most intelligent people realize it is not wise to try to catch a falling knife.

Yes waiting for the fall for things to get better is a dream. Plan for your new year's eve party. better use of time.

50% drops could happen as foreclosures and bankruptcies explode going forward.

8/02/2006 11:16:00 AM  
Anonymous Anonymous said...

I don't believe the myth that most Wall Streeters will blow their bonuses on expensive and over-priced homes. They are smarter than that knowing that their careers are shorter than the average persons. They also know that not every year is a big bonus year. In any case, only a small handful of individuals make a boatload of money.

8/02/2006 11:18:00 AM  
Blogger chicagofinance said...

not good

3-Month 5.09
2-Year 4.95
10-Year 4.97

8/02/2006 11:20:00 AM  
Blogger BergenBuyer said...

I echo everyone else, Wall Street'ers pay attention to mkts and know there's only one way to go in the RE mkt and that is down.

The only people buying now are the people not paying attention and/or listening to misleading realtors and David Lereah(who wants to place bets on a class action lawsuit against Davey and the NAR once this thing bursts?).

Some of you might remember that I mentioned my father was trying to sell a house and after dropping the asking price 10%, he got an offer at only 4% less than the new asking price, he rejected it without even countering, he wanted asking.

I told him he was crazy, was the $5-10K really that important? The downside could be a lower price and more carrying costs as the house sits during the winter. I told him the mkt was going down and if I was selling now, I'd cut cut cut the price until it sold. I'd rather have a small loss now, than a catastrohpic loss in a year or two.

His response:
"The avg person buying this starter home isn't paying attention and doesn't know as much about the mkt as you. They see a break in the high prices and want to get in before it goes up again, they don't understand the economics behind it."

The next week someone came and offered asking. My father accepted and the house is under contract. Some idiot that doesn't understand and probably listened to the
"now's a good time to buy"

"interest rates are rising, you better buy now before it's too late"

"you don't want to miss another chance to buy in this market"

I'm happy for my father, I feel sorry for the masses that have been mislead and will lose their savings and may never be able to buy again because of lack of savings and their new poor credit rating from the foreclosed home that was bought because "it's a great to time to buy"

8/02/2006 11:28:00 AM  
Anonymous Anonymous said...

One simple reason why Wall Street is not sitting on the sidelines, ready to buy at this time, HISTORY!!!!!!!!!

The following article is 1924. If you took out the date you would think this article was pertaining to present time!!

The 1920’s, in America, were a time of great prosperity. Skilled and educated working Americans had jobs providing numerous fringe benefits, paid vacations and pensions. In addition, automobiles were becoming commonplace for the wealthy and middle class allowing cross country travel. This good fortune set the stage for the Florida real estate bubble.

Starting in 1920, many Americans became enamored by the materialistic and prosperous lifestyle of the time. During this time, the stock market was moving forward at an extremely fast pace. Many investors were becoming quite wealthy. Florida became a hot spot for these newly rich people, who didn’t enjoy the cold. Many whole families took vacations to Florida. It was at this point that tourism started booming and land prices were skyrocketing. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn’t meet the demand. Florida became the “playground of the rich and famous”. Illegal casinos and drinking parlors became widespread in Miami.

At this point, almost anybody could invest in Florida, even without much money. Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent. In 1922, the Miami Herald became the heaviest newspaper in the world as a result of its humongous real estate advertisements. People in the North heard about the real estate prices “doubling and tripling”, causing a snowball effect. Capital was rapidly pumped into the real estate market. Whole golf communities were developed, such as Temple Terrace. Resorts and retirement communities were developed almost overnight. Mansions were sprawling in every area, as were swimming pools. As always, waterfront property was the most desirable. Florida was seen as a veritable Utopia.

Real estate prices quadrupled in less than one year. An elderly man invested $1,700 in property and by 1925 the property was worth over $300,000! It seemed you could do no wrong by just buying any property in Florida and become a millionaire. By 1925, real estate prices had become so exorbitant that buying land wasn’t affordable any longer. New investors failed to arrive and old investors started to sell. Panic arrived, as it always does, and the real estate market crashed. Prices kept moving downwards as heavily indebted investors tried to sell to avoid bankruptcy. In most cases, no buyers arrived, and the investors were bankrupt from the enormous mortgages.

Market crashes always occur in the same manner. Regardless of the market, the same simple psychological underpinnings are always at work. People who are caught up in a bubble never look back for historical examples. For this folly, they become paupers.

Those who cannot remember the past are condemned to repeat it.

PATIENCE,PATIENCE,PATIENCE

BC Bob

8/02/2006 11:32:00 AM  
Anonymous Anonymous said...

The price of Power.

read and Weep Bubbleheads.
Buyers beware.

http://www.xanga.com/russwinter

8/02/2006 11:45:00 AM  
Anonymous Anonymous said...

Know all your cost before you sign the dotted line.

