Where can you buy this apartment for $3,600 a month

On what basis was 670 S&P silly? It wasnt so silly in terms of normalized earnings multiples...It was about 11x. It was infinitely LESS silly than was Nasdaq 5000. We actually know this because the Nasdaq is still trading at a fraction of 5000 10+ years later.

Also, down 10% from here is not year 2000 prices in Manhattan. Is that what you are trying to say?

Fortunately the bubble mentality has hit credit hard - it's going to be some time before LICC can take out another Ninja Loan to rent out his LICC condo at a loss.

We're nowhere near equilibrium yet. When LICC is able to buy an LIC condo today and rent it out to an unrelated third party and break even, we will have reached equilibrium.

By my calculations there's another 40% to go.

Thats more aggressive than your last estimate Steve. What happened? I am guessing rents moved lower. I have a new rule of thumb. I am buying whatever I can at ten years ago price or better. I guess I am renting and owning the Nasdaq right now haha.

inonada, i think the fall will be and has been cushioned by gov't action. but i can't foresee that continuing endlessly over a decade. the incomes simply aren't there, and i don't see where top-line growth is going to come from, other than perhaps emerging markets if i'm reading their situation incorrectly, and even if so that's not enough to support the local real estate market (although it may help corporate profits).

would i be surprised to see periods where prices actually increased in NYC over the next year or so? no, i wouldn't. would i be surprised if in 2012ish prices weren't a fair bit lower than today? yes, i would.

Finance industry incomes are huge...but they are increasingly concentrated and those people MUST own already. You cannot have year 2000 rents and prices greater than double....unless you have unnaturally easy credit and thats over...Over. OVER!!!

Yes, Rhino, rents have fallen and they continue to fall.

Personally, if it's just another 30% that would work, too - bring us back to 2003, which was always my prediction.

I'm saying that we'll see a 30-40% drop in real prices, with the majority coming from nominal prices not keeping up with inflation. Artificial govt support of housing has been around for decades; why stop now? Sure, we'll reduce support now that the market seems to no longer be in free-fall, but I don't think for a second that govt wouldn't be back if price drops continued.

Rhino, I agree that Nasdaq 5000 was infinitely more silly than SP 670. The 9% earnings yield, when compared to the 2.5% 10-yr yield, is probably as wide a spread as we are ever going to see in our lifetimes. Maybe '74 can compare if you were around then, but I don't think it was that wide even then. The point is the same knuckleheads who were buying Nasdaq at 5000 were puking and screaming their guts out at SP 670. I bet you the majority of stock holders can't tell you why stocks go up or how to value something without knowing its recent price.

-30% x -30% gets us to half off...which has some intellectual appeal. Interestingly, the stock market bottomed at the same multiple of eps as it did in 1982, if you adjust for the difference in interest rates... I'd like to adjust the 1990s trough for interest rates and see what I get. However, thats a lotta work. Simply speaking, troughs are usually made with cap rates > mortgage rates and mortgage rates have an upward bias from here. The reality is if you bought at 1/2 off you'd probably still have 30% downside risk, unless rents were ripping up at that time.

What earnings yield? Earnings yield on normalized? You may be right. My friend made the same case to me. Technically though, cheap is cheap. So 1982 was a much better, sounder buy regardless of treasury yields. Your trade specifically could have been to buy the market and short treasuries, to hedge your rate risk. I am a trader, so I wont argue the trade because it worked. And its right, 670 was cheap but only compared to yields not compared to historical troughs.

Income constrains both rent and purchase prices in the long run. In a credit-driven bubble, when lenders are willing to lend based on (rising) asset value without reference to income, prices (but not rents) can escape this constraint for a while (e.g., the entire last decade). But when the bubble ends, lenders need to return to the ordinary rule that loans need to be paid back out of income, and the constraint returns.

However, for Manhattan, the relevant income is extremely high end. That income has been rising at far more than .7% and, assuming that the current downturn is cyclical and not the end of an era, is likely to continue to rise at rates far higher than the averages. That suggests that the income constraint (on both rents and purchases) allows larger increases than Shiller's historic returns.

