Numbers Game

Third quarter gross domestic product increased at an annual rate of 1.6 percent according to advance estimates from the Bureau of Economic Analysis. This was a slowdown from 2.6 percent in the second quarter. "Real" estimates are in chained (2000) dollars.

Inquiring minds might be wondering whether or not we are headed for a Goldilocks landing or a recession so let's dig a bit into the numbers.

Release Highlights

• The deceleration in real GDP growth in the third quarter primarily reflected an acceleration in imports, a downturn in private inventory investment, and a larger decrease in residential fixed investment.
• Motor vehicle output contributed 0.72 percentage point to the third-quarter growth in real GDP after subtracting 0.31 percentage point from the second-quarter growth.
• The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.0 percent in the third quarter, compared with an increase of 4.0 percent in the second.
• Excluding food and energy prices, the price index for gross domestic purchases increased 1.9 percent in the third quarter, compared with 2.9 percent in the second.
• Durable goods increased 8.4 percent, in contrast to a decrease of 0.1 percent.
• Nondurable goods increased 1.6 percent, compared with an increase of 1.4 percent.
• Private businesses increased inventories $50.7 billion in the third quarter, following increases of $53.7 billion in the second quarter and $41.2 billion in the first.
• Personal saving -- disposable personal income less personal outlays -- was a negative $46.8 billion in the third quarter, compared with a negative $54.6 billion in the second. The personal saving rate -- saving as a percentage of disposable personal income -- increased from a negative 0.6 percent in the second quarter to a negative 0.5 percent in the third.
• Implicit price deflators (table 4) were 3.3 for Q1, 3.3 for Q2, and 1.8 for Q3.

Contributions to Percent Change in Real GDP

• Motor vehicles and parts added .60 in Q1, �.04 in Q2, and .41 in Q3
• Furniture and household equipment added .65 in Q1, .10 in Q2, and .21 in Q3
• Motor vehicle output (release addenda) added .12 in Q1, �.31 in Q2, and .72 in Q3

Car Sales

AutoNation reported new-car sales fell by 7.6% in the third quarter.

The number of new cars sold by the nation's largest automotive retailer dipped 7.6 percent in the third quarter that ended Sept. 30 from a year ago. Yet that was less than the 11 percent fall in new-vehicle retail sales in the United States that CNW Marketing/Research has reported.

AutoNation blamed the drop on higher interest rates, a softening economy and the generous discounts that boosted sales in the third quarter last year.

"There's no question the consumer has been knocked back on their heels," said AutoNation Chairman and Chief Executive Mike Jackson. "The economy is clearly in transition. We don't know if it's going to be a hard landing or a soft landing for the economy."

Car and Driver reported GM's Third-Quarter Sales Slide 3 Percent.

MSNBC is reporting Ford loses $5.8 billion in the third quarter.

The nation�s second biggest automaker said its loss widened to $5.8 billion in the third quarter, weighed down by the costs of its massive restructuring plan. Company officials also predicted things would get worse in the fourth quarter, as market share drops and Ford pays for further plant closures and restructuring costs.

Dearborn-based Ford�s turnaround plan aims to cut $5 billion in costs by the end of 2008 by slashing 10,000 white-collar workers and offering buyouts to all of its 75,000 unionized employees.

The loss including restructuring costs was Ford�s largest quarterly loss since the first quarter of 1992, when the company lost $6.7 billion due mainly to accounting changes.

Excluding charges, Ford would have lost $2 billion on its North American automotive operations in the latest quarter. It blamed its decline in market share, intense competition, a drop in U.S. and European sales and a market shift away from its high-profit trucks and sport utility vehicles.

A Mirage, a Fluke, or Something Else?

A quick read of the above might cause the inquiring mind to conclude the .72% added to the GDP for motor vehicle output was a mirage related to the ending of discounts by GM as well as channel stuffing of dealers with cars that were simply not sold.

But is "mirage" even the right word?
Bloomberg is reporting U.S. Statistical Fluke Exaggerated Growth, Will Be Reversed.

An unexpected increase in auto production last quarter was a statistical fluke that will be reversed, making current U.S. economic growth even weaker, according to a former Commerce Department economist.

Last quarter's annualized 26 percent increase in auto production shocked Joe Carson, now director of economic research at AllianceBernstein LP in New York. Without the gain, the economy would have grown at an annual rate of 0.9 percent, not the 1.6 percent the Commerce Department reported today.

Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, called the output numbers ``the most unbelievable detail'' in the GDP report.

The composition of growth last quarter, which included an unexpectedly large accumulation of inventories, also prompted other economists to reduce estimates for fourth-quarter growth. An increase in inventories overall suggests manufacturers may need to trim production this quarter.

Is "Fluke" the right word?

Nouriel Roubini is asking Was Q3 GDP growth manipulated upwards because of the coming elections or is the US government clueless about measuring output?

This mismeasurement of motor vehicle production in Q3 is highly suspicious coming about ten days before the US mid-term elections. It is also highly suspicious as it is not clear how the Bureau of Economic Analysis (BEA) at the Department of Commerce could have made such a gross mistake when seeing an alleged 26% increase in auto production that was patently at odds with many facts. During Q3 all the major US automakers - Ford, GM, Chrysler - announced production cuts for both Q3 and Q4. So, how could the folks at BEA argue and estimate that production went up by a whopping 26%? These data also do not make any sense as the Federal Reserve Board data on automotive production in Q3 show a sharp fall in production of motor vehicles of 12% (see http://www.federalreserve.gov/releases/g17/Current/g17.pdf, Table 1).

So how come the FRB data show a -12.0% sharp drop in production while the BEA estimates show an incredible 26% increase in production in Q3? This is altogether fishy. If one wants to give the benefit of the doubt to the usually non-partisan statisticians at BEA one would have to conclude that they were clueless about estimating motor vehicle production and they used a wrong price index to deflate the value of auto sales. How could they make such a gross mistake and believe in their estimate 26% growth figure - when all news headlines for months have been presenting the bad news about the plight of US automakers - is anyone's guess?

Whether manipulated or not, auto sales are extremely likely to become a future drag on GDP. Furniture and other durable goods numbers are also suspect given the slowdown in housing.

GDP Deflator

Let's assume for the moment that the auto numbers were accurate. It still took a mammoth decrease in the price deflator from 3.3 in both Q1 and Q2 to 1.8 in Q3, to achieve the anemic 1.6 growth that was reported. Without that downward move in the deflator, GDP would have been basically flat. To the extent that prices rose more than indicated by the deflator, third quarter GDP is overstated.

Inflation Measures

Kevin Depew on Minyanville offered this succinct viewpoint on the CPI and Personal Consumption Expenditures (PCE).

Core inflation is supposed to measure the underlying trend in inflation, but it's difficult to parse out in real time which "pieces" of inflation are fleeting or transient. The Fed has "tweaked" the Consumer Price Index measure many times over the past decade to try and get to an inflation measure that is more durable, less transitory.

But until recently no one had tried to apply any of those "tweaks" to the Personal Consumption Expenditures, which is the Federal Reserve Board of Governors' preferred inflation gauge in the first place.

A paper from the Dallas Fed looks at the technique in question, called the "trimmed mean" technique, as applied to the PCE. An interesting comment on inflation measures contained in that article goes directly to the difficulty of measuring inflation in the first place, whether one looks at core or an overall measure. It's not simply a matter of standing back and looking at all the prices, averaging them up and printing a number.

"Rather, consumers pay for the services in the form of lower interest rates earned on deposits. Imputing prices for such services is an inexact science and it is not clear to what extent central banks should pay attention to the behavior of these imputed prices when reckoning the overall pace of inflation."

Imputed prices raises all sorts of questions. Some argue that the Fed deliberately understates inflation. Others argue that they are deliberately overstating inflation to fight deflation.

I don't believe they are deliberately doing anything except functioning as a group of bureaucrats making decisions within a bureaucratic framework. That in and of itself should be quite enough to ensure as much dysfunctionality as anyone could want.

Of course there is no such thing as an 'average' or 'aggregate price' in the first place. The entire exercise of trying to measure fluctuations in a basket of goods and services is futile. The process is made even more difficult because the bureaucrats attempt to measure hedonics (quality improvements) when making their claims. I talked about this in Inflation: What the heck is it? and on Mises.Org in Inflation Monster Captured.

The important point above is to not underestimate the massive amount of dysfunctionality created when basically useless numbers are essentially pulled right out of thin air by a bunch of government bureaucrats.

Home Sales

Here is a little "numbers gem" spotted by Calculated Risk.
Historically, the National Association of Realtors (NAR) used 11.43 as their Seasonal Adjustment for September. This year they used 11.73.