Do NOT be a monthly mtg slave.

http://www.thedesertsun.com/
apps/pbcs.dll/article?AID=/20060727/NEWS01/607270311

Babababa

Bob

8/02/2006 11:51:00 AM  
Blogger grim said...

For those looking for the inventory numbers, my GSMLS access is on.. well.. still on 'vacation'.

I have no way of getting the inventory numbers other than someone with GSMLS access stepping forward to provide them for me (nnjbubble@gmail.com). Don't worry, your identity will never be revealed.

As for NJMLS, here are the two week numbers:

(Bergen, Essex, Passaic, Hudson)
July 19th - 9229
Aug 2nd - 9201

MLSGuide:

(Hudson)
July 19th - 2641
August 2nd - 2714

grim

8/02/2006 12:16:00 PM  
Anonymous Anonymous said...

Chicago-

I'm just a very casual observer of the bond rates. But, weren't we inverted before the last recession?


JM

8/02/2006 12:26:00 PM  
Anonymous Anonymous said...

Chicago-

Follow-up, do you think there are any LTCM's out there waiting to implode? That could be the catastrophic event to trigger a real panic in RE, other markets.

JM

8/02/2006 12:34:00 PM  
Anonymous Anonymous said...

So, for those playing along at home, here's the recap:

People whose bonuses are determined in large part by their ability to judge the relative qualities of specific investments ... are expected by realtors to purchase scores or hundreds of overpriced houses at precisely the moment the red-hot RE market turns south.

Good plan.

-Jamey

8/02/2006 12:38:00 PM  
Blogger X-Underwriter said...

-Jamey,
Well crafted words.

Also, the Wall Street Execs who make $million bonuses have likely been doing so for some time, bought a property some time ago, and are likely the ones selling them now

8/02/2006 12:44:00 PM  
Anonymous Anonymous said...

Jamey,

Excellent point!!!

In conjunction with this, many of those, who received their big bonus, are arbitrage traders. They profit from inefficiencies when markets are out of balance. There is no scale to measure how far out of balance that this market is. The arb traders are sharks that smell blood. Well the patient has only started to bleed. The real blood bath will come in 2007-2008.

PATIENCE,PATIENCE,PATIENCE

BC Bob

8/02/2006 12:55:00 PM  
Anonymous Anonymous said...

I think many of you are missing one very important point, houses in the Hamptons has nothing to do with the northern jersey real state market. The purpose of those homes are different, the targeted buyers for those homes are also different.


Have you guys take a moment to think, why is the real state more expensive in north Jersey than in central Jersey or south Jersey, why are towns on or near the train tracks more expensive? Has anyone of you try to move away from northern New Jersey and try to find a job in other areas or other states? What kind of salary do you get?

If you take a look at Long island, Queens, Brooklyn, or even state island, what is the price you see when you browse those real state listings in those boroughs? Now compare that to the houses you see in northern Jersey, Don't the houses in Jersey look awfully cheap compare to those in NY? If you compare the neighborhoods, the school systems etc? Are those in NY that much better to justify for such a higher price? If you don't know, try driving around in Brooklyn and Queens and see, and I hope the traffic doesn't bother you and it won't take you too long to get around; and now, let's take a look at the time it takes to commute to Manhattan. For Brooklyn and Queens, it is about 45 minutes by subway; In Jersey, along the path line, 45 minutes or less; along the train line, even as far as Morris town, only about an hour. Imagine yourself being a New Yorker who works in Manhattan trying to look for a house? Houses in Northern Jersey, while not cheap, don't they still looks like bargains to you when you compare to those you have seen in the boroughs of NY?

This is unfortunate for those of you in New Jersey who got priced out, however, haven't you noticed the traffic patterns on the parkway, the turnpikes now a days? more and more ppl are moving south, so why be stubborn and try to stay in Northern Jersey?

8/02/2006 01:03:00 PM  
Blogger RichInNorthNJ said...

For the curious in Bergen County, here are the number of residential SFH listings NOT including condos & co-ops from NJMLS

03/03 3,132
03/10 3,230
03/17 3,337
03/23 3,432
03/30 3,543

04/05 3,628
04/12 3,706
04/19 3,781
04/24 3,856

05/08 4,082
05/15 4,174
05/22 4,292
05/29 4,352

06/05 4,382
06/12 4,353
06/19 4,526
06/26 4,588

07/05 4,550
07/12 4,613
07/19 4,604
07/26 4,623
As of today: 4,562

8/02/2006 01:16:00 PM  
Anonymous Anonymous said...

8/02/2006 02:03:29 PM
Anonymous said...

"This is unfortunate for those of you in New Jersey who got priced out, however, haven't you noticed the traffic patterns on the parkway, the turnpikes now a days? more and more ppl are moving south, so why be stubborn and try to stay in Northern Jersey?"

I did not get priced out, I cashed out in 8/2005. You can compare any area to another, it's all relative. However, the bottom line is when RE increases 100% and the underlying fundamentals (incomes up approx 15% over the same time), do not support it, it is a recipe for disaster.