On the other hand, there is absolutely no reason -- absent bubbles -- to assume that prices should track the income constraint.

First, standard economic theory says that in capitalist markets prices tend to revert to COSTS, not ability to pay. The COST of building is far below current Manhattan prices. Moreover, building costs should increase LESS than inflation as productivity increases. So anyone who believes that ordinary economics applies to real estate, should expect that prices will drop from here to something approaching building costs (???$400-$500??? psf for ordinary quality) and then increase at a rate BELOW inflation.

Second, standard economic theory says that comparable products tend to sell for similar prices, since otherwise consumers will switch from the expensive to the cheap.

Similar apartments remain similar products regardless of whether they are financed by renting or by secured lending -- so they should have similar values in either case. Absent an extremely peculiar imbalance in the credit markets, it is hard to see why it should matter whether the occupant gets financing from landlord or from bank or from savings. It's the same product and it should sell for more or less the same amount regardless of how it is financed.

So, the price of an apartment held for rent should be more or less the same as a similar apartment occupied by an owner.

Third, prices of apartments, in the long run, should be determined by investors not owner occupants. This is because many NYC apartments can be converted relatively easily from owner-occupancy to rental and vice versa.

Accordingly, if apartments are worth more to owner-occupants than renters, we should expect investors -- over time, and in NYC, this means years not months -- to convert rentals to owner-occupancy by selling condos held for rent or converting rentals to condo/coops until the markets realign. That will increase supply of owner-occupancy units until prices drop to the point where investors are indifferent between holding-to-rent-out or selling. Of course, this is a slow process, so prices could stay away from equilibrium for a long time.

Still, this means that we can predict EQUILIBRIUM prices by looking at the economics of renting for profit. Renting for profit requires that investor-landlords be paid a reasonable amount for their opportunity costs, risk of loss, time and effort. In a bubble, of course, investors may expect to make all their gains by selling to another bubble investor. But when the bubble has ended, investors must expect to make their returns from the rents they charge. Moreover, since an equity investor (landlord) always has more risk than the lender on the same unit, investors should expect to earn more than the relevant mortgage rate. This means that in non-bubble markets, investors must be able to earn a **net** return, ignoring potential capital gains/losses, of at least 8% (i.e., significantly more than the commercial mortgage rate).

Investors seeking to make at least 8% will not be willing to pay more than 8-10x annual rent roll, even if they are quite optimistic about their ability to keep costs down, unless they anticipate massive near term rent inflation. This suggests that equilibrium NYC prices are significantly below current prices -- maybe even 50%.

Fourth, taxes have an unclear impact. High income NYers are taxed under the AMT. Owner-occupants do not get a deduction for real estate taxes under the AMT; but landlords do not pay this penalty imposed on high-tax/high-service states. The anti-Federalist AMT, thus, may reduce rents relative to owner-costs slightly on comparable upper end units. On the other hand, mortgage interest up to $1m is deductible for owner-occupants even though they do not pay tax on imputed rent, which is a subsidy to borrowing not available to renters or their landlords; that could make rents slightly higher on comparable units. Since the subsidy is to borrowing rather than owning, it is hard to predict how much it will affect prices. In any event, even if these tax effects have a definite impact, it will only be on the level of prices, not the direction or the speed with which they change: it might change the equilibrium price/rent ratio slightly, but it won't allow for the steady increases in price/rent ratio necessary to sustain a bubble.

Finally, a note on empirical evidence. Shiller's longest term numbers -- for Amsterdam -- show no increase over inflation. His US numbers show a slight increase over inflation, but they are clearly impacted by the current bubble. Moreover, quality increases over time -- kitchens are renovated to higher standards and so on -- as income increases. So his numbers include not just price increases but renovations -- and it seems highly likely that if you backed out quality increases, he'd show what theory predicts, which is that QUALITY CONTROLLED prices decrease with time as productivity increases. That's how all other prices work, and there is no obvious reason why housing should be different.