The NAR reported 6,180,000 SAAR.
Using 11.43 results in a SAAR of 6,020,000.
On that basis sales fell over 16% from 2005.
Here is the actual report: September Existing-Home Sales Ease, Setting State for Stable Market

For Alternate Headlines and additional information see Calculated Risk's posts NAR: Sales Down, Prices Down and NAR Adjustment.

Grossly Distorted Procedures

Previously I proposed changing the meaning of GDP from Gross Domestic Product to Grossly Distorted Procedures. If one discounts third quarter motor vehicle output, and subtracts various hedonics and imputations, GDP was easily negative for the third quarter (and perhaps substantially so). If one believes the published price deflators are off, GDP will look even worse.

I questioned GDP on Silicon Investor this past weekend and was astounded to receive the following reply:

If you want to make money you better believe the
GDP
CPI
Unemployment Numbers

Because what you personally think is "real" is irrelevant.

Not only was I stunned to find someone that actually believes all those numbers, I was equally stunned to find a person that actually thinks you have to believe those numbers to make money. It is of course the reaction to the numbers that matters. Whether or not anyone actually believes them is irrelevant.

In the meantime I notice that almost no one is talking about the yield curve, the one set of numbers that someone can and should believe. The Yield curve is what it is, and it is quite inverted, signaling a recession. Forget Goldilocks, the next recession will be an extremely hard affair, led by a falloff in consumer spending, rising unemployment, and a continued slowdown in housing.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Book-Event of the Moment

David Rockwell, an architect known as much for set design as for architecture and interiors, and whose work is self-described as a "quirky pluralism", has a new book.

Spectacle is "a visual essay documenting the notion and history of spectacle, those public performances and happenings that galvanize hordes of people and, if only for a brief moment, express the culture of our time in mass participation." Here's a taste. In its documentation of images influencing the author/architect it reminds me of John Pawson's popular book Minimum. Not coincidentially, both are published by Phaidon Press.



To celebrate the publication of Rockwell's book, The Architectural League (with the Municipal Art Society�s Urban Center Books) is hosting a panel discussion on Wednesday, November 1 with David Rockwell and Bruce Mau, moderated by Chee Pearlman. It's at 6:30 p.m. at the Baruch Performing Arts Center, 55 Lexington Avenue.

Half Dose #31: Z-House

As an extension of this week's dose by Denmark's 3XN, here we feature the work of that office's former competition design managing architect Eve Harlou.



The Z-House is a 700 sm (7,500 sf) single-family residence in Risskov, Denmark.



The design is composed about an S-curve, visible in model above but also this elevation.



This S-curve continues into the arrangement of rooms in the floor plan, whereby outdoor "rooms" are created, especially towards the back of the house.



A feature wall abutting the stair creates an anchor for the house, a kind of eye of the swirling around it.

Links:

:: Eve Harlou
:: 3XN

Monday, Monday

My weekly page update:

Glass Museum in Ebeltoft, Denmark by 3XNielsen A/S.

The updated book feature is Wallpaper* City Guide: New York and New York's 50 Best Places to Find Peace and Quiet by the editors of Wallpaper* and Allan Ishac, respectively.

Some unrelated links for your enjoyment:

Eco Tecture
"Musings on Sustainable Urban Development & Design," from Chicago.(added to sidebar under blogs::sustainability)

vision42
"A citizens' initiative to re-imagine and upgrade surface transit in Midtown Manhattan, with a low-floor light rail line running river-to-river along 42nd Street within a landscaped pedestrian boulevard."

American Cities
Catherine Opie photographs at The Morning News.

Today's archidose #42

Habitat '67 by hyfen
Habitat '67 by Moshe Safdie.

To contribute your Flickr images for consideration, just:

:: Join and add photos to the archidose pool, and/or
:: Tag your photos archidose

Canon PowerShot SD900

The Canon PowerShot SD900 stuns with its shiny, titanium ultracompact body and gigantic 10-megapixel sensor. The SD900 takes the diminutive size of cameras like the SD550 and 700IS, and stuffs it full of megapixels. Canon is all about 10-megapixel cameras this season, it seems, and the SD900 is a remarkable addition to this ever-growing class of cameras.
Specifications

* 10 megapixels
* Movie mode with sound
* JPEG file format
* 3x optical zoom / 4x digital zoom
* Auto focus, auto and manual exposure
* 2.5-inch LCD
* Secure Digital card storage (32MB card included)
* ISO 80-1600
* Lithium-ion battery

Dwell on Design

Dwell on Design: Coming to Palm Springs December 1-3 2006
Exploring the past, present, and future of modern architecture and design.



FOR IMMEDIATE RELEASE...October 27, 2006...San Francisco, CA...Dwell has announced plans for Dwell on Design: Palm Springs to be held at the Hotel Zoso in Palm Springs December 1-3 2006.

Known as a Mecca of modern design and boasting one of the highest concentrations of important mid-century modern architecture in the United States, Palm Springs is the ideal location to address issues of preservation, sustainability, and the future of modern living. The weekend will be packed with information and activities including two very special cocktail receptions, a conference, an on-site modern showcase, a film premiere, and exclusive home tours.

A DAILY DOSE OF ARCHITECTURE DISCOUNT!
A Daily Dose of Architecture readers who register for Dwell on Design Palm Springs will receive a $75 discount off of the full conference ticket price. Use A Daily Dose of Architecture code DOSE when registering.

Register at www.dwell.com/dwellondesign

Today's archidose #41

ArcAm west by mauOne
ArcAm in Amsterdam by Rene van Zuuk.

To contribute your Flickr images for consideration, just:

:: Join and add photos to the archidose pool, and/or
:: Tag your photos archidose

Treasury Talk

Michael McDonald, writing for Bloomberg is talking about What Fidelity Knows About Bernanke That Gross Doesn't.

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., says Treasuries maturing in less than two years will lead a market rally next year as the Federal Reserve lowers interest rates.

George Fischer, who oversees $22 billion in debt at Fidelity Investments Inc., the world's largest mutual fund company, says short-term U.S. government debt will lose the most because the central bank, which meets this week, will keep rates unchanged, possibly through next year.

"We're at a very odd point here in bond market history," Fischer said in an interview from his Merrimack, New Hampshire office. "The Fed is being very clear that they do not want to ease soon, but the bond market is saying, 'we know better'".

�The conflict may explain why the biggest quarterly rally in four years is unraveling. Fund managers including Federated Investors say they are less convinced Fed Chairman Ben S. Bernanke will lower borrowing costs as soon as the first quarter of 2007. The latest government report showed stronger-than- anticipated job growth and a jump in consumer confidence.

��We're at a very odd point here in bond market history,� Fischer said in an interview from his Merrimack, N.H., office. �The Fed is being very clear that they do not want to ease soon, but the bond market is saying, �we know better���

�Goldman Sachs Group Inc. and Merrill, two of the 22 primary dealers of U.S. government bonds that trade with the Fed, agree with Gross. They forecast the central bank will lower its target to 4% next year and that two-year notes will lead a rally. Merrill forecasts that yields on the debt will fall to 3.8%, while Goldman predicts 4.2%.

�Strategists at Lehman Brothers Holdings Inc. and RBS Greenwich Capital Inc. say Fidelity is right. There is a growing likelihood the Fed will leave the overnight rate unchanged, further erasing the advances that pushed two-year note yields to eight-month lows, they say.

�Fed Vice Chairman Donald Kohn warned investors on Oct. 4 not to underestimate the central bank's inflation concerns. He said he's more worried about a pickup in consumer prices than a slowdown in growth. �Further upward movements in inflation would be very adverse to the economy,� he said�

�The decline in home prices after a five-year real estate boom will cause the economy to slow and force the Fed to lower rates to avoid a recession, McCulley wrote on Pimco's Web site on Oct. 19. �To think otherwise after a bubble is to not understand bubbles.�

�Gross said in an Oct. 10 interview that he is most bullish on six- to 18-month Treasuries. He boosted his holdings of Treasuries and bonds of federal agencies to 12% in September, the highest since January. His $97 billion Total Return Bond Fund has gained 2.5% this year�

��The market is starting to get the sense that maybe the slowdown is not going to be as severe and the Fed is not going to ease as soon,� said Donald Ellenberger, who oversees $5.5 billion as co-head of government and mortgage-backed securities group at Federated Investors in Pittsburgh�

�Fischer is avoiding two-year notes. Instead, he is buying 10-year Treasuries and securities maturing in less than six months. His $5.2 billion Fidelity Government Income Fund, which holds at least 80% of its assets in government securities, has earned 2.16% so far this year, according to Fidelity data.

