Will Restaurants Go Hungry?

This post first appeared on Minyanville.

It’s a tough time to be peddling $10 crab cakes and $12 cocktails: Just ask restaurants throughout Manhattan, and nationwide.

As the economic downturn picks up speed -- and consumers continue what's now becoming a historic retrenchment -- dining out is increasingly becoming a luxury many Americans are choosing to do without. This is forcing restaurateurs to get creative, get friendly, and get back to basics.

The New York Times reports diners are now finding waitstaff vastly more eager to serve, acutely attentive managers, and a dining experience that's positively enjoyable. Gone are the days when just getting a reservation was a feat unto itself. The only problem: Stomaching the fact that most meals could be eaten at home for a fraction of the cost.

Restaurants are notoriously challenging to run successfully: Razor-thin margins and fleeting trends mean only the savviest chefs are able to consistently retain their clientele.

New York is particularly hard hit, as Wall Street prepares for what are likely to be lean years ahead. It’s estimated that fine-dining tabs are down as much as 12% to 15% in Manhattan - which could mean the different between scraping by and folding for many eateries. Owners are calling this January the worst on record.

Many highbrow bistros and cafes are succumbing to the pressure, lowering prices and offering deals unthinkable just a few months ago. Others, like the popular Chanterelle, are holding out, hoping name recognition and cachet will see them through.

Typically, investors aiming to profit from changing consumer preferences seek out affordable dining options during tough times; trading down from Chipotle (CMG) to Taco Bell (YUM), or from California Pizza Kitchen (CPKI) to Domino's (DPZ). This type of shift towards thrift isn’t uncommon during economic slowdowns - but the speed at which consumer preferences have changed seems to have caught many restaurants off guard.

These patterns aren’t just a coincidence: Necessity breeds change. With credit lines being cut, be it by Capital One (COF) or Target (TGT), consumers simply don’t have the disposable income -- or disposable debt -- to keep on spending at the breakneck pace retailers had grown accustomed to.

As consumers at every social level face their changed economic reality, superfluous purchases are the first to go.

So much for that foie gras. Anyone for tap water and free bread?

Fighting Debt With... Debt?

This post first appeared on Minyanville and Cirios Real Estate.

Our elected officials appear convinced that Americans should buy stuff they don’t need with money they don’t have.

The Senate, in passing its version of the over $800 billion economic stimulus package yesterday, threw a great deal of cash at 2 industries whose products we have far too much of already. Despite the fact that we have too many cars on the road and far more homes than we do people to buy them, lawmakers are determined to prop up both the auto-making and home-building industries.

According to Bloomberg, Ford (F), General Motors (GM) and Chrysler, the latter 2 already suckling the government teat just to stay alive, will benefit from a provision that allows consumers to deduct car-loan interest payments and local sales taxes from their income tax.

Meanwhile, Centex (CTX), DR Horton (DHI) and other homebuilders are salivating at the prospect of a $15,000 tax credit for those brave enough to buy a new home. The new, more generous tax break replaces a $7,500 credit granted last year.

In what shouldn’t come as a surprise, Brian Catalde, the president of the National Association of Homebuilders (or NAHB) is pleased that his group’s intense lobbying efforts paid off.

“We’re pretty happy with the way the Senate bill is shaping up," Catalde said. "We think it will entice a lot of those people sitting on the sidelines into the marketplace.

”NAHB members nervously await the disposition of the final bill as their balance sheets remain bloated with unsold homes priced well above prevailing market prices.

Lawmakers seem determined to dig our way out our debt problem with yet more debt. By encouraging Americans to borrow more to buy the cars and homes irresponsibly manufactured by these industries in the first place, Congress and the President alike reward the very poor financial decisions that brought our economy to its knees in the first place.

To borrow the analogy from Professor Succo's piece yesterday, Economy: Code Blue, this is akin to handing an obese person a donut, telling them to munch away as long as they stay away from pizza. It just doesn't make any sense.

Among the Senate bill's numerous differences from the House’s version passed last week -- most notably the handouts earmarked for homebuilders and automakers -- it also excises more than $20 billion in funding for new public-school construction.

Once again, lawmakers display their unparalleled financial acumen: Only more McMansions will counteract the vast oversupply of schools this country is struggling to get out from under.

Living in a Bubble

This post first appeared on Minyanville.

I grew up in a bubble.