Bubble psychology can overwhelm fundamentals for a long time. But the bubble is over and the fundamentals are beckoning down. Way down.

inonada, the gov't let the bubble markets fall hugely. we always lag. many of the bubble markets are near their eventual bottom, although with the massive amounts of foreclosures expected that may be tested as well. in which case the gov't will continue to provide some support, but just like everywhere else they are just filling some of the holes, not all of them.

we don't have enough resources to keep this market from correcting indefinitely. some like to think of it as a mere confidence issue. it's an incomes/credit issue.

Christ financeguy. Where do you think prices will bottom and why? Clearly investors are not the marginal consumer of coops in Manhattan. What return will owner occupants require in a world where credit is tighter, albeit at relatively low nominal costs?

Perhaps '82 was better. It's all good...

'82 was a 15-bagger to '99 so that'd be tough to beat. The recent spread trade was great any way you slice it.

financeguy, very interesting post. $400-500 psf for average product takes you back to 1998 nominal pricing.

To condense my long post:

People who predict equilibrium (post-bubble) prices of 14 * annual rents, or where an investor with a 20% downpayment only breaks even on a cash basis, or constant-quality prices rising with incomes, are predicting unprecedentedly HIGH prices.

Equilibrium prices in NYC will ultimately be set by investors, and absent bubbles or obvious near-term rent inflation, rational investors will not pay more than 8-10 times annual rents.

Once equilibrium is reached, over the long run prices should rise with rents, and rents for constant quality should rise LESS than inflation as building-productivity rises. Rents and prices will rise as fast as incomes ONLY if quality increases as well.

Charts showing historic ratios higher than that are comparing AVERAGE sales to AVERAGE rentals, which is very different from COMPARABLE sales and rentals. Average sales are higher quality than average rentals. Shiller's long term charts showing price increases in line with incomes do not correct for quality increases and are not a valid indicator of what an investor can expect.

Financeguy if there are enough people with money who will look at it a certain way, then it becomes the way. 14x rents doesnt strike me as a terrible number. That would make my place around $850k. Around the corner they are asking $1.2mm for something like this...in fairness a bit nicer due to finishes. At 14x, that would be about $1mm adjusting by $1000/mo for finishes. That would be a 5% cap rate. This would be fair, not attractive to investors. If we really want to get down and dirty into economics, we would need to know if at the bottom the marginal buyer is an owner or an investor. In a market dominated by coops, I am not sure how we could say the marginal buyer is an investor. While 5% might not be fair compensation for risk, its also not a terrible allocation of $$$ in a diversified portfolio.

12x is the long-term average. I think it reached about 10x at the nadir, 1998.

That would put my OP lease at $432,000, 50% or more below the current price. I think what will happen instead is that prices will stagnate and rents will catch up after about 10 years.

That was a large part of the 1983-1998 bust.

And by stagnate you mean what, stagnate after they go down another 30%? I feel like your place at $600k would be interesting. $400k seems too much to wish for.

I guess I'd buy it at $600k and buy the one next to it at $400k.

About buying & selling on top/lows of the market.

For example:

If I bought $50k worth of S&P 500 10 years ago, I would have only $40k today.
If I used 50k on the deposit and bought an apartment 10 years ago, I would double the price of the apartment.

Its all about lows & ups.

No shit. This whole conversation is about triangulating the bottom..or at least a favorable risk reward.

Rhino:

Investors are EFFECTIVELY the marginal buyers of coops. Coops compete with condos. Condos can be rented. Rentals can be converted to condos and coops. So absent bubbles, investors will keep all categories in line with each other.

So long as renters are willing to pay more than the cost of building, builders will build. So rents tend to converge to the cost of building. I guessed at the cost of building -- I'm not in the business, and reported numbers are distorted by the cost of land, which was inflated by the bubble, and the cost of credit, which was reduced by the bubble. The cost of building new product is the theoretical equilibrium price.