"If you must buy, buy 10 years," said Amitabh Arora, head of U.S. interest-rate strategy in New York at Lehman Brothers. "Do not buy the short end of the yield curve."

Analysis

About the only thing that is clear from the above article is that everyone is talking their book. Not only that, but the book is suspect. Let's start with a bit of reality, moving on to the ridiculous, and finally to the absurd. In all cases I am accepting the statements as presented above.

The Reality

• Bill Gross's $97 billion Total Return Bond Fund has gained 2.5 percent this year.
• Fischer's $5.2 billion Fidelity Government Income Fund has earned 2.16 percent so far this year.

Enquiring minds might be wondering how it is remotely possible for a government bond fund to only be up 2.16 to 2.5% so far this year. After all, anyone parked in 3-6 month treasuries would be up 5% annualized or so. Anyone playing longer durations that caught the market bottom in May would be up substantially more than that. Something is seriously wrong with this kind of performance when someone can do much better by buying treasuries and holding them, or simply by parking money in CDs. Short term government backed CD's are yielding 5.5% at some banks.

Could the answer be expenses and management fees? If so, exactly what performance are investors paying for? What are investors getting in return?

If one is going to pay a management fee, one might expect better management. Perhaps the problem is the nature of the funds themselves. There are short term funds, intermediate term funds, and long term funds. Exactly what is there to manage in those funds that remotely merits fees approaching 1% or even higher? After all, the investor is supposed to pick the duration correctly himself, then within a limited range, the fund manager takes as much as 25% off the top for "managing" that decision. Give me a break. How about a "managed treasury fund" that allows management discretion to do the task at hand: manage money. Is that too tough to ask?

If there was such a fund and IF the manager did the task at hand very well, perhaps that person/management team would be worth 1%. The reality of the picture is that close to 25% of the gains in these bond funds go up in smoke in management fees, with enquiring minds asking "For What?"

The Ridiculous

• According to Federated Investors "The latest government report showed stronger-than- anticipated job growth and a jump in consumer confidence."
• "Strategists at Lehman Brothers Holdings Inc. and RBS Greenwich Capital Inc. say Fidelity is right. There is a growing likelihood the Fed will leave the overnight rate unchanged, further erasing the advances that pushed two-year note yields to eight month lows".

Enquiring minds might be wondering exactly what "stronger-than- anticipated job growth" Federated Investors is talking about. Job growth this year has been extremely slow. I talked about jobs back in August in Strike Four after the fourth consecutive miss vs jobs expectations. I talked about jobs again on October 10th in A Discrepancy in Jobs? The fact of the matter is that job gains during this entire recovery have been very weak and both GDP and jobs have been tailing off this year.

Even more odd is the expectation that "A growing likelihood the Fed will leave the overnight rate unchanged, [will] further erase the advances that pushed two-year note yields to eight month lows" while not expecting the same to happen to ten-year notes. If two year treasuries get hammered it is extremely likely that ten year notes will suffer even more.

The Absurd

• "If you must buy, buy 10 years," said Amitabh Arora, head of U.S. interest-rate strategy in New York at Lehman Brothers. "Do not buy the short end of the yield curve."
• "Short-term U.S. government debt will lose the most because the central bank, which meets this week, will keep rates unchanged, possibly through next year.", said George Fischer at Fidelity.

I am simply flabbergasted at the above statements. Yes, there are reasons to buy 10 year treasury notes, but fear of being punished in six month bills is simply not on the list. The reasons to buy the long end are because the yield curve is inverted, the economy is weakening led by housing, and because of expectations of future cuts by the Fed.

Moving along, can someone tell me how it is possible that short term debt "will lose the most" if rates stay unchanged? That statement is so blatantly absurd I am wondering if it was a misquote. Yet, in context of other statements made by Fischer, it is clear he is buying 10-year Treasuries and very short term debt (under 6 months) while shying away from 6 month to 1 year timeframes. How can you lose on 6 month to 1 year durations if rates stay unchanged? All one has to do is simply roll the bills over as they mature and sit back and collect over 5% yield. If for some reason yields skyrocket, the long end of the curve (ten year and above) would likely get hammered the most. On the other hand, if treasuries put in a massive rally, the long end may gain the most, but remember the premise presented was that "the central bank will keep rates unchanged, possibly through next year".

Is this a case of talking one's book so much that a person needs to find silly statements to support it? Regardless, put me in the group with Goldman Sachs and Merrill that agrees with Pimco. I am not exactly a huge fan of McCulley, but his statements: "The decline in home prices after a five year real-estate boom will cause the economy to slow and force the Fed to lower rates to avoid a recession. To think otherwise after a bubble is to not understand bubbles." are among the few statements in the Bloomberg article that make any sense.

Now, can we just ask a bond fund to return a reasonable yield off the housing slowdown premise or is that expecting too much? After all, a simple strategy of buying six month notes and rolling them over is beating the pants off of all of those fund managers all year long. Anyone who caught the May top in yields on longer term durations is doing far better than that.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Canon PowerShot SD40

The Canon PowerShot SD40 is intended as a small, pocket camera for photographers who would rather not worry about a big, bulky camera as they hit the town. The SD40 also comes in four fun colors: precious rose, noble blue, twilight sepia, and olive gray (or red, blue, black-ish, and silvery). It's got a nice 7.1 megapixel sensor, great for such a tiny little camera, but an underpowered 2.4x digital zoom, probably figuring that photos taken with this camera will be of the party-closeup variety. $350 seems a little steep for this kind of camera, though, and DCHQ suggests shopping around a bit before deciding on this little party favor.
Specifications

* 7.1 megapixels
* 2.4x optical zoom / 4x digital zoom
* Auto focus, auto and manual exposure
* JPEG file format
* Movie mode with sound
* ISO 80-1600
* 1.8-inch LCD
* Lithium-ion battery
* Secure Digital card storage (16MB card included)

Canon PowerShot G7

The Canon PowerShot G7 is a sturdy, advanced camera for serious users, with a large 10-megapixel sensor and 6x optical zoom. The G7 replaces the Canon G6, now about two years old, and is a nice middle ground between point-and-shoot cameras and digital SLRs. The G7 features a "shift-type" form of optical image stabilization, using tiny, internal gyroscopes to compensate for hand movements and other jitters that may cause blurring. Keep in mind, the G7 does not feature the RAW file format, so if you're looking for a real heavy-duty shooter, you'll have to look to SLRs like the Digital Rebel XTi/400D.
Specifications

* 10 megapixels
* 6x optical zoom / 4x digital zoom
* Auto focus, auto and manual exposure
* "Shift-type" image stabilization
* Movie mode with sound
* JPEG file format
* ISO 80-1600
* 2.5-inch LCD
* Secure Digitial Card storage (32MB card included)
* Lithium-ion battery

P.A.N.

P.A.N. stands for [progressive architecture network], an exhibition opening tomorrow at the Frederieke Taylor Gallery in New York. Curated by Winka Dubbeldam and Helene Furjan, the exhibition includes:

The exhibition will feature the work of five, young, international architecture firms that share an attitude toward architecture rather than a common style or formal doctrine...mobile and connected, operating on multiple continents simultaneously and moving in and out of collaborations and affiliations at a fast pace.

A reception will be held tomorrow from 6-8pm at the gallery's space at 535 West 22nd Street in Chelsea.

Earnings, Confidence, and Boxes

Countrywide reported third-quarter profit rose 2 percent, less than analysts expected, as demand for home loans slumped. The company's shares surged higher on plans to lay off more than 2,500 employees and buy back up to $2.5 billion of stock, and as higher profits in other units, including Countrywide Bank, cushioned the mortgage decline.

It seems the street just can�t get enough bad news. CFC rallied 5% as investors warmly welcomed news of more layoffs. CFC is already talking about the 2008 recovery. It's never too early to do that. �By 2008, surviving players will be positioned for �one hell of a year�� said CEO Angelo Mozilo.

Ford lost $5.8 billion, or $3.08 per share, during the 3rd quarter this year. Sales fell 10% to $36.7 billion. Excluding special charges, Ford posted a loss from continuing operations of $1.2 billion or 62 cents per share. Last year during the same period, Ford posted a net loss of $284 million, or 15 cents per share. Ford has now lost $7.2 billion for the year. 3Q output was down 11% vs. 17% drop in overall North American sales and a 25% drop in F-series pickups. The company plans 4Q North American output cuts of 21%.

