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Thursday, 20 October 2011

As Wall St readies cuts, fears grow in luxury market

By Phil Wahba and Jilian Mincer

REUTERS - New York luxury store owners and real estate agents are wondering whether they have to brace for some of Wall Street's pain.

With others likely to follow Goldman Sachs ' lead and slash compensation, Wall Street dealmakers, traders and other staff at banks and funds could cut back this holiday season.

That, along with the threat of layoffs, might spell shorter lines at luxury shops like Saks Fifth Avenue and will make finance industry types think twice before plunking down $200,000 to reserve a three-month summer rental for 2012.

"People do remember 2008," says Michael Pomerantz, president of financial advisers Pomerantz Financial Associates, which has Wall Street clients. "There's still so much fear, even among older traders and financial professionals, they're scared they'll get laid off."

When the financial markets seized up in 2008, luxury businesses got slammed. Saks, for example, saw double-digit sales declines and had to resort to deep discounts to clear inventory from its shelves.

Given that the New York area accounts for nearly a third of the nation's entire annual $65 billion luxury retail market, any blows here will have reverberations for the U.S. as a whole.

One associate at a top tier bank who declined to be identified, said he planned to spend less this year, regardless of how big his bonus ends up being, citing the threat of layoffs.

A number of major banks have announced job cuts in recent months, including Bank of America, JPMorgan Chase , UBS AG and Goldman.

A computer technician at another bank said he and his colleagues had low expectations for their year-end bonus. He said bonuses had already been slashed a few years back and there was now an expectation of a further reduction.

Even those who are still getting big bonuses may hesitate to flaunt their wealth in New York this year given the Occupy Wall Street protests have been growing from a camp set up near the New York Stock Exchange . A number of finance industry leaders have said they understand the anger of the protesters, many of whom are concerned about a lack of jobs and growing income inequality.

Goldman, which on Tuesday reported only its second quarterly loss as a public company, said it was setting aside 59 percent less money for overall compensation in the third quarter. During the first nine months of the year, Goldman set aside an average of $292,836 of pay per employee, down 21 percent from $370,706 for the same period last year.

Some other major banks have reported weak earnings, prompting Wall Street compensation consultant Alan Johnson to predict that bonuses overall may fall by 30 to 50 percent from last year.

Morgan Stanley Chief Financial Officer Ruth Porat said on Wednesday that the bank expects to save $1.4 billion over the next three years through a program that includes layoffs, pay cuts and other expense reductions.

The New York State Comptroller said last week that Wall Street cash bonuses are likely to drop for a second year. One in eight jobs in New York City is linked to the securities industry and the comptroller is expecting job cuts through 2012.

SPILLOVER

There are already some ominous signs in high-end real estate.

The market for apartments worth $4 million or more has become noticeably quieter in recent weeks, said Donna Olshan, president of Olshan Realty.

"This is the kind of market where the discretionary buyer might pause," she said. But more modestly priced apartments, like one-bedrooms for $600,000 or so are selling well, she added.

The pain may be worse in the Hamptons, a string of tony towns on Long Island where many rich New Yorkers have beach homes. The extent of the damage will not be known until early next year when more deals usually get done.

"We are heavily dependent on Wall Street," said Stuart Epstein, a managing director at Devlin McNiff Halstead Property in East Hampton.

For now, prospective buyers and renters are taking a 'wait-and-see' approach until they know how big their bonuses will be, he said.

Veteran caterer Peter Callahan, whose namesake company has catered many Wall Street events, said that so far this year business is up but he is still not sure how the year will end. Parties are less lavish nowadays because no one wants to look wasteful, least of all public companies, he said.

"That dancing in the end zone party is gone, and I don't see that coming back anytime soon," Callahan said.

Still, there are some positive signs.

In the past 10 days, U.S. stock prices have recovered a big chunk of the losses they suffered in recent months -- and luxury retail executives say that in New York, the Dow Jones industrial average can never be ignored as a proxy for consumer confidence among the well-heeled.

The sheer extent of the wealth in New York often acts as a buffer to economic blows. There are about 7,720 people in the area with a net worth of at least $30 million each, according to research firm Wealth-X.

DREAM CARS

Generally, small businesses that serve New York's affluent are not seeing an immediate pull back.

Upscale Manhattan travel agency Artisans of Leisure reports that business is strong, but that people are nonetheless being deliberate before they spend.

"People are really thinking hard about what they're purchasing and that what they're purchasing is special," said Ashley Isaacs Ganz, the agency's chief executive.

Businesses that serve seekers of luxury who don't necessarily want to make a large financial commitment are benefiting from such caution.

Gotham Dream Cars rents cars such as a Porsche 911 to a Rolls Royce for $600 to $2,200 a day and is doing great business, its founder and president Noah Lehmann-Haupt said.

"People realize the world isn't collapsing and they splurge and rent a car," said Lehmann-Haupt.

RESILIENT LUXURY

Some retailers, like Saks and luxury jewelry chain Tiffany & Co are particularly dependent on strong New York sales. Saks' Manhattan flagship store makes up more than 20 percent of company sales, while Tiffany up the street gets 8 percent from its famed store on Fifth Avenue. Representatives from the two companies declined to comment.

Earlier this week, consulting firm Bain & Co raised its luxury sales growth outlook for 2011, saying demand is stronger now than it was in spring.

And international tourists, particularly from China and Brazil, have been flocking to New York's high end stores and snapping up pied-a-terres since the recession, helping counter a slowdown in spending by Wall Street executive.

As it does every year, Neiman is betting that the rich will continue to splurge. The upscale department store on Tuesday presented its annual Christmas book, featuring items like a $45,000 ping pong table by Tom Burr, an 18-foot diameter yurt for $75,000 and a $420,000 international flower show tour for 10.

But while, luxury in New York has proven resilient, experts said an endless onslaught of scary headlines about layoffs and market plunges, could change that.

"It has a snowball effect on morale," says Jean-Marc Bellaiche, senior partner and managing director for the Boston Consulting Group.

(Reporting by Phil Wahba and Jilian Mincer. Edited by Martin Howell)

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