Alternatively, if it's more profitable to sell rentals than build them, equilibrium should be 8-10 times annual rent, with likely overshoot before getting there.

Or just take pre-bubble prices and add inflation: that's probably too high for quality controlled product, but not by much, since so much of the inflation measure is just OER anyway.

All three suggest more or less 2000 prices -- but as Shiller said the other day, a burst of irrational exuberance or in-uberance (is that the opposite of exuberance?) can always overwhelm the fundamentals.

I dont agree with using replacement costs for real estate. The value of the land and interest rates make the analysis circular. You do realize your conclusion is premised on much higher interest rates. If you can make that call...well then shit trade it.

Steve's 12x annual rent is the historic ratio for AVERAGE sales: AVERAGE rentals, reported nationally.

Of course, nationally average sales are a far higher quality product than average rentals. NYC is one of the few places where medium and high end rentals are available, due largely to the history of rent stabilization.

5% is too low for an equilibrium return for investors. That's below mortgage rates. I don't know any way to decide absolutely what the risk is of owning NYC real estate. But I know that the risk of owning the equity interest in ANY investment is by definition higher than the risk of owning a secured loan on the same investment. So absent bubbles, equity investors should ALWAYS demand a higher expected return than the loan rate.

(In bubbles, investors tend to see the only risk as losing out on future price appreciation, so they are willing to pay to assume risk. That makes fundamental analysis irrelevant).

I agree. But 5% might be close enough, given my investment alternatives and potentially some poor mental accounting of tax benefits and opportunity costs. Needless to say, 5% is 30% down from here. 8% is pretty close to a halfing. However, I do call the 8% a worst case.

No, my 12x is for NY.

"opposite of exuberance" --> underuberance.

Rhino: I agree that if everyone believes some particular piece of nonsensical pricing theory, markets can make it true, for a while. 14x or 12x may serve as a focal point. Or the Congress/Fed/Fannie/Freddie might assume all the downside risk of the housing market, in which case investors don't need any return at all. Or a generation of investors might decide that real estate is a losers game and the government might remove some of the subsidies.

If you are buying for the long term and don't have so much money that you can afford to lose your downpayment, you need to estimate future prices. Irrationalities are hard to predict and can go either way. The market isn't likely to be at equilibrium when you sell -- but perhaps it is fair to say that it is no more likely to be above it than below it, so equilibrium is the best available (if not very good) predictor.

If you are buying for short term, none of this matters. Prices are dropping. Fundamentals don't offer a floor in the near future. Psychology is also bad, unless you think bonus headlines are going to turn it around.

I am not arguing at all to buy now. I am simply saying a 5% cap rate (30% down from here) might have me considering long term ownership...if only because at that cap rate, I might actually be able to afford the final solution apartment comfortably.

Rhino:

1. Land. The land problem is hard. I think the theoretical answer should be that land also should be valued at its next highest income production value: as a parking lot, tenement, brownfield, river, etc. Actual sales numbers would be too high, because they are inflated due to the bubble, which created disequilibrium profits some of which went to existing landowners. I don't know how profitable parking lots are or what they would cost to buy in a non-bubble market. I guessed say $150psf for parking lots or the AIG building, $350 for hard and soft development costs for ordinary quality high rises.

I could be way off. In any event, it looks like rents are currently below real building costs, since empty land isn't being developed. So the floor should be rents, not building costs, until rents bottom and start going up again.

2. Credit. Since bubbles are the result of credit extended based on expected asset value increases rather than income, they always have low interest costs. So I am implicitly assuming at least lower credit availability.

But current commercial/jumbo mortgage rates don't seem to imply prices higher than 8-10 x annual rents or any reason for equity investors, who take on more risk, to accept a 5% expected return. Why not just invest in a portfolio of NYC mortgages -- higher return for less risk? Do you disagree?

Rhino: Even if you can make the payments, can you really afford it?