Ford called those results �clearly unacceptable�. Shares of Ford are also up since the announcement. Yes those results are �unacceptable� but what is Ford doing about it? Ford�s �Way Forward� plan, calls for eliminating 44,000 hourly and salaried jobs, closing 16 factories and making other changes by 2012. Part of the �Way Forward� is to Kill Taurus and along with it a lot of jobs at US assembly plants

To be sure there have been some earnings successes with Apple and Google and others, but in the end how many jobs are those companies going to be able to provide to make up for housing and manufacturing related losses? People need jobs to be able to afford their McMansions, not just any jobs but good jobs.

Is tech the savior?

I think not. A Challenger Report shows IT job cuts up sharply in Q3.

Just three months after U.S. IT job cuts reached their lowest levels since 2000, a new study has found that planned workforce cuts are again heading upward as recent corporate restructuring, mergers and other events are reducing the number of available jobs.

The study, released today by Chicago-based global outplacement consultancy Challenger, Gray & Christmas Inc., found that planned IT job cuts increased 74% in the third quarter to 50,957, up from 29,226 this past June 30, when the number of IT job cuts had dropped to its lowest level since the third quarter of 2000.

The seven-page study, "Tech Spending Slowdown on the Horizon?" concludes that the third-quarter job cuts are attributable mostly to cost-cutting and restructuring, which accounted for 33,373, or 65%, of the cuts in the quarter that ended Sept. 30. Overall for the year, corporate mergers have been cited for 29% of the tech job cuts through September, according to the study. Also affecting job cut levels are business competition, reduced sales and product demand, company closings and outsourcing.

Other related data from Challenger shows that technology companies have announced plans to hire just 5,764 new workers in the third quarter, down from 14,090 in the second quarter, according to the study.

In the Box

Still more evidence is piling up that suggests the current slowdown will go far beyond a housing bust. I received an email just yesterday from the CFO of a major North American cardboard box manufacturer. He wished to remain anonymous so I will honor that request.

Here goes from �Mr. Jack I. Box�:

Mish, please do not use the name of my company but I thought you might be interested in this letter. I have received four other letters in the last 6 weeks that indicate pricing stress and volume stress from major OEM's. Some fault the housing market and others don't know who to fault for the fall off of business.

I am a CFO for a box manufacturer. Our business, in my opinion, is a very good barometer of all business. Everything comes in a box. Tomatoes, 3COM Switches, television sets, hot water heaters, and everything from hot sauce to game boys. If these companies are feeling the stress with cheap foreign labor I see a major problem in the future.

The following letter was from **** Water Heaters. We have receive similar letters from Sanyo (Energy divisions), Panasonic (Power tool division) and Sony (Television ). All of our furniture accounts are gone except for Douglas Furniture.

Dear Supplier:

I regret to inform you that there is a strong likelihood that beginning Wednesday October 18th we will be asking you to reduce or stop shipments on all products associated with The Home Depot. This could represent up to 50-60% of your supplied parts volume. The details will be communicated to you through each of the Planners at the three plants.

This action was necessary due to the large number of increases that we incurred from our supply base.

I understand that this will have a profound impact on your business.

Please bear with us as we work through this.

Sincerely,
�John Doe� Purchasing Manager

Mr. Box�s company not only makes custom and generic boxes but on occasion also boxes up stuff for clients and ships them out. As far as Home Depot goes the problem can be on either end so do not assume there is any problem with Home Depot itself. I had a followup question to Mr. Box about the Home Depot situation and here was his reply:

More than likely Home Depot and **** Water Heaters came to a standoff on price increases. What I am not sure of yet is whether this is being forced due to a reduction in **** Water Heaters sales volume with Home Depot.

We have also had a major brand TV manufacturer (Not Sony) reduce all open PO's by 50%. I must assume this is a lack of demand for their product as we have not lost any of this business to a competitor.

CEO Confidence Survey

The Conference Board is reporting The Chief Executives' Confidence Measure Fell to 44 in the Third Quarter

The Chief Executives' Confidence Measure, which had fallen to 50 in the second quarter of 2006, fell to 44 in the third quarter, The Conference Board reports in its latest survey of CEOs. A reading of more than 50 points reflects more positive than negative responses. The survey includes about 100 business leaders in a wide range of industries. This is the first time the Measure has dipped below 50 in nearly five years, when it was at 40 in the final quarter of 2001.

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "The lack of confidence expressed by CEOs is a result of the recent slowdown in economic growth, combined with expectations that this lackluster pace of growth will carry over into the beginning months of 2007."

CEOs' assessment of current conditions weakened further in the third quarter. Now, only 16 percent of CEOs claim the current economic environment is better, down from about 27 percent in the second quarter. In assessing their own industries, business leaders were less upbeat. Approximately 28 percent say conditions are better, compared to 40 percent in the last quarter.
CEOs are also less optimistic about the short-term outlook. Now, only 16 percent of business leaders expect economic conditions to improve in the coming months, down from 21 percent last quarter. Expectations for their own industries were also less positive, with 20 percent anticipating an improvement, down from 31 percent last quarter.

Of Boxes and Confidence

Given this is just one box manufacturer�s story it may not be possible to draw conclusive proof but once again the anecdotal evidence is piling up. Mr. Box�s story is consistent with what CEOs have been saying in the Confidence Survey. I never thought about it much before today but boxes simply have to be a leading indicator, and that leading indicator along with CEO confidence is pointing South.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Half Dose #30: Urban Cactus

Urban Cactus is a housing project in the Vuurplaat section of Rotterdam by UCX Architects / Ben Huygen and Jasper Jaegers and done for Vestia Rotterdam Feijenoord/Estrade Projecten.



Due to its siting at the end of harbor, the architects chose to conceptualize the project as belonging to the "green nerve" rather than the surrounding urban structure.



They placed the 98 residential units on 19 floors, using the pattern of outdoor spaces to determine the overall appearance of the project.



The slightly irregular pattern alternates these outdoor spaces to create what are in effect double-height spaces. Each unit then receives more sunlight than a typical stacked composition.



Also the terrace area might be equivalent to a constant depth extended around the perimeter (say two meters), but their configuration creates larger "rooms" for gardening and for enjoying the outdoors and the city views.

Links:

:: UCX architects
:: Estrade

Chicago Natural Resources Conference Highlights

On October 13th & 14th I attended the Chicago Natural Resources Conference. If you have not been to a mining/minerals or natural resources conference you owe it to yourself to do so. I had the pleasure of sitting on two Q&A panels along with Bob Moriarty of 321gold.com, Clyde Harrison of Brookshire Raw Materials Group, Jason Hommel of Silver Stock Report, Michael Berry of Investing Success, Dave Skarica of the Skarica Letter, Peter Grandich of the Grandich Letter, and several other prominent speakers. I was certainly the junior member of that group.

Many of the speakers on the panel did not need to be there by any means, but they graciously donated their time and knowledge. Where else can you go and fire off questions to well respected industry experts like Bob Moriarty or Clyde Harrison for free? The room should have been full but there were some empty seats.

Does anyone remember the summer of 2005? People were camping out overnight in Florida and drawing lottery tickets as well just for the privilege of buying condos at absurd prices. Others were paying upwards of $500 to listen to Donald Trump talk for 30 minutes at seminars instructing people how to accumulate wealth by flipping houses. Meanwhile a real chance at building wealth by accumulating assets when they are cheap goes largely unheeded.

At one point in the conference, Rich Radez, the organizer of the event said something to the effect of �When people are paying $500 to attend natural resources conferences and the room is 5 times this size, please remind me to sell�.

That analogy might tell you just how much closer we are to the beginning of this move than the end of it. Instead of learning about building wealth in what is likely to be a very long bull market in resources fueled by demand from China, India, and other emerging markets, the masses were in a deadly embrace, chasing the end of a housing bubble that has now burst.

Everyone in attendance was captivated by the �Market Views� discussion given by Bob Moriarty and Rich Radez, as well as the lunch discussion of Clyde Harrison on �The Big Picture� otherwise known as China. There were over 20 resource companies giving slideshow presentations and many additional exhibitors. Attendees had the chance to talk to CEOs of various junior mining and exploration companies of all kinds (not just precious metals), pick up free literature, and hobnob with industry experts willing to share their knowledge.

The presentations that most caught my eye were given by Douglas Lake Minerals, Houston Lake Mining, and Hard Creek Nickel. I am now making plans to tour all three operations and have a tentative schedule to visit Douglas Lake Minerals early next year.

Douglas Lake Minerals

Douglas Lake Mineral's (DLKM) properties are in Tanzania, a very poor but politically stable, mineral rich country in Africa. Gus Sangha and Byron Hampton made the presentation. They talked about the country, its people and the mine. Drilling is currently in progress. The first core sample, 200 meters in length, hit pay dirt revealing visible gold.