BC Bob

8/02/2006 01:20:00 PM  
Anonymous Anonymous said...

Grim:

Dean Baker of CEPR (Center for Economic and Policy Research weighs in on the current housing bubble:

Money quote:

"Of course, the housing crash, like the stock crash, was entirely predictable. Housing prices had never risen like this in the past and NO ONE has identified anything that made the period after 1996 different from the period prior to 1996. The press can be given a bit of a pass on this one -- as with the stock bubble, most of the blame lies with my profession. In both cases, economists were more worried about the possibility that we might have to raise Social Security taxes in 50 years or tariffs on imported shirts, than trillions of dollars of paper wealth disappearing with the collapse of a financial bubble. [...]

"the crash of the housing bubble will not be pretty. Millions of people stand to lose their home and/or their life savings. However, it was inevitable. The bubble created a fantasy world that could not continue. At the peak of the bubble, 160,000 people a week were buying a home, most at bubble inflated prices. The longer the bubble persists, the larger the group of people who paid way too much for their home. While it is not good that so many dreams had to be ruined, the number will be even larger if the bubble deflates slowly. So I make no apologies about hoping for the hasty demise of the housing bubble."

http://www.prospect.org/deanbaker/2006/08/the_slow_motion_train_wreck.html#005593

(For more bloggy goodness, bookmark Baker's page at The American Prospect online: http://www.prospect.org/deanbaker/)

Very edifying reading. Am thinking of printing bumper stickers that read, "Don't Blame Me, I Bought My House in 1998."

-Jamey

8/02/2006 01:21:00 PM  
Anonymous Anonymous said...

Bob:

I understand that, however, my point is, there are other factors in play here, you can't just use one formula for everywhere, Florida is no doubt heading for a crash, if you look at what kind of jobs those people get down there and how much they get paid for doing those jobs, then you get the picture. However, in northern jersey, there are other factors, when did you first notice the jump in price? it was not long after 9/11, right? I don't know whether you paid attention to the real state markets near New Orlean after Katrina, I think you will be suprised to see how similiar the patern is.

8/02/2006 01:30:00 PM  
Anonymous Anonymous said...

You are right!!!! Right after 9/11. Why???? The fed decided to throw a party and opened the faucets. Now the kegs are dry. The hangover sets in!!!!!!! How do you explain the worlwide runup in prices at the same time; London, Milan,Dublin,Sydney,Madrid,Paris???What do they have in common with NNJ???? It is a giant Ponzi, mania, bubble all over. NNJ will get hit just as hard as others!!!!!

PATIENCE,PATIENCE,PATIENCE

BC Bob

8/02/2006 01:42:00 PM  
Blogger grim said...

Let's try to avoid the broad generalizations.

A statement based on "other factors", is meaningless unless we all know what those other factors are.

Are you talking about population growth, wage growth, job growth, changes in literacy rates, birth rate, life expectancy, net population inflows? What factors? Be specific.

grim

8/02/2006 01:46:00 PM  
Anonymous Anonymous said...

It's real Estate, with an E.

8/02/2006 01:47:00 PM  
Blogger Shailesh Gala said...

Watching RE report on CNBC:

One guy was saying, there will be jump in inventory after Labour day, and that will lead to at least 10% drop.

Also the impact on economy by housing going down. The measure was about 10%. So, if house price drop by $100K, consumer spending reduces by $10K.

My personal thinking is since the impact on consumer spending is only 10%, the downward price shift will not be easily reflected in GDP rates. So bottomline, House prices can drop without getting major Recession.

8/02/2006 01:47:00 PM  
Anonymous Anonymous said...

Not real state.

Thank you.

8/02/2006 01:48:00 PM  
Blogger grim said...

Cash-out party isn't over yet..

We are living in a cash-out refi world

In the second quarter of this year, 88 percent of Freddie Mac-owned mortgages that were refinanced resulted in new mortgages with substantially higher balances. In other words, 88 percent of refinances were cash-out refis. That's the highest such ratio in 16 years, Freddie says.

grim

8/02/2006 01:49:00 PM  
Blogger skep-tic said...

anon @ 2:30:

incomes do not support prices anywhere in the NYC-area. take a look at some census data. median prices are 10-11 times median income. historically, even in the most expensive markets in the nation, this ratio has struggled to break 4

8/02/2006 01:53:00 PM  
Anonymous Anonymous said...

"A statement based on "other factors", is meaningless unless we all know what those other factors are."

I am too lazy to type so here is a link that will explain it:

http://njfuture.org/index.cfm?fuseaction=user.item&ThisItem=581&ContentCat=3&ContentSubCat1=14&ContentSubCat2=3

In Short, people in New York are moving to areas near New York in Jersey (northern Jersey), people are orginally lived in those areas got pushed out and move to the less developed areas, even though the population didn't grow by much, but now you have people with better jobs and higher income living in northern jersey, there are the homes are more expensive.