What happens if prices revert to equilibrium or below and you want to sell? Will you have enough cash to cover a short-sale -- pay the bank -- and also put up a downpayment on your next place?

If not, aren't you still anchoring on tulip prices? As if the bubble is likely to only partly pop?

With (1) the problem is the value of land as all those things is related to the value as a rental. (2) I agree you should get more as an equity investor...but at the right price level you do get more - you get appreciation - however, I agree you dont get appreciation from this entry point. I would invest in a portfolio of mortgages. The fudge factor here is the tax deduction. I agree its not 'right' but it is real money. Do NYC mortgage funds exists? That sounds like an interest option, especially as a natural hedge.

Yes, I can really afford it. And by afford it, I mean have a mortgage lower than your 8-10x rent scenario.

NYC mortgage funds would be a limited hedge to renting, not buying. Best would be to buy a collection priced with expectation of default, so it will soar if NYC real estate unexpectedly recovers allowing underwater defaulters to sell and pay off their loans, but not have too much downside if RE continues to drop.

If it doesn't exist, you should start one and market it to renters. Then you could market a short derivative to worried buyers.

Right it's a hedge for renters. And prob an unnecessary one at these levels.

Is that enough? Imagine prices plummet and you want to trade your underpriced home for another underpriced home. The issue isn't whether you have a short sale or not. It is whether you have enough for the new downpayment.

Yes I would. I don't think you get your 8 to 10x price point is my bottom line. Only with much higher interest rates, which is a bet you are welcome to make.

"I am simply saying a 5% cap rate (30% down from here) might have me considering long term ownership."
"I don't think you get your 8 to 10x price point is my bottom line."

Sorry, I'm having a reading comprehension problem. Are you saying you'd buy at a 5% cap rate and not worry about downward risk because you'd still be fine if prices dropped to an 8-10x annual rent (which is more like a 10% cap rate)? If so, you are spending admirably little on housing. Congratulations.

Or are you telling me I'm screwing up the value or risk calculations? If so, please take it a little slower; you've lost me.

Rhino: regarding the hypothetical 1982-1999 SP investment resulting in a 15x return. You're the fixed-income guy, so correct me if I'm wrong, but weren't 30-year bonds, callable after 25-years, yielding something like 14-15% back then. What would the total return there have been?

My point being I'm wondering how attractive that 15x return was compared to buying a 30-year bond over the same 17-year period (i.e., the cost of tying up your money).

Inonada do you need to be a "bond guy" - which I'm not - to calculate compound interest? I think the issue is you would not have had the same re-investment opportunity of your coupons in the treasuries, whereas, you could have left the $$$ in the S&P the whole time. Further those dividends would be taxed. Over 17 years, 14% doubles roughly three times. So I guess around 8x. Not sure if that is right given that each time you received your interest. This is an excel exercise that I'm not going to do. It wasnt anywhere near a 15x....It wasnt even the 8x if you took your money out of stocks before they went to 40x eps...say at the 20x mark... It was 8-bag.

"Sorry, I'm having a reading comprehension problem. Are you saying you'd buy at a 5% cap rate and not worry about downward risk because you'd still be fine if prices dropped to an 8-10x annual rent (which is more like a 10% cap rate)? If so, you are spending admirably little on housing. Congratulations. "

What is your comprehension problem? If I buy at 14x, and it goes to 10x, thats a 30% loss. All I am telling you is thats a risk I could conceivably take. You also assume that rents are constant. They are not. I am not promising you I would buy at 5%. I would consider it at 5% and only a place that is deemed lifetime, admitting that the unexpected can happen. BUT AGAIN, I do not think you are going to get your 10x.

LICC, what's your opinion about all this? :)

Steve Brazil is getting destroyed....retreat!

Rhino, I was asking you because I didn't want to think too hard about it and thought you might know better / with less effort. But given that you're not a "bond guy", here it goes. For re-investment of the coupons, you'd need to set up forwards so that when the coupons came in, you'd receive the forward rate onwards for whatever is left on the 25 years overall. Given that the entire yield curve was at 14-15%, not just the tail end, assume the forward rates are also 14-15%, so you can set up compounding of 14-15% all the way, including the coupons.