Click on the following image to see enhanced resolution.



Obviously these images represent a hand picked sample that is certainly NOT representative of the entire core length by any stretch of the imagination.

Still, visible specs of gold in core samples are rather uncommon, and chunks of gold are extremely rare.

Byron Hampton, VP of Investor Relations, mentioned that 3 more core samples are currently planned and/or underway, 60 meters out from the strike, 140 meters out from the strike, and 240 meters out from the strike. Those are unusually large distances which shows the confidence Douglas Lake has in the size of the strike zone. Results of those drillings are expected to be announced by the end of November, possibly sooner. Email Byron Hampton if you wish to request additional information.

Hopefully the above example shows how conferences like these are a good way to find out about exciting happenings in the world of junior miners and explorers. I would not have found out about any of these other companies had I not attended. There were many good presentations. I simply do not have time to write them all up in a single blog. Those wishing additional information can click on the following links.

Conference Presenters (in order of appearance)

• Minera Andes
• Ascendant Copper
• Houston Lake Mining
• Pele Mountain Resources
• Apolo Gold & Energy
• Fisher Watt Gold
• Largo Resources
• Hard Creek Nickel
• Dumont Nickel
• MetalCORP Ltd
• Crystallex International
• Etruscan Resources
• Queenstake Resources
• Candente Resource Corp
• Logan Resources
• Douglas Lake Minerals
• Palladon Ventures
• Soho Resources
• Kenrich Eskay Mining
• International Wayside Gold

Other exhibitors

• Canaco
• Tradewinds
• Sterling Mining
• CZM Capital Corp
  

For what it's worth, (and possibly nothing), I am particularly interested in Canaco and Tradewinds from the above list.

Additional Notes

It took me over a week to figure out whether or not to present the above information and if so, how best to go about it. On the list of possibilities was simply doing nothing, starting a newsletter, charging a subscription fee to my blog, and many variations thereof. The newsletter idea was quickly discarded. There are arguably too many metal related newsletters already. A glance at the panel above should be proof enough, especially given that list is by no means all encompassing of available newsletters. Note too that I already have my own newsletter produced with partner Brian McAuley but is not specific to metals nor is it tailored to writing about junior mining companies.

I also made a personal commitment not to charge for my blog from the day it was launched. There is no good reason to change that stance now. Yet the amount of hours I spend writing without any compensation whatsoever keeps escalating higher and higher. That led me to consider the idea of doing more paid ads. Yes, the first ad of this nature will be for Douglas Lake. This of course puts me in the position of being accused of all sorts of things, most of which are not printable. Rest assured I am not going to take an ad for any company whose story I do not understand or believe. Nor will I accept ads for any company that I feel is not treating its shareholders fairly. Taking ads will also let me recover some costs that will occur when I start touring mines later this year or early next year.

I vividly remember the brouhaha that developed on the Motley FOOL not too long ago when I first put up banners for Elliot Wave. The discussion was intense to say the least. Yes, Prechter has made some horrid calls on gold and other things. But I use Ewave principles in some of my technical analysis and find the concept of waves quiet useful. I use it and I encourage those interested to find out more about it. If I did not find Ewave to be a useful tool, I would not have a banner for it. Yes, it is that simple.

Almost everyone by now understands that I am a Huge Housing Bear. Yet for some time now you have seen a banner on the right hand side of my blog for No Bull Mortgage. I have explained this twice now, the latest being Two Anecdotes.

The bottom line to all of this is simple: I made a decision that I can easily justify and I am running with it.

Disclaimer

Anything and everything written above is not and should not be considered as investment advice. Please consult your investment advisor before making any investment decisions. Furthermore I may or may not have a position in any companies I write about and I may or may not have a position in any company that I accept an ad for. I do pledge to the best of my abilities to only take ads from companies that I believe are legitimate endeavors, but mistakes can be made. Any actions that you take based on information or analysis printed above is ultimately your responsibility.

Final Thoughts

I am not sure if I can attain the lofty standard of integrity set by keynote speaker Robert McEwen former CEO of Goldcorp in his keynote address to the Denver Gold Forum, but it is my commitment to try. That integrity caused him to be banned from further Denver gold shows. If you have not yet read my take on his presentation please read Gold, Mortgages, & Bigger Things.

In the end, what investors need is for companies to protect and enhance shareholder value and ultimately for the interest of shareholders to be aligned with interests of the board. McEwen's keynote address shows we have a long way to go. Investors also need more discussion of ideas and more sharing of worthwhile information. Investors do not need another paid newsletter or another subscription based blog. This blog has been and will remain a free forum of discussion with a goal of sharing ideas and information about all kinds of economically related topics. The best way for me to accomplish that goal, while at the same time attempting to recover some of my costs in time, effort and dollars, was to start taking more ads. I have no doubt that I am opening myself up for more criticism over this decision, but over time I will strive to prove those critics wrong.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Monday, Monday

My weekly page update:

Juliana Curran Terian Design Center in Brooklyn, New York by hanrahanMeyers Architects.

The updated book feature is Hotel as Home: The Art of Living on the Road by Gary Chang.

Some unrelated links for your enjoyment:

ShantyWorld.com
"Observations & Commentary on all issues affecting Architecture, Urban Planning & Design...the Antidote to a world of McMansions, Starter Castles and other crimes against the Built Environment." (added to sidebar under blogs::architecture)

Archicad 10
Archicad 10 is free for students. Yes, free!

iMod
"A blog about Modern Home and Design." (added to sidebar under blogs::design)

Today's archidose #40

DSCF2506.JPG by schopaia
Handrail detail at the Figge Art Museum in Davenport, Iowa by David Chipperfield Architects.

To contribute your Flickr images for consideration, just:

:: Join and add photos to the archidose pool, and/or
:: Tag your photos archidose

The Easy Button / Pent Up Supply

This post is a followup discussion to Kool Aid & Krispy Kremes, a discussion I had with Mike Morgan at Morgan Florida on October 15th.

If you are hungry for donuts or thirsty for Kool Aid or simply have not read the above article it is a good lead-in for what follows. Following is Morgan's latest housing update he emailed me on Wednesday.

Mike Morgan:
Hi Mish,

My recent update on what we�re seeing in the housing market generated a couple dozen calls from some very large financial institutions, REITs, hedge fund mangers, public builders and a variety of financial experts. Those callers are not just callers from the US but from Germany, Australia and the UK. I have had so many calls, that I found myself on the phone eight to ten hours a day discussing the housing industry. I learned as much as I shared, if not more. So here�s a little bit of what I heard.

The Street is scared: scared to death that we are in for a housing crash that will rock our economy to its knees. Even Cramer attempted to reconcile his bullish position on his Tuesday night broadcast when he said he did not believe we have seen the worst of the housing market, but he does believe we have seen the worst for the builders� stocks. Duh? What he and many others don�t realize, is that the housing industry will not recover in 2007.

Maybe he�s setting up for a flip flop, or maybe he, like many others simply doesn�t understand the dynamics. And how could anyone understand the dynamics unless they were on the front line. How can you evaluate a market like this, from the comfort of a cushy Manhattan office. No way. No how.

So let me tell you, simplistically, what we see and hear on the front lines. On the street we are dealing with builders and sellers every single day. And both groups are trying to leap frog the other on the way down. That means lower margins or no margins for the builders. And that means the banks that have financed the millions of homes flippers bought, as well as the ATM cash drawn down with ARMs, will wind up owning a lot of property they cannot sell. Sure, most banks sell their paper. Okay, so the guys like Fannie Mae will own hundreds of thousands of homes they can�t sell. The result is the same. Massive amounts of inventory flooding the market at foreclosure sales. And prices drop further.

On the other end, here�s what I am hearing from the desperate builders. �Mike � We�ve got to unload inventory. Bring me offers. Please, Mike, we�ll look at anything.�

And from the big money that have financed many of these builders? They want to know how bad it is . . . and how bad it is going to get. These guys are truly on the razor�s edge.

And from the guys with smart money sitting on the side lines? �Mike � We�re ready, and we�ve got a billion dollars to put to work. Should we start buying?�

The answer is no, a very simple NO. Sellers are desperate. Builders are desperate. But with a 6-1 ratio of listings to sales, the markets are still being flooded with inventory. Builders are trying to monetize land by building spec homes at cost, but cost is not selling. And even though builders are unloading inventory at attractive prices, the worst is yet to come. And here�s why.