My hometown, once a typical middle-class suburban city not unlike countless others around the country, got swept up in Silicon Valley's tech boom, altering the fortunes of its residents forever.

My parents didn't come from money, nor did they make tech-bubble millions. They were, and are, simple folks who worked hard, saved their money and shied away from extravagance. They just happened to choose to put down roots in a town that, unbeknownst to them, was about to enjoy a period of unprecedented prosperity.

I go back home these days and barely recognize my childhood stomping grounds. A 2500-square-foot, 4-bedroom, 2-bath house is now considered a tear-down; formerly quaint shops and restaurants are now highbrow boutiques and French bistros.

Most residents, after 3 decades of kindly financial markets and vast fortunes that virtually fell from the sky, still live in that bubble. In the words of a local wealth manager, "[This area] mints more millionaires in a year than any other 20-mile radius in the world."

It's this attitude, that somehow attaining wealth and collecting vast sums of cash puts a person -- or a community -- above his neighbors, that saddens me when I return home. What used to be a humble community of families and creative entrepreneurs has transformed into endless rounds of keeping-up-with-the-Joneses.

The local public schools even go so far as to publish monthly newsletters with each parent's donations itemized in the back pages, as if to shame the less generous with the lavish gifts of their neighbors.

Insulated by multi-million dollar suburban estates, upscale organic grocery stores, and a great deal of money, the lives of the new rich had never been touched by the struggling masses.

Until now.

But even after 18 months of turmoil on Wall Street, their travails exist mostly on paper: How can one empathize with the loss of a home, when all you've lost is a couple zeroes from the end of your net worth?

This isn't quite fair, of course. Many of our parents, baby boomers headed for retirement, are active philanthropists, and spend the great majority of their time giving back to a community that has given them so much. Some of the most dynamic charitable organizations and international development groups were founded by this region's brightest minds.

They arrived in the Bay Area before debt and excess became mainstream; when simplicity, humility and respect were still valued traits.

Nevertheless, our streets are now overrun by the swollen egos of too many thirty-somethings, drunk on hubris and determined to ignore the country's economic plight. Ignorant of the conditions outside their bubble of wealth and comfort, they remain convinced that the worst is over, that the gentle bath of government money will solve the problems of those subprime people they keep reading about.

After all, the alternative scenario is unimaginable - particularly to someone whose life's meaning is derived from the price of their home and the commas in their brokerage account.

To be sure, location isn't everything; many of the kids who were raised with the most now have the least. Growing up, I saw the other side of wealth - the high-school drug habit supported by an egregious weekly allowance, truly impressive laziness, and families that seemed to increase in dysfunction the higher up the social ladder they climbed.

Now, as my new career carries me back to the quiet, tree-lined streets I grew up on -- the ones now paved with Internet gold -- I watch in wonder as my former neighbors struggle to fight off reality. Their misplaced optimism, along with the belief that their riches have lent them some sort of moral superiority, is manifested in the arrogance of the asking prices for their homes.

What I see every day is a symptom of the tectonic shift that's only just begun to occur.

Debt, which once created artificial prosperity, is once again a privilege, not a right. Extravagance is becoming revolting. Families, friends, and simple -- not to say free -- pleasures are increasingly becoming the vogue.

While some part of me does feel sorry for my former neighbor, whose 3000-square-foot home was listed at nearly $4 million -- and whose open houses have been entirely unattended -- a greater part is horrified. His arrogance and devotion to a way of life now desperately outmoded make him the last of a dying breed.

And good riddance.

Bank Rescue? What Bank Rescue?

This post first appeared on Minyanville.

In a move reminiscent of John McCain’s suspension of his campaign to return to Washington for the vote on the first bailout, Barack Obama is putting the latest iteration of a bank-rescue package on hold while he addresses the economy.

So as not to distract Congress from imminent debate on the $800 billion economic stimulus package, newly minted Treasury Secretary Timothy Geithner delayed a speech outlining his bailout plan for the financial markets till tomorrow.

Details about the latest initiative are still cloudy, but over the weekend, reports by both Bloomberg and the New York Times focused on difficulties pricing illiquid, toxic assets, which seem to be new scheme’s the biggest sticking point.

Banks, laden with hard to price and impossible to sell assets, can’t make new loans since any fresh capital they receive is simply eaten up by mounting losses. And while big lenders like Wells Fargo (WFC) and JPMorgan (JPM) would love to unload troubled assets onto the government above their market price, politicians are wary of the negative press such a taxpayer burden would cause.