The 14% over 17 years leaves you with 9x. However, you are missing the fact that yields had dropped to 5-6% by 1999, so you have a hefty capital gains on the 1982 30-year bond and the forwards you set up. I think the right way to figure it out is that the bond would yield 14% over 25 years to get you a 26.4x return at the end of 25 years. A bond yielding 6% over 8 years leaves you with a 1.6x return. So you back those last 8 years out, and you're left with a 26.4/1.6 = 16.6x return. Agree / disagree?

So, as far as I can tell, a 30-year bond with pre-invested coupons performed about as well as the 17-year period with the cherry-picked end date for SP. My point being that a nominal earnings yield of 9% (using your number) with the long-rate at 2.5-3% might be more attractive than an earnings yield of 13% with the long rate at 14-15%.

If you set it up as a spread trade, by shorting the treasuries, then you are right. If you compare the markets long-term attractiveness in its own right at the two points in time, then I dont think there is any comparison. I have to admit I didnt think about using forwards to pre-re-invest the coupons. I am not sure you are right about the capital gains...Because wasnt your original 14% a yield to maturity including receiving par?...Oh wait you mean you can sell it at a premium to par based on the remaining coupons re-rated to the new yield. I cant argue... It sounds like you are the real bond guy. All I am really saying is March 2009 wasnt as good as 1982 unless and only unless you set it up as a spread trade.

Rhino, everything is getting destroyed today! Last day of mutual fund accounting.

But LICC already knew that!

Yeah this might be the real turn. The move off the bottom has been pretty extreme.

Yep, Rhino, that's what I'm saying regarding selling it at a premium to par. You got the idea on doing spreads for the coupons: i.e., if you have a coupon showing up in 1 year for $X, short a 1-year and go long the remaining duration in size $X. Or set up a forward rate swap. Of course there's margin & counterparty risk associated with all that. Anyways, not a really bond guy: just know enough to be dangerous.

Hadn't really thought through it until your comment made me think about now vs. 1982. Kinda crazy. In any case, I don't think my metric of earnings yield - long rate is quite right. I think you want earnings yield - real long rate. I.e., take future expected inflation out of the equation using what's implied by TIPS. So perhaps 1982 stocks were more attractive than 2008-2009 stocks? I guess we're just comparing supermodels now. But 1982 bonds were very attractive as well, and 2008-2009 bonds aren't attractive at all.

At least we have RE now ;).

"The stock bubble and crash seem to have killed stock bubbles for a decade. "

Interesting how bubble and crash in stocks will kill stock prices (which I agree will have an effect for a while)...

but no mention of the same effect on RE.

Fact is, this is the first crash on record in RE, since they started measuring. If it hurts stocks, its really gonna hurt RE...

"Finance industry incomes are huge...but they are increasingly concentrated and those people MUST own already. You cannot have year 2000 rents and prices greater than double....unless you have unnaturally easy credit and thats over...Over. OVER!!!"

Yup.

If there are big bonuses, it will be folks who already had some money, and now there are fewer. And the totals are still supposed to be less (because individual bank numbers don't tell the full story - you have to add in for the banks now GONE).

And pretty much every other industry is in the crapper.

vlahdf

"Yeah this might be the real turn. The move off the bottom has been pretty extreme."

FWIW, I bought $95,000 worth of stocks today - buy when people are fearful. Established a position in an insurance company which is trading at less than 40% of tangible book value (valued as of 6/30/09). I would give the name, but I'm sure you mavens already know what it is and are way ahead of me (as usual).

Why buy overpriced NYC RE when you can instead buy $1 worth of assets in the stock market for less than 40 cents??? It's a no brainer. Peace.

> buy when people are fearful.

You call this fearful?