We are still not at positive cash flow when you evaluate the rental income of housing. We�re close, but not there yet. And until it makes financial sense to buy a single family home or multi-family project, prices will continue to drop. One public builder offered me the remaining inventory in a project of townhomes and condos. But when I ran the numbers, they didn�t make sense. This builder would have to drop prices another 30%. When I discussed the numbers with them, they said that was 15% under cost. Kiss margins and P/Es goodbye guys.

The soft money we saw for the last three years from flippers is gone. The funny money drove prices up more than 100% in just three years in many markets. Irrational Exuberance was a replay. History repeats again. Surprise? No. So even though we are down 30-40% in many markets year over year, we now have more inventory than we have ever had in the history of the World. In high school I learned about supply and demand. This is a classic example. Too much supply and too little demand. So housing prices will fall further and the entire economy will suffer for our Irrational Exuberance. Far more so than we suffered during the dot.com boom.

Now you have the top builders like Pulte, KB Homes, Lennar, Centex, DR Horton, Hovnanian, Toll Brothers, etc. scrambling to unload standing inventory, lots and land. Centex was ahead of the curve when they started slashing prices in Q1 of this year. Everyone thought they were crazy. I say, crazy like a fox. They were right on the money. Horton concentrated on affordable housing and tried to avoid flippers as best they could, but even they got a bit carried away. Lennar concentrated on �Everything Included.� But do homeowners want limited choices? No. Homeowners want a design center. Flippers wanted Everything Included.

As we enter Q4, all of the builders are scrambling to unload inventory, reduce land exposure and bone up on hard core centralized prayer. But it�s too little too late. You can�t stop a tidal wave, and you can�t stop the effects of the housing crash. When in the history of the United States have you seen 20-40% drops in housing prices? Mish, you might not want to answer that question, because you�d have to look back about 77 years.

The fall out is nationwide. Truckers delivering building supplies and carting away debris are losing their jobs. Many builders have cut their sales staff by more than 50%. In our local markets more than 20% of the real estate agents are leaving the industry. How about mortgage brokers, insurance agents, title companies, attorneys, furniture manufacturers, and the companies that make paint, concrete, plywood, toilets and the kitchen sink. This crosses all industries and the entire US economy.

For November I already have booked most of the month with bankers, REITs, hedge fund managers and industry experts that want research and tours of the housing markets. One caller, an institutional client with more than five billion dollars invested in real estate, wanted to know whether they should sell and convert to cash. I looked at the Staples Easy Button on my desk and replied without hesitation, YES. Then I hit the Easy Button and heard the familiar voice say, That Was Easy.

It was an easy call because of the basic fundamentals we learned when we were kids . . . Supply and Demand.

Mish:
Ah yes, supply and demand. The interesting thing to me is the big disconnect with what you hear from media pundits who have for weeks now been calling for a bottom on the flimsiest of evidence and actual field results. We have also seen upgrades out the wazoo lately in the face of clearly deteriorating figures.

Today more nonsense was trumpeted by Bob Willis at Bloomberg in an article entitled U.S. September Housing Starts Unexpectedly Increase.

Housing starts in the U.S. unexpectedly rose last month from a three-year low, as falling mortgage rates began to draw buyers back into the market, a sign the housing slump may be nearing bottom.

Housing starts increased 5.9 percent to an annual rate of 1.772 million from a 1.674 million pace in August, the Commerce Department said today in Washington. Stepped-up construction in the Midwest and the South made up for declines in the Northeast and the West. Building permits dropped for an eighth straight month to the lowest level in almost five years.

Talk of pent up demand or a stabilizing market are both ridiculous. Who does not have a house that wants one? Contrast that with those still wanting to cash out in a bubble market and move somewhere cheaper. Add in desperate flippers, and then let's look at the above numbers that Willis presented from the correct frame of mind, building permits.

The key point is that permits reflect future optimism of builders and that is falling even as builders scramble like mad to complete started projects. Those factors do not represent strength or any kind as he suggests. What it does represent is a massive amount of additional pent up supply.

Besides, who does not have a house that wants one? Nor can comfort be taken in any supposed drops in inventory. Some sellers have pulled their listings while Waiting for Godot (oops I mean better conditions). Since good conditions may be years away, sharply rising REOs are also going to add to pent up supply. What about the effects of $2 trillion in mortgages whose rates will reset in 2007. That represents more pent up supply.

What�s going to happen if and when Morgan's institutional contact (and those in the same seat) sitting on untold billions in real estate holdings all hit "The Easy Button"?

Realty Times is reporting Real Estate Agent Complaints Rise.

California's Department of Real Estate said it received more than 10,000 complaints in the fiscal year ended June 30, up 29 percent from the previous year and up one-third from three years ago.

The increased level of complaints and backlog coincides with a 44 percent increase in the number of real estate agents in last five years, pushing the total to about 400,000. In some areas, including Los Angeles and Silicon Valley, the number of real estate agents outnumber the number of properties for sale.

Nationwide, the number of licensed real estate agents has swollen to 2.5 million, according to the Association of Real Estate Law Officials and NAR says membership has risen 25 percent over the last five years to more than 1 million.

The obvious question is how many of those 2.5 million agents really depend on that license to make a living. Even assuming the answer is as low as 20%, that is still a half million real estate agents that are making a lot less than a year ago. The top end is likely to be doing very well and once again let's try to be generous with the numbers and claim 50% of them are still doing well. That leaves perhaps as many as 250,000 agents who are seriously hurting if they ramped up their spending and lifestyle to a higher sales level and have little savings as a cushion. The next question to address is �How many real estate agents have investment properties of their own?�

All things considered, real estate agents themselves will eventually add to housing supply.

Perhaps the ultimate in pent up supply may come from tens of thousands of real estate agents who have not made a sale for months. Those agents are about to find out this is NOT a �totally new paradigm�. They represent still more potential foreclosures and thus potential supply when they are unable to pay their bills.

It would be fitting irony if massive property sales by real estate agents (or former real estate agents) mark the bottom of this market some number of years to come.

The Easy Button



Let me join Morgan by clicking �The Easy Button�. Pent up supply is coming from every nook and cranny. There is no way this is the bottom and there is no way we have a soft landing either.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

2 Projects

Here's a couple recent projects that have landed in my inbox.

Vanke Center in Shenzhen, China by Steven Holl Architects:

A "progressive new sustainable mixed-use complex...on the South China Sea...the building, a horizontal skyscraper, will contain a conference center, hotel, serviced apartment and offices and the headquarters of China Vanke Co., Ltd....The floating horizontal bars of space loosen the connection between formal structure and function, giving vitality to the main ground level and surrounding landscape. The plan provides open space for the intricate multi-faceted daily life at this ground level to evolve and change."

O-14 Commercial Tower in Dubai by Reiser + Umemoto:



"O-14, a twenty-two story tall commercial tower perched on a two-storey podium...comprises 300,000 square feet and...will be located along the extension of Dubai Creek, occupying a prominent location on the waterfront esplanade. The design for O-14 is for a tower sheathed in a forty centimeter-thick concrete shell perforated by over 1,000 openings that create a lace-like effect on the building�s fa�ade. The shell is not only the structure of the building, it acts as a sunscreen open to light, air, and views."

Craps, Dominoes, or Jenga

Last week Ramsey Su (one of my favorite posters on Silicon Investor) proposed and idea that the current rally in stocks is really just a part of "One Big Trade".

Ramsey Su:

I had a conversation with a couple of fund managers yesterday and we drew one simple conclusion: The market is now just One Big Trade. There is no need to follow any fundamentals. Everything would be great if credit does not collapse, real estate lands softly and the economy slows just a little before taking off again.

On the other hand, many issues are facing a total do or die scenario. Take the MBS market as an example. Every loan originator securitizes at least one of these every quarter. If any originator fails in securitizing just ONE of these, the entire house of cards will collapse because no other deals can be done. Every originator would be stuck with at least a quarter's worth of loans that now must go to the "loans held for sale" or "loans held as investment" line items in addition to whatever they already have in the books. If that happens, then all financing shuts down.

This week Ramsey Su continued the idea with a discussion about Corus Bank.

CORS said they have a $61m condo conversion loan in South Florida in trouble. I can't figure out which one it is. I think someone who is interested in CORS can use their stress model and see how likely it may be.

On the other hand, this is once again part of the ONE BIG TRADE that I talked about last week. If the real estate market soft landing proves to be pipe dream, then CORS along with everything else will come down hard. There is almost no need to do individual Due Diligence. It is only if you believe in a soft landing that you need to see who will come out better or worse than others.

Mish:

Here is Corus Bank's lending model straight from their website.
Bolding emphasis is mine.