I am not saying a drop won't happen, it will happen, but it might not drop as much as you think. Most houses in Northern jersey now a day, still looks like bargains when you look at houses in Queens or Brooklyn, with the commute time about the same, I just don't see why New Yorkers won't find them attractive.

8/02/2006 02:07:00 PM  
Blogger chicagofinance said...

While your argument makes sense in itself, in context and in absolute terms, it makes plenty more sense in the year 2003. I think it has aged beyond its relevence.

8/02/2006 02:10:00 PM  
Blogger chicagofinance said...

3-Month 5.10
2-Year 4.95
10-Year 4.96

yuck!

8/02/2006 02:12:00 PM  
Blogger chicagofinance said...

Anonymous said...
Chicago-
......weren't we inverted before the last recession?
JM
8/02/2006 01:26:13 PM

Anonymous said...
Chicago-
Follow-up, do you think there are any LTCM's out there waiting to implode? That could be the catastrophic event to trigger a real panic in RE, other markets.
JM
8/02/2006 01:34:48 PM

yes & yes-ish [more of a slow boil]

8/02/2006 02:18:00 PM  
Blogger chicagofinance said...

The new LTCM is mispricing of credit risk, and levering up positions that are considered cash, when in reality, under duress they may be illiquid.

8/02/2006 02:20:00 PM  
Blogger grim said...

Australia hiked 25bps to 6% yesterday, the BOE and ECB are set to announce policy tomorrow. It's expected that the BOE will hold, and the ECB will hike. Payroll data due out Friday. FOMC meeting on Tuesday. Natural gas up on the heat wave, Crude up at two week highs due to Chris strengthening in the Carribean.

Anybody worried? Nah!

grim

8/02/2006 02:25:00 PM  
Anonymous Anonymous said...

feel sorry for the masses that have been mislead and will lose their savings and may never be able to buy again because of lack of savings and their new poor credit rating from the foreclosed home that was bought because "it's a great to time to buy"

Hey that was me !! Been there done that it sucked (1989) .... Kids are older , finally got good credit again, got money for a downpayment. Shit can't buy now.This sucks too.

KL

8/02/2006 02:32:00 PM  
Blogger chicagofinance said...

chicagofinance said...
The new LTCM is mispricing of credit risk, and levering up positions that are considered cash, when in reality, under duress they may be illiquid.

8/02/2006 03:20:51 PM


Example [bad, but illustrative]

You have some hedge fund that are using a synthetic structure in lieu of cash to generate higher returns.

Instead of holding cash, they hold synthetic cash, which is made of lower-rung mortgage back security or commercial paper [overnight mini-bond for a corporation such as General Electric] collateralized with some valuable asset.

This MBS/CP [collateralized security] is itself used as collateral for other borrowing by the hedge fund.

Suddenly a market shock occurs and the hedge fund gets a margin call. This commercial paper was supposed to be the safety net. In reality, the market shock causes the assets that collateralized the MBS/CP to drop in value substantially. The commercial paper was supposed to be a cash substitute, but instead drops in value by 5% [doesn’t seem like much]. However, the hedge fund needs cash for margin calls – domino effect across whole portfolio etc.etc.etc.

The problem is not the gifted managers on the Street. It is the people who are trying to differentiate themselves and resort to making huge bets with unintended consequences. In many instances trades are based on models that have not been thoroughly tested under duress. Add correlation of events to a model that has not been shock tested comprehensively [almost impossible, and certainly not practical] and poof……

8/02/2006 02:37:00 PM  
Anonymous UnRealtor said...

To summarize Anon:

"This time is different."

8/02/2006 02:52:00 PM  
Anonymous Anonymous said...

Could somebody translate LTCM for us dense folks?

TIA! (Thanks in advance)

8/02/2006 03:06:00 PM  
Anonymous Anonymous said...

LTCM in brief (very brief);

Long-Term Capital Management (LTCM) was the management arm of a hedge fund that operated from its founding in 1993 to its liquidation in early 2000. It went through a period of spectacular success from 1994 to early 1998. In August of 1998 Russia defaulted on its debt and the financial markets came unraveled. Historical regularities that had prevailed failed to hold and LTCM which had bet on those regularities nearly went bankrupt. It was saved only by the Federal Reserve Bank of New York sponsoring a bailout of LTCM by its creditor banks. The Fed justified its intervention on the basis of the potential of the failure of LTCM precipitating a financial crisis and the creditor banks were enticed into extending credit to LTCM because their financial losses in a general financial crisis could well be more than what they stood to lose if LTCM defaulted on its loans. As it happened LTCM survived long enough to pay off its indebtedness but by early 2000 it was liquidated.

BC Bob

By the way, no one is dense if they did not know LTCM.

8/02/2006 03:13:00 PM  
Anonymous Anonymous said...

OK Grim, Chicago Finance, SAS, and BC Bob...
Where do I park my bonus money, not Wall Street, until things turn around? I was saving for a downpayment on a vacation home, but that's a bad idea right now.

I bought my home 7 years ago and I am @ 5.125% on a 15 year mortgage. Should I pay off my existing mortgage first. No other debt. I can't find a financial planner that I really trust. What would you do?