This is a mild blip....

somewhereelse - if today doesn't smack of fear, you don't know of what fear is. There was fear in March and renewed fear today (although not as extreme). It's all relative, dude. GL.

...smart money buys on days like today - dumb money was buying 10 days ago. Cheers.

Well, thats my point.... relatively speaking, this is nothing.

I like buying when there is fear... and I did, dow in the 6s and 7s. But I've been shaving off in the 9s and over 10k. And this isn't enough fear yet for my tastes to buy the rest back in. In the last couple drops, all I did was some 401k money which I have a big cash lump sump that needs to get in there sometime. The regular portfolio is just waiting...

I didn't sell anything from late-Feb until mid-Oct (was in 100% the whole time). About 10 days ago sold an arb play that had reached its potential (CYCL). Now I'm back in 100% (except for my cash needs for the next 4 months). Could the mkt go down some more? Of course - but who cares, everything I currently own is undervalued at these levels, so why would I sell? So, holding everything for the foreseeable future...

At the risk of exposing your BS, what was your exposure from last summer through late-Feb? Honestly, by saying today is 'buying fear' you are exposing yourself as a JV player. Undervalued is a bullshit concept. Energy stocks were undervalued last August when oil was $90...but they were just ahead of the curve when oil went to $40. You would sell to have more $$$ when the market actually trades at an attractive level. 1100 to 1040 is not 'fear'.

I like that you call yourself smart. Call your buys today smart when the market trades above this level, not until then.

I'm on record with the SSO calls in the dow 6 and 7s, and then being 100% invested in the 8s.

And I've definitely lightened up considerably since then. I've actually been able to keep in more than I had in, but I've taken all the profits out for the most part (and some of those profits being 100 or 150%). I'm not going to be a pig.

What record is that? I mean good for you if you did. As far as BS, I am wary of anyone who calls the market cheap at 15x an imaginary $70 in EPS when the trailing is $38.

LICC, where's the deets on your great LIC pad?

The rental market there has to be looser than a gooses bowels. Must feel good to own.

rhino, coffee in the nostrils moment. hif'nlarious.

I think Steve should have rented right between LICC and Ericho...a place 2x the size for the same monthlies... And then reminded them of it in the elevator daily. v

What kind of institutional investment management do you do, Rhino? Stocks, bonds, balanced?

Stocks (oil & gas), but advanced amateur on the rest.

Seems like your passion lies more with global balanced asset allocation. Enjoy.

You may be right. I feel like people who focus on one thing tend to lack the context for what the appropriate risk/reward is for that thing. About 15% ago, all the sellside oil services analysts said almost literally that it probably wouldnt see a meaningful pullback on the way to the next 30-40% up.

We actually use Wall Street strategists as one of many reverse sentiment indicators for the overall market. Particularly good indicator for a two-year investment horizon with an R-squared on almost 0.20 and considerable differentiation between top and bottom quintiles.

The Shiller real 10-year PE is also one of the best long term indicators.

We have Ned Davis Research tabulate results monthly to our specifications.

It's always funny when people who have no clue what they are talking about, and do no research to back anything they say, make conclusions and declare themselves geniuses. steve, rhino, aboutready- good comedy.

Topper, do you use technicals? They are my latest obsession. An r-squared of 0.20 is not great, is it? I agree that a histogram of shiller P/Es is the right way to decide on equity allocation. The dirty secret is bonds are a better risk/reward than stocks a majority of the time. Wait Ned Davis does have technical aspects, doesnt it? I joined the Market Technicians association and his work was references by a speaker the other day.

"It's always funny when people who have no clue what they are talking about, and do no research to back anything they say, make conclusions and declare themselves geniuses."

Mirror, mirror, on the wall, what makes LICC so very small?

:/

Comedy? You want COMEDY?!

How do you say LICComment in Latin?

Ignoratio Elenchi

Waiting on your deets, LICC....

I've generally been skeptical about technical analysis.