Lending Approach

• Large, non-recourse loans in major metropolitan areas
• Construction and redevelopment financing
• Special emphasis on condominium construction, conversion, and inventory loans
• Other commercial real estate loans secured by office, hotel, apartment, and industrial properties
• High advance rates which may include a mezzanine component
• Highly customized loans to meet borrowers' specialized needs
• Quick, streamlined decisions from our officers and our four-member loan committee
• The financial strength of a large bank with the responsiveness of a small bank

Regardless of how prudent Corus Bank thinks they might be, if the One Big Trade (credit expansion) totally collapses, they and along with numerous other lenders and homebuilders are going to do a swan dive into oblivion.

LEND

The One Big Trade has not collapsed yet, but cracks are starting to appear in quite a few walls. Please consider Accredited Home Lenders 2006 Outlook which came out October 19th.

Accredited Home Lenders Holding Co. (LEND) announced today it anticipates fully-diluted earnings per share for the year will not reach the lower end of the company's previous 2006 guidance of $4.50.

Increasing turbulence in the non-prime mortgage market has impacted the company's ability to achieve its previous earnings guidance. The most significant factors underlying this turbulence include:

• Origination volume and loan submissions have not increased as much as the company anticipated and continue to be adversely affected by a combination of pricing competition and product contraction that has been prevalent in the market throughout 2006.
• Whole loan premiums and securitization returns are under more pressure than previously anticipated, caused a decrease in whole loan investor appetite for certain products, as well as changes in credit standards and equity requirements promulgated by the various rating agencies.
• Delinquency from production periods in 2005 and 2006 has risen above previous expectations, which requires the company to further bolster its reserves to prudently value the loan portfolio and potential exposure.

A friend of mine who posts under the name "Rodger Rafter" on the Motley FOOL offered these thoughts:

Strike one: Even in good times their ponzi business model required ever increasing loan volumes to keep default rates down. New loans don't go bad as fast as bad loans, but now they can't create enough new loans.

Strike two: There are fewer suckers out there who want to buy their securitized crap because the housing market has turned and even dense portfolio managers are beginning to recognize the growing problem.

Strike three: They couldn't get away with absurdly low reserves forever. Their loss estimates were based on default patterns during the housing boom, not during normal times or a housing bust. As they increase reserves, their imaginary profits of the past will turn to losses.

LEND 2005 earnings were $7.07
90 days ago the 2006 average estimate was $6.53
LEND then lowered guidance to $4.50-$5.00
Analysts figured $4.78 for the year
This morning Lend announced they won't even hit the bottom of the range.

It's not just LEND either. Washington Mutual lost $33 million from its mortgage business in the third quarter, and JPMorgan said it lost $83 million from home loans.
What's next?

Defaults in California

Here is another huge crack in the dike that is developing. The LA Times is reporting More Homeowners Going Into Default.

A housing market slowdown combined with rising payments on adjustable-rate loans is leading to a sharp hike in notices from lenders.

The number of Californians who are significantly behind on their mortgage payments and at risk of losing their homes to foreclosure more than doubled in the three months ended Sept. 30, providing the latest evidence of trouble in the housing market, figures released Wednesday show.

Lenders sent out 26,705 default notices � the first step toward a foreclosure � during the July-to-September period, up from 12,606 during the same quarter in 2005, according to DataQuick Information Systems.

Defaults are still well below their peak level of 59,897, which came in the first three months of 1996, as the state's last housing slowdown was ending. But the report shows that the slumping housing market is taking a toll on more homeowners � especially those with mortgages that offer low initial payments at the cost of higher bills down the road.

"We were putting buyers in homes with loans they could not afford to sustain over the long haul," said Bob Casagrand, a San Diego real estate agent. "If you're a marginal buyer with an adjustable mortgage, you're rolling the dice on the future."

Foreclosures are rare when the housing market is strong and prices are rising. In those conditions, borrowers can usually sell their homes quickly, or they have enough equity to allow them to refinance their loans. But in another disquieting sign, DataQuick reported that 19% of the owners who went into default earlier in the year actually lost their homes to foreclosure in the third quarter, more than triple the 6% in 2005.

Three Things

1. Once the dice have been rolled it's too late to take back the bet.
2. The dice have already been rolled.
3. The amount already bet on the Come Line is far far bigger than anything seen in 1996.

As long as the bubble keeps expanding the game can continue. Rising home prices have so far bailed out California. Not any more. Prices have stalled and the economy has slowed. Default notices for July to September total 26,705 up from 12,606 during the same quarter in 2005. Let's do the math. Hmmm is that a 210% increase in default notices? Are home prices going to head back up? Will jobs at Walmart and Pizza Hut pay the bills?

Yet somehow, some way the One Big Trade marches on. Today, October 19th, the Dow made a new high closing over 12,000. CNBC and others are ignoring the cracks even as pressure is building up on the dam.

Disbelievers are hopping on board. Hussman missed the last 1500 DOW points or so but has recently bought calls increasing exposure as noted in Temporary versus Permanent Returns.

On the intermediate term, however, we've observed enough improvement in market action to warrant � in the event of short-term weakness � a small exposure (perhaps 1-2% of assets) to index call options in order to �soften� our hedge, provided that market internals remain firm during such a short-term pullback.

Please consider a poll from my own board on the Motley FOOL, normally a pretty bearish crowd.

Poll: The Dow



Not only has Hussman reluctantly embraced this rally but so has a traditionally bearish group that I am pretty familiar with. How many more bears have to toss in the towel before we top? I guess that remains to be seen.

Previously I proposed this would play out like Falling Dominoes. Right now I am beginning to sense that the "falling dominoes scenario" may have been a bad call. I am now wondering is this is just the mother of all craps game will all winnings repeatedly plowed back onto the Come Line. Then again please consider Jenga for "edge of your seat fun".



So is it Craps, Dominoes, or Jenga that we are playing here? Whatever it is, the end result is not going to be pretty. In the meantime, a high cash and gold position along with some speculative shorts in the right sectors looks pretty good to me.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Book of the Moment

This just landed in my inbox, and it looks very promising: World Changing: A User's Guide for the 21st Century.

From consumer consciousness to a new vision for industry; non-toxic homes to refugee shelters; microfinance to effective philanthropy; socially responsible investing to starting a green business; citizen media to human rights; ecological economics to climate change, we think this is the most comprehensive, cutting-edge overview to date of what's possible in the near future -- if we decide to make it so.

Canon EOS 30D

The Canon EOS 30D expands upon the ever-popular 20D with some fantastic new features. The camera's body has been redesigned into a smoother, sportier form, much like the luxurious 5D. Canon's also tossed in a large, 2.5 inch LCD monitor for taking a better look at those 8.2 megapixel images. For the impatient, a direct print button has been added to the back, and ISO speed is displayed in the viewfinder as it is changed. A 100,000 shot shutter cycle offers robust durability and the camera is capable of simultaneous RAW and JPEG image recording. The 30D is a step up, and will certainly be the digital SLR of choice in the coming year.
Specifications

* 8.2 megapixel CMOS sensor
* DIGIC II image processor
* auto and manual focus
* auto and manual exposure
* RAW and JPEG file formats (with simultaneous format capture)
* ISO 100-3200
* focal-plane shutter
* 2.5 inch LCD
* lithium ion battery
* Compact Flash storage (not included)

Today's archidose #39

turbine room by MaLoL
Carsten Holler's installation in the Tate Modern's turbine hall.

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Size of Your Segment and Network Reach Matters in Behavioral Ad Targeting

Size of Your Segment and Network Reach Matters in Behavioral Ad Targeting


Recently I came across a company who invested a lot of effort (time and money) in behavioral ad targeting. At the end, they were not happy with the results and were wondering if it was worth continuing with this effort. Further discussion revealed that they did not get enough clicks on their behaviorally targeted ads and hence their discontent. Since they were paying for clicks only, money was not an issue, but the clicks on behaviorally targeted ads were not enough to justify the efforts they were putting.

So what happened, isn�t behavioral ad targeting suppose to provide you more click-throughs?

The problem was that their behavioral targeting vendor showed them great case study but did not set the realistic expectation about what this customer should expect. I am sure; there are a lot of companies in the same boat. So, in this article, I will explain how to set realistic expectations about what to expect in terms of clicks on your behaviorally targeted ads.

Let's take an example of a Cruise site which sells cruises packages for travel around the world.

This site participates in Behavioral Ad network to target visitors who had shown interest in cruise package to Alaska when they visited their site but wandered-off without making a purchase. These visitors will be targeted when they arrive at other publisher sites participating in the behavioral ad network.