8/02/2006 03:24:00 PM  
Blogger chicagofinance said...

I can't find a financial planner that I really trust. What would you do?
8/02/2006 04:24:26 PM

You break my heart :).


Talk to the U.S. Treasury Direct zealots. They will respond soon.

8/02/2006 03:27:00 PM  
Blogger chicagofinance said...

By the way Anon 4:24PM:

From my perspective, you are not supplying enough information for a complete answer. However, I understand, in context, that it is appropriate considering this is just a Blog.

8/02/2006 03:31:00 PM  
Blogger grim said...

I've been hoping that chicago might drop some tips here and there, throw a crumb or two to the masses, you know. Heck at least an idea or a pointed finger. :)

I can't find a planner I particularly care for either. Had a great guy a few years back, over at Morgan Stanley. Was a friend of the family, 100% trust. He since retired and I've got someone new. Never particularly cared for the guy, never gave me much reason. Been thinking about jumping ship and going elsewhere lately.

grim

8/02/2006 03:50:00 PM  
Anonymous Anonymous said...

"unrealtor:

To summarize Anon:

"This time is different." "

Everytime is different, if the market is so easy to predict, there should alot more rich people out there, there is no sure thing in the market.

8/02/2006 03:50:00 PM  
Anonymous Anonymous said...

Anonymous said...

I can't find a financial planner that I really trust. What would you do?

8/02/2006 04:24:26 PM

There are just too many variables involved to give an appropriate answer;
-risk tolerance
-time horizon
-tax bracket
-short term future income expectations
-monthly income/exp ratio
-emergency fund

I would never advise someone else where to put their $, except that RE at this time is very,very risky. Talk to friends, family and get some referrals for a CFP. Just to let you know, I have 70% in short term instruments, mm's and cd's with 30% in precious metal futures and related stocks. I would not advise anybody put 30% in this area. However, I am comfortable with it.

BC Bob

8/02/2006 04:03:00 PM  
Blogger RichInNorthNJ said...

More from Mish's MotleyFool board and his ongoing discussion with "Sonnypage".

You can find is here at Mish’s GLOBAL ECONOMIC TREND ANALYSIS

8/02/2006 04:15:00 PM  
Blogger DebtVulture said...

Chicago,

I would hasten to say that leverage in the system now is greater than when LTCM was around. The CDS market is just incredible. And by incredible, I mean scary.

8/02/2006 04:15:00 PM  
Anonymous Anonymous said...

BC Bob,

Thanks for the LTCM history. You learn something new every day!

jw

8/02/2006 04:15:00 PM  
Anonymous UnRealtor said...

"Everytime is different, if the market is so easy to predict, there should alot more rich people out there, there is no sure thing in the market."


You believe "this time is different" and the price decline won't be so bad because Northern NJ homes are close to NYC -- which has been true since the day they were built decades ago.

Most here believe "this time is different" because the fundamentals do not support the mania-driven prices we've seen the last 4-5 years. Indeed, this time the market is poised for a harder fall than in the past due to exotic loans, homes priced at 10X incomes, 0% down mortgages, interest only mortgages, rampant speculators & flippers, HELOC madness, etc, etc).

8/02/2006 04:21:00 PM  
Blogger chicagofinance said...

If you want my bio please send an e-mail here.

chicagofinance@yahoo.com

8/02/2006 04:42:00 PM  
Anonymous Anonymous said...

"unrealtor:

You believe "this time is different" and the price decline won't be so bad because Northern NJ homes are close to NYC -- which has been true since the day they were built decades ago."

But the New York you see today is not the same as the New York you see decades ago. New York went through some major changes over the last 2 decades. Do you know how much some of the apartment buildings in manhattan costed in the 1980s? you are day dreaming if you think they will go ever back to that level. Property values go up when an area develop and revitalize.

8/02/2006 04:43:00 PM  
Blogger chicagofinance said...

grim said...
I've been hoping that chicago might drop some tips here and there, throw a crumb or two to the masses, you know. Heck at least an idea or a pointed finger. :)


grim:
While I would not personally go with Treasury Direct, I fully support your approach. Assuming your AGI profile maximizes your tax advantage.
The most important issues to consider with your down payment are in order:

1. Safety
2. Liquidity
3. Yield

The only concern that I have with hoarding the down payment is that we are all in this amorphous period of uncertainty. If you end up sitting on your down payment for 3 to 4 years, then suddenly, you are introducing a structural over-conservatism into your portfolio. I kind of like BC Bob's thought of taking a piece, and putting it to work. However, I am not a big precious metals fan here. To be honest you, if you believe that you may not purchase for 36 months, then you can build the case that at least 25% of the portfolio should be devoted to opportunistic investments [I have to be careful in what I say]. That euphemism sounds much more intriguing than the reality. These opportunities are as exciting as pouring honey, but in a sense, that is the point.

8/02/2006 04:59:00 PM  
Blogger chicagofinance said...