That said, Ned's heart is definitely in technical analysis and it's tough not to have a lot of respect for him. I know his chief strategist, Tim Hayes, is a CMT. And sentiment indicators are generally classified as technicals so I guess I'm cool with them. Momentum has also been useful. But you have to know when momentum turns to mean reversion.

Actually, 0.20 R-squareds in the asset allocation world are very high - although they don't seem so. NDR emphasizes the differentiation between quintiles - but I've never been all that comfortable with that perspective. The 10-year R-squared for the Shiller real 10-year PE is an extraordinary 0.36. It is less useful on a one-year horizon; hence, the potential interest in technicals.

As regards your dirty little secret, it is, indeed, still very much a secret for the most part. It becomes particularly relevant in that when you take a traditional 60/40 portfolio and look at its risk allocation you get 95% of your risk from equities and 5% from bonds. That is a very inefficient portfolio. The really interesting work being down now is in turbo-charging and increasing the low risk bonds in the portfolio while reducing the allocation to stocks with a goal of about a 50/50 stock/bond risk allocation. It does mean leverage which can be a dirty word. But leverage is everywhere - even when you buy most top quality companies you're also getting a big slug of leverage. Leverage simply has to be prudently managed.

Another fascinating wrinkle on your dirty little secret is that the long term average yield curve has had very different Sharpe ratios along it. So where do you choose to do your leveraging? And how do you leverage?

This is the big dirty little secret out there. And fixed income has had a long history of often doing fine in downside equity environments. Average correlations are nice. But what you really want is negative correlations when stocks are tanking. Treasuries have often been great in this environment.

Off to New York now.

Cheers.

Do you manage private wealth money? I like the cut of your gibe. Fixed income does well because it pays. The problem with equities broadly speaking is they are a ponzi scheme. Most of the companies I follow took the windfall from high oil prices and reinvested it in overpriced rigs or overpaid for property. Its like well...making a bunch of money in NY in the finance industry and then just putting it into an overpriced coop. Not really the path to value creation. A handful of companies get the joke and do it well, holding out to make their expansion during the trough.

Thanks. For close friends and family.

My very fulltime job is as strategist for a Fortune 10 company's pension fund.

Further to my earlier comment you might find the following of interest. Sharpe ratios for the period 1926 to 2008.

Intermediate-term government bonds: 0.32
Long-term government bonds: 0.24

S&P stocks: 0.29

I'm cool with stocks. Some do stupid things some do smart things. Always have, always will.

As regards, bonds having higher Sharpe ratios it actually "depends." BTW, you get even higher Sharpe ratios with short-term government bonds.

Interesting. Most of my money is in bond ETFs right now. TIP and BSV and a Fido NY muni fund. This market at 17x Shiller P/E holds no LONG TERM interest to me. I will trade it however.

Ned and Tim's view has been pretty spot on. "Masssive cyclical rally in a secular bear market." They are still 15% overweight stocks and have been since close to the bottom. But they are starting to sound edgy. (They were also underweight stocks through most of the carnage.)

I generally just do over weights and under weights around long term strategic weights. I'll let the real smart money make the black & white calls!

I think overweight is probably wrong here...either by the fact we're over 15% above 15x Shiller EPS, or that we've broken ugly through the 50-day.

Topper how much do you pay for Neds service?

They offer their standard package which includes about four updates a day on various markets as well as a custom work package based on an hours-per-year basis. (Those often include numerous links to charts on website.) Subscriptions include access to their huge web database of charts on the economy and capital markets which are constantly updated depending upon data source - daily, weekly, or monthly.

Pricing is dependent upon the number of seats (how many people in the firm have access) and the number of custom hours. The latter is particularly important for me.

I'm sure you'll understand that it would not be appropriate for me to discuss our pricing arrangement. I would, however, be happy to provide you with the name of a contact person there. You might give me a personal e-mail address and I'd respond similarly.

The other very interesting - but much less customized and not web-based - good service is ISI here in New York. NDR is based in Florida but they do have a New York rep.

I see. Probably out of my zone for my individual purposes.