Even though the Treasury, the Federal Reserve and the FDIC have guaranteed almost half a trillion dollars in lousy debt owned by Citigroup (C) and Bank of America (BAC), bureaucrats have now found it politically expedient to play hardball with the nation’s bankers. And by hardball, I mean slow-pitch softball.

The Wall Street Journal reports President Obama’s much-heralded executive-compensation restrictions, far from squaring off with Wall Street fat cats in the UFC Octagon, is attacking Manhattan’s uber-rich with kid gloves.

Executive-pay experts and management attorneys have identified loopholes in the President’s plan, which could allow the very executives Obama means to punish to reap the very same benefits he seeks to limit. This shouldn’t come as much of a surprise, since Wall Street’s expertise lies in staying one step ahead of regulators and lawmakers, figuring how to bust new, supposedly tough rules the moment they’re announced.

As the ongoing efforts to rescue the American economy and fix the banking system roll on, the extent to which Washington is waging primarily a public relations campaign, rather than a true battle against the demons of Depression, becomes increasingly clear. Even the most well-designed stimulus takes months to filter into the economy and effect actual economic decision-making, so in the mean time politicians are focused on swaying public opinion.

Oddly, the current tactic is to frighten the public with ominous warnings about the risks of doing nothing. This is just exacerbating the contraction, as purchasing decisions are delayed for fear things may keep getting worse.

The focus on social mood rather than actual, sound policy highlights the extent to which the turmoil of the past 18 months has altered the American psyche.

Consumers are recoiling, shunning debt and extravagance for savings and thrift. Washington and Wall Street, more joined at the hip than ever, know this combination could topple their carefully constructed house of cards - economic expansion founded on unsustainable levels of debt.

We'll know more tomorrow about the latest in a string of attempts to fix our ailing financial system - unless of course something more important gets in the way.

Ford Joins Bailout Parade?

This post first appeared on Minyanville.

It was really just a matter of time.

Ford (F), the only US automaker not currently being propped up by federal loans, may have to contribute $4 billion to its ailing pension fund. That's cash the carmaker dearly needs to stay afloat, given abysmal auto sales from the US to Japan and everywhere in between.

According to Bloomberg, the company reported a loss of $14.3 billion for fiscal 2008 and earler this week drew all of a $10.1 billion credit facility.

As the stock market has tumbled, Ford's pension grew deeper in the whole. Future obligations now outweigh the value of it's assets and the company may have to pony up the difference. Some fear Ford's need for government assistance is inevitable, its cash troubles showing no signs of easing.

Ford is shopping around it's Volvo unit to raise capital, and is said to be in talks with China's Geely Automobile Holdings about a potential deal.

With General Motors (GM) and Chrysler already on the government dole, and once-mighty Toyota (TM) struggling to ofload cars onto cash-strapped consumers, it's a rough time to be in the business of selling cars.

Nor is it a great time to be guaranteeing pensions. The Pension Benefit Guarantee Corp, a quasi-public entity that backs corporate pension plans in the event they fail, estimates that collectively, American pensions have a $46 billion shortfall.

About half that deficit comes from firms connected to the auto industry.

This new economic stimulus package had better work.

Keepin' It Real Estate: Capitulation Now!

This post first appeared on Minyanville and Cirios Real Estate.

Finally, housing is starting to act like a market searching for a bottom.

Well, sort of.

In former boom states like California, Arizona and Florida, distressed sales are driving the local real-estate markets. After a near-complete evaporation of buying activity last year, buyers have been brought off the sidelines by continued price declines, a glut of homes for sale, and low interest rates. Comparisons with last year are easy: Some areas are seeing activity up more than 300% year-over-year.

Many contend this is a healthy development, as prices return to more affordable levels and latent demand sops up overhanging supply. The bottom, they argue, is nigh.

However, even in areas seeing strong buying activity, median home prices continue to tumble. Banks and private sellers alike are finding the only way to guarantee a sale is to list the house below the market. This constant undercutting is pushing prices down, sometimes well below affordability levels derived from median income data.

This trend is not indicative of the capitulation most market watchers believe must happen before prices can truly bottom.

Capitulation is a concept more often reserved for equity-market analysis than for housing. Since real estate is vastly more fragmented and localized than stocks, housing trends take months, even years to develop, while equities can reverse course in a manner of days, if not hours.