DebtVulture said...
Chicago,
I would hasten to say that leverage in the system now is greater than when LTCM was around. The CDS market is just incredible. And by incredible, I mean scary.
8/02/2006 05:15:47 PM

It a sense it is safer though, but until the kimono is opened, we don't know.

I will say one thing. The hedge funds cannot be purely opaque, because their assets have to be held somewhere. Whether it is a commercial bank, trustee, or prime brokerage operation, there is a counterparty [effectively] on the other end of most transactions. As a result, if the SEC and other regulatory bodies can police through their normal channels, they do have an indirect view to the hedge fund portfolios.

It does make me queasy though.

8/02/2006 05:06:00 PM  
Anonymous Anonymous said...

DebtVulture,

You are right about the leverage being much greater now than LTCM. I don't know what they were actually leveraged at but the fed brokered a bailout, with 14 banks to the tune of approx $4 billion.

Our residential real estate today is valued at approx $20 trillion. It's anybody guess what the debt/equity ratio is. Our stock market is valued at approx $15 trillion. There are some major differences between these markets;
-75% off all U.S. stocks, held by individuals, is held by the richest 10% of the population.
-nearly 70% of Americans own their home/or the note on their home.
-today these homes are bought on close to 100% margin.
-the total margin debt relative to the value of all stocks is less than 5%.

The stock market is ultra conservative compared to today's RE market.

If the value of real estate drops 25%, or $5 trillion, it will be virtually impossible to handle and maintain stability of the banking system. The entire GDP of the entire U.S. is approx $11 trillion.

You are exactly correct. This is much greater than LTCM.

PATIENCE,PATIENCE,PATIENCE

BC Bob

8/02/2006 06:07:00 PM  
Anonymous Anonymous said...

{{{I am not saying a drop won't happen, it will happen, but it might not drop as much as you think. Most houses in Northern jersey now a day, still looks like bargains when you look at houses in Queens or Brooklyn, with the commute time about the same, I just don't see why New Yorkers won't find them attractive.}}}

They are no bargain compared to the 'Other 4 boros' outside Manhattan. The NY'ers who aren't making an individual income of over $100,000 or a household income of over $250,000 a year with kids are pretty much priced out of the area. Both the rental & sales market are geared toward those making six figures and above.

The population of the 5 boros of NYC, Long Island & North / Central Jersey is being filled with wealthy people from other states while 'poorer' native NY'ers are being pushed out of these areas.

It isn't about what is 'attractive'. It is what one can afford and qualify for based on their income & the standard qualification ratios.

8/02/2006 06:32:00 PM  
Anonymous Anonymous said...

{{{But the New York you see today is not the same as the New York you see decades ago. New York went through some major changes over the last 2 decades. Do you know how much some of the apartment buildings in manhattan costed in the 1980s? you are day dreaming if you think they will go ever back to that level. Property values go up when an area develop and revitalize.}}


You are right. But the statement above describes not only the 5 boros of NYC, but Long Island, North Jersey, Westchester & Rockland as well.

The concentration of wealth in this region of the country along with spiraling rents & a booming job market will stem any decline in housing.

NY'ers who make the fictitous reported median or mean income know that they cannot afford anything within 100 miles of Manhattan in any direction and are moving to other parts of the country.

The rest of the five boros is being filled with very wealthy young transplants from the rest of the country who have unlimited financial resources to buy or rent.

I expect prices to continue to rise for the forseeable future not only in NYC but in the surrounding suburban counties as well.

8/02/2006 06:38:00 PM  
Anonymous Anonymous said...

Yee anon 04:24:26 PM,

I too would have to know a little more, like your AGE! Most important. income, any other debt, do you plan on staying put for the long haul or moving soon, how stable is your job, etc, etc..

But my rule of thumb has always been, get completley out of debt, don't have all your net worth tied up into one asset, especially RE cause the bubble is about to be pricked. Let me tell you, there is no greater freedom then being debt free.

Once you are totally debt free, take your new income (what would have went to debt, now goes to you to work with), then split into 1/3.

1/3 high interst rates savings account, I think they have 5.5% now a day, but check the rating of your bank, if it not a B or above, don't goto that bank. Remember, FDIC doesn't mean jack shit.
1/3 metals (I am big fan of gold & silver-poor man's gold, if its good enough for Buffet, its good enough for me). Other 1/3 stocks. But stay away from Dow 30 cause its piss, propped up by hedge funds who don't know anything. I would go with coal, uranium, cooper stocks. I like these 3 because when you travel around the globe, the rest of the world is having an industrial boom (unlike us here). Coal stocks have had a nice pullback recently, so you can pick some up on the clearance rack, but ya better move on it. If you have over a million in cash money, I highly suggest diversify out of the dollar. If these god dam Chinese start dumping dollars, your millions will go up in smoke. Maybe think about the euro? I have been going with some middle east currency myself.