Still, drilling down into individual transactions, evidence of capitulation in certain markets is becoming evident. Sellers, after 4 years of price declines, are finally throwing in the towel.

Homebuilders are becoming desperate: Toll Brothers (TOL) is trying to lure in buyers with 3.99% interest rates through a partnership with Wells Fargo (WFC). Centex (CTX) did them one better by offering rates as low as 3.25% (that rise to 4.50% after 2 years) and Pulte Homes (PHM) also offers a 3.99% fixed rate option for qualified buyers.

Banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C), desperate to shed their growing inventory of foreclosed homes, are beginning to accept bids 10, 15 or even 20% below their asking prices.

And its not just banks. Just in the past few weeks, private sellers have started to jump at low-ball offers. Better to take less cash now than be constantly priced out of the market, chasing it all the way down.

Although this type of sale is still very much the exception rather than the rule, it’s an indication that sellers are becoming despondent, willing to accept any reasonable price to rid themselves of what could be months of headaches, upkeep expenses and deteriorating market conditions.

To be clear: This analysis is by no means a call that housing has bottomed, or is even remotely close to a bottom. It’s merely evidence that certain areas are closer to stabilization that others, and these signs -- which may look like capitulation -- should be viewed as a positive development in a market deeply in need of hope.

Main Street Out for Wall Street's Blood

This post first appeared on Minyanville.

Why do you look at me when you hate me?
Why do I look at your when you make me hate you too?
I sense a smell of retribution in the air.
- Guns N' Roses, "Get in the Ring"

Man, but it's a lousy time to be a banker.

Are We At Risk?
Protesters Mass Outside Bear Stearns
Not the Financial End of the World as We Know It
Outbreak! The Other Side of Anxiety
Toddo on TV: Capturing Crude

Fed Jumps on Loan Modification Bandwagon
Bank CEOs Beg For Bailout, Their Jobs
Central Banks Fight For Survival
Taxpayer Dollars Don't Return to Main Street
Wal-Mart Goes Green, Makes Green

Not only are financial professionals facing the most hostile market environment in a generation, but backlash -- thanks to their role in the current crisis and the size of their paychecks during the run-up -- has politicians and the public alike out for blood.

After last week's World Economic Forum in Davos, Switzerland, which attendees were calling "the grimmest ever," the witch hunt for those responsible continues . And increasingly, finger-pointing and blame are being directed at the world's financial professions.

According to Bloomberg, Wall Street was virtually unrepresented in Davos, with JPMorgan's (JPM) Jamie Dimon the lone banking CEO in attendance to defend his ilk. To his credit, Dimon owned up to past mistakes, but openly wondered whether blame should also be directed towards regulators: "God knows, some really stupid things were done by American banks and by American investment banks. To policy makers, I say: Where were they?"

The mood of the gathering, typically a highbrow affair where the ultra-rich and ultra-influential flaunt their good fortune for the rest of the world to admire, was humble, even depressed. And rightly so.

Opinion on Main Street has been turning against Wall Street for months. But as details of just how much bankers and traders are paid -- even as their firms receive billions in taxpayer support -- continue to emerge, things are turning hostile. Last night, at an otherwise good-natured Super Bowl party, one guest muttered aloud, "Can you believe how much these banking [expletive]s got paid? People are losing their jobs, and they're still taking home million-dollar bonuses." The crowd agreed; it was a "shameful" display of unadulterated greed.

The irony -- and evidence the changing social mood isn't just the usual negativity that accompanies economic downturns -- is that this didn't just start last year: Bankers have always taken home outrageous sums. Year-end bonuses weren't paid out for the first time in 2008; greed didn't suddenly rear its ugly head in the bowels of Manhattan. Nevertheless, people who couldn't have cared less that investment bankers and traders earn massive salaries -- even as their firms cut staff -- are suddenly up in arms.

And while many argue this time is different -- since the likes of Goldman Sachs (GS), Morgan Stanley (MS) and Bank of America (BAC) are now on the government dole, that's simply canon-fodder for political posturing.

What's really changed is the mentality on Main Street – we no longer look fondly upon the pin-stripe suited banker or dapper real estate mogul. Flashy cars get sneers as they roar past, Louis Vuitton bags are carried by only the most egregious snobs. Our envy has turned to disdain.

The sentiment of millions, however, doesn't change overnight. Just as it took years to arrive at the apex of bling, so too will it take time for the revulsion at unnecessary excess to fully take hold.

But take hold it will.