About the metals, get coins, not bullion. Bullion can be taken away from you by the govt. Get collector coins, and them delivered, don't tell anyone you got them and have them delievered into your hot little hands. Perhaps even aliquot some for a little midnight gardening ;)

Also, always have emergency cash. At least 3 months of bills worth in case you lose your job or have a medical emergency.

Alot of people are not fans of metals, but I am and I will tell you why. When I was in the war, I picked up alot of gold in Saigon, then the bull market came, I went from nothing but bullet holes in my legs to being able to buy the Dow on 1 oz of gold. I bought a townhouse with some of that jack on the upper west side for someting like 150,000. Sold it 2 years ago for millions, so it has made me a fan.

Remember oil, gold, interest rates, and inflation all go up at the same time. We are once again in that time period like we were in the 70s. Go back and review that history, and see what was working, and make yourself rich.
Then buy me a steak for all this advice I am giving you.

This is just my thoughts off top of my head. I am just one man in a sea of sharks.

SAS

8/02/2006 06:43:00 PM  
Anonymous Anonymous said...

SAS,

Absolutely great reading. I totally agree with your assessment, especially when foreign countries dictate what our interest rates are. When Gold takes out the 1979 high, I will buy you the best steak you have ever had!!!!!!!

BC Bob

8/02/2006 07:19:00 PM  
Anonymous Anonymous said...

SAS or others,
Can you invest in a money market/CDs fund based on other currencies? I know we can trade currencies but i would like the traded currency to beat or come close to beating inflation.

Thanks in advance

8/02/2006 07:23:00 PM  
Anonymous UnRealtor said...

"But the New York you see today is not the same as the New York you see decades ago. ... you are day dreaming if you think they will go ever back to that level. Property values go up when an area develop and revitalize."


Then why are NY and NJ properties sitting, inventory climbing, and prices dropping? Have you just stumbled onto this blog today, and not seen the data and articles from the past few months?

8/02/2006 08:06:00 PM  
Anonymous UnRealtor said...

"The concentration of wealth in this region of the country along with spiraling rents & a booming job market will stem any decline in housing."

Too late, the housing decline already started last August.



"I expect prices to continue to rise for the forseeable future not only in NYC but in the surrounding suburban counties as well."


Too late, prices are already dropping, inventory is ballooning, and houses are sitting on the market for months.

8/02/2006 08:08:00 PM  
Anonymous Anonymous said...

{{{Then why are NY and NJ properties sitting, inventory climbing, and prices dropping? Have you just stumbled onto this blog today, and not seen the data and articles from the past few months?}}}

No, I check out craigslist and realtor.com to check on prices & rentals.

Prices, rents continue to spiral higher & higher along with the general inflation rate.

But everyone seems to have a ton of cash. What will electric bills look like with the recent heat wave??

Will higher utility bills + higher interest rates + higher property taxes slow consumer spending and home sales?? Or is everyone just disgustingly rich with a ton of cash???

Of course you have all these transplants moving into the area who have no problem paying $3,000 a month for a one bedroom in any of the 5 boros.

8/02/2006 08:28:00 PM  
Anonymous UnRealtor said...

"No, I check out craigslist and realtor.com to check on prices & rentals."

Well, that's your problem right there.

"Asking price" does not equal "selling price."

If you intend to 'prove' your points based on gut feelings and anecdotal evidence, you've come to the wrong place.

If you're new around these parts, please stick around for awhile, and see if your opinions hold up to the data presented on this blog.



"Will higher utility bills + higher interest rates + higher property taxes slow consumer spending and home sales?"

It already has slowed home sales; the real estate bubble ended August 2005.

8/02/2006 09:03:00 PM  
Anonymous Anonymous said...

It already has slowed home sales; the real estate bubble ended August 2005.

Unfortunately, this is not true.

Prices went up even in early 2006. I think prices are technically still increasing slightly (closing costs are now often paid by the seller so in the end, real prices may have declined by 1%). Now in some areas there are first signs of slight price drops but only compared to the original asking prices.

I'm sure prices will come down but they certainly have not yet done that.

8/02/2006 09:12:00 PM  
Anonymous Anonymous said...

Anon @ 8:23,

Try www.everbank.com for CD's based on other currencies.

CNS

8/02/2006 09:22:00 PM  
Blogger grim said...

http://www.njar.com/2006Q1.pdf

Page 8 - Price of Existing Single Family Homes

New Jersey - Median Price
2005.03 - $370,000
2005.04 - $358,400
2006.01 - $356,700

North Jersey - Median Price
2005.03 - $452,600
2005.04 - $424,500
2006.01 - $431,000

Central Jersey - Median Price
2005.03 - $366,100
2005.04 - $361,800
2006.01 - $356,800

Page 6 - Median Sales Price by number of bedrooms

2br
2005.03 - $225,300
2005.04 - $220,800
2006.01 - $222,200

3br
2005.03 - $311,500
2005.04 - $312,700
2006.01 - $303,800

4br
2005.02 - $473,700
2005.03 - $477,600
2005.04 - $462,500
2006.01 - $453,600

Second quarter data should be released sometime mid-month.

grim

8/02/2006 09:23:00 PM  
Anonymous Anonymous said...

SAS,

Buffett does not have his pile of silver anymore (130 million oz).

That does not mean I disagree with you - i am just making a clarification.

CNS

8/02/2006 09:23:00 PM  
Blogger chicagofinance said...

PLEASE BE CAREFUL WITH PRECIOUS METALS AND FOREIGN CURRENCIES.

There is a place in your portfolio for these asset classes, but don't over-allocate if you do not fully understand the fundamentals of these investments and what dynamics would cause them to change value.

My apologies to SAS and BC Bob.

Also on behalf of this board, you should not rely on any investment infomation posted here to make a decision. You should at a minimum conduct your own research, and further retain professional advice if you do not have the requisite background to make an objective evaluation of your choices.

Sorry for that, and sorry that Billy Wagner is the Mets' closer. Where is the freakin' Pepto?

8/02/2006 09:54:00 PM  
Anonymous skooch said...


In the second quarter of this year, 88 percent of Freddie Mac-owned mortgages that were refinanced resulted in new mortgages with substantially higher balances. In other words, 88 percent of refinances were cash-out refis. That's the highest such ratio in 16 years, Freddie says.


I'm not sure I understand. In a rising interest rate environment, what other reason could people possibly have to refinance? Especially in light of the astronomical price increases of the last few years. The only other reason I can think of is to get out of an ARM. This number doesn't seem very unexpected.

8/02/2006 10:29:00 PM  
Anonymous Anonymous said...

Yes, I agree with shytown, don't take what I say or anyone says on this blog and run with it. I am (and I am sure others on this blog), are just throwing ideas and options out to you. Thats all. But, the real power is for the individual to do their homework and know there risk levels. Nothing in life is certain, except death & taxes.

I am just telling you in general terms what I am doing. Because I may tell you things people might not tell you.

But I plan my strategies more on geopolitics, cause I travel the globe alot to learn about things and how they trickle down or will trickle down to the US economy vs. just reading something from a tesxt book or the WSJ.

Speaking of WSJ, thats a childs play newspaper. Better of with the finacial times. The financial times gives you a better global perspective. Because buisness is all about global these days. Now, don't get me wrong, WSJ has good articles, but overall its not the best. And for goodness sakes, don't buy those sissy "Fortune" or "Money" mags.

SAS

8/03/2006 06:24:00 AM  
Anonymous Pat said...

Great job on the blog last night, everybody!

Another thought regarding financial advice for the anon seeking help.

Do not fear educating yourself about economic theory and history. Just a few hours of reading. Once you begin, you might find it quite fun. I have a terrible time convincing single women to do this, but it is imperative to understand your own risk mentality (regardless of age), in order to find synergy in a financial advisor. It might help you avoid the situation Grim is in. [And it will immediately filter out drones.]

In several past threads here, I and many others have posted links to economic Web pages that will help you understand concepts. For example, if you are a believer in a housing bubble, and you read the history of past bubbles, you must develop YOUR OWN gut feeling for what is going to happen in financial markets over the next ten years. But you admit to your true beliefs based on facts - not your fears or hopes, such as "housing never goes down." That is a fear, not a fact. Fears and hopes that an investor proclaims are usually based on prior decisions that investor has made. Throwing pearls before swine, they say in Pennsylvania Dutch. Good money after bad.

The goal should NOT be that you become your own financial planner, but that you formulate a belief system for yourself. Then interview at least three independent planners. Ask them what they think about, for example, the bond market of the last twenty years, inflation control policy, etc.

As one of my idols [an old college football coach of Italian ancestry] taught me watching him work for 6 years, the best defense is a good offense.

Best of luck.

8/03/2006 09:08:00 AM  
Anonymous Anonymous said...

Oops..offense is defense.. Joepa would laugh.

8/03/2006 09:11:00 AM  
Anonymous UnRealtor said...

Compare and contrast:


Opinion:

Prices went up even in early 2006. ... I'm sure prices will come down but they certainly have not yet done that.



Fact:

http://www.njar.com/2006Q1.pdf

Page 8 - Price of Existing Single Family Homes

New Jersey - Median Price
2005.03 - $370,000
2005.04 - $358,400
2006.01 - $356,700

North Jersey - Median Price
2005.03 - $452,600
2005.04 - $424,500
2006.01 - $431,000

Central Jersey - Median Price
2005.03 - $366,100
2005.04 - $361,800
2006.01 - $356,800



Anon, please pick a nickname so we know who you are, and stick around, if you're interested in learning more about the current Northern NJ real estate market based on an examination of data and facts.

8/03/2006 09:14:00 AM  
Blogger chicagofinance said...

SAS,
When Gold takes out the 1979 high, I will buy you the best steak you have ever had!!!!!!!
BC Bob
8/02/2006 08:19:37 PM

....and this is where you get it
www.peterluger.com

8/03/2006 11:20:00 AM  

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