Here are some stats on this site and target audience (visitors)

Traffic: Let�s assume they get 1,000,000 visitors a month (This is for illustration purposes and you can use your own multiplier to see the effect on your site).

Target: Visitors who viewed details and prices about cruises to Alaska. Let�s assume this customer base is about 250,000, 25% of the total site visitors. (Most of the segments I have seen actually are way less than 25% of the total visitors)

Behavioral Ad Network Reach: For this example, the network, the site is participating in, only reaches 30% of the internet population. Let's assume the site�s visitors are a good sample of the total internet population.

By participating in this network the customer will able to reach 75,000 visitors (30% of 250,000), assuming you were able to get impressions on all the sites participating in the network.
Note: This is a big assumption because even if you network reaches 90% of the internet population you will not reach 90% of your target audience. You will be competing with other advertisers (both participating in this network as well as the advertisers directly advertising on the publisher�s site) for the available inventory. Most of the network do not get premium inventory, what they get is Run-of �Site or Run-of-Network inventory which further reduces the reach.

Click-Through Rate: Assuming the click through rate without targeting is .5%. With behavioral ad targeting it is expected to increase to 1.0% (100% increase, this has yet to be proven the % increase is all over the board and one study even said that click through rate declined)

So let's say you show 75,000 impressions to these 75,000 visitors (1 impression each). So the clicks you get will be 750 visitors (1% of 75,000)

So For every 1,000,000 visitors on your site you can only expect 750 visitors from Behavioral Ad Targeting (.075% of your total site visitors, not a huge number).

No let's assume your network reached 80% of internet population. In this case you will be able to reach 200,000 (80% of 250,000) visitors and with 1% click through rate you can expect 2,000 clicks (167% increase). 0.2% of your total site visits, still not a huge number but still better than a network with 30% reach.

By choosing the right network marketer would be able get more clicks for the same efforts.

Your Behavioral Ad Networks (vendor) should have a way to forecast the clicks you can expect. Talk to your account representative; get all the facts, talk to their customer (not just read case studies) so that you have realistic expectation about the clicks. If they can�t provide you this information then time to move on to a new vendor.

House of Terror

This afternoon we were treated to a lecture on Budapest, Hungary's House of Terror, "illustrating the grim decades of Nazi and Communist repression." Architecturally, the museum is basically a renovation of a much-renovated former headquarters for both the Nazi and Communist secret police, but the exhibition installations seem to overshadow the interiors. The exterior is another story.



The existing building is painted a muted grey that stands out from its neighbors and supposedly recalls the outfits of the secret police.



Wrapping the building's cornice is a new projecting "blade" with backward letters and figures cut out; the blade continues down the side of the building to sidewalk level.



During the daytime hours the reverse letters spell out TERROR in the shadow case from the new projection. The blade intervention is strengthened at pedestrian level as visitors are forced to walk through it on the way to the entry.

What at first glance appears to be a silly PoMo device, seems to have a greater appeal over time. Both the font and figures recall Nazi and Soviet era displays, though the cut-out is like an inversion (backward=forward, dark=light) of those principles towards something of more humanitarian ends.

Canon Digital Rebel XTi (a.k.a. 400D)

The Canon Digital Rebel XTi (a.k.a. 400D) is the successor to the ever-popular Canon Digital Rebel XT/350D. Canon has made every effort to continue the affordability and power of the Digital Rebel line by bringing the 400D up to the 10 megapixel level, and introducing important features from their line of professional dSLRs. The Digital Rebel is a unique opportunity for curious and adventurous photographers to graduate from mainstream cameras and into the upper echelons of photography without getting too deep into unfamiliar territory or spending an exorbitant amount of money. The body-only model of the XTi/400d will cost only $799, with the lens-included model coming in at around $899.

The nine-point auto focus (a feature it shares with the 30D) provides faster, more accurate photos, and the 2.5-inch LCD is a marked improvement over the previous version's measly 1.8-inch display. For current XT/350D owners, the XTi/400D is an attractive upgrade, and for those who haven't yet graduated to prosumer digital cameras, this is the perfect opportunity. Don't hesitate, the Digital Rebel will change the way you take photos.

Note: This version of the Digital Rebel XTi comes with an included EF-S 18-55mm, f3.5-5.6 zoom lens from Canon. For the "body only" version, click here.
Specifications

* 10.1 megapixels
* JPEG and RAW file formats
* DIGIC II Image Processor
* Canon EF / EF-S lens mount
* Auto and manual focus and exposure
* 9-point CMOS sensor auto focus
* ISO 100-1600
* 2.5-inch LCD
* Lithium-ion battery
* Compact Flash Type I or II storage, Microdrive support
* Vibrational/ultrasonic dust reduction and "dust mapping" for automatic post-production removal.

Kool Aid & Krispy Kremes

I asked Mike Morgan at Morgan Florida if he had an update for us.
Here it is. It is something quite different too.

Mike Morgan:

With so many �experts� out there singing the praises of the housing market, I think it is time for me to once again poke my head out. I had an email exchange this week with Jim Cramer, and it was hard to believe he is as bullish as he is. I hear from too many analysts and Wall Street gurus that don�t take the time to get out of their offices and get on the front line here in Florida, as well as Arizona, Texas, California, Virginia, etc. I also hear from the analysts and hedge fund managers that are visiting the corporate offices of the big builders. Unfortunately, they�re drinking the Cool Aid. It�s potent stuff that clouds rational thinking and it is probably just what is needed to wash down a few hundred stale donuts.

Do you remember my analogy of housing to donuts? A year ago I said this was like the room of 1,000 donuts. Even if they are warm Krispy Kremes, how many can you eat? Three? Maybe four? And even if you come back the next day, and the donuts are now half price, how many can you eat? Same thing with housing. We only have so many people in the US. But builders built houses like donuts. They sold houses to non-users. They sold houses to the greedy masses that bought multiple houses to flip. Now we have the inventory, but there are not enough people to occupy these homes. Moreover, with interest rates rising and mortgages becoming tougher to obtain, we have less and less people that can buy these homes, even if they want to.

Since my recent article in Barron's, I have received dozens of calls from builders, bankers, buyers and investment groups perched like vultures. Let me give you a sampling of a few calls.

Public Builder - Called me to find them bulk buyers with the ability to buy out all remaining units in developments they cannot sell. They are willing to sell at cost. I told them they were about 10% over the current distress market, and they didn�t even hesitate. They said, fine. Drop the price 10% and we�ll pay a 5% commission to you. Just help us get rid of this inventory.

Condo Developer - They have a 600 unit project that is 100% up for resale. This means no one is going to close when the building is completed in January. Every single buyer will walk from their 20% deposits. The developer will simply going to turn the keys over to the bank. And the bank will take a massive hit that will have the Feds on top of them in the blink of an eye.

Townhome Developer - Asked me to resell 132 units that they had sold a year ago for an average of $400,000 a unit. All of their buyers have notified them that they will not close. Unfortunately, even a year ago in the heated market these units were only worth about $250,000. Now, the units will not command more than $175,000 . . . if they�re lucky.

Real Estate Agent - She sold 10 of the 132 units I just mentioned to her friends, family, banker and co-workers. They�re all going to walk away from their $40,000 deposits, so they don�t lose $250,000. The developer will be stuck with 132 units that are not worth what it cost to build them.

Homeowner - This one really hurts, and this is the next wave of the massive tidal wave hitting this industry. As surfers know, the third set is the biggest. This homeowner purchased her home for $390,000 plus $15,000 in closing costs. It is now worth maybe $300,000. Their interest only ARM is scheduled for refinancing. The bank told them they need to come up with additional cash to cover the drop in equity. But they don�t have the $75,000 the bank wants. And even if they sell for $300,000 and clear $280,000, they can�t pay off their $390,000 mortgage balance. You see, their mortgage was 100% and it was interest only. They are going to walk away from the house and give it to the bank. The bank, if they are lucky, will sell the house for $300,000 less commissions and expenses. Maybe they will net out at $280,000. The math is simple. The bank, at best, will lose at least $110,000 on a $390,000 mortgage. That�s a 28% loss . . . IF they can sell at $300,000. Back to the donuts. Maybe they can sell a few of these homes at market prices, but as foreclosures mount, prices will drop further.

The Third Wave - This massive tidal wave will effect all aspects of our economy. Some banks will fail. Other banks will suffer the worst liquidity crisis since the Depression. And there is no way to stop this wave. This wave not only effects current mortgage holders who can no longer afford to live in their homes, but it devastates the new home market. Buyers with contracts are finding it tougher to qualify for mortgages. We can�t forget that rates are also up about 18% from a year ago, so buyers cannot afford the same home they could have a year ago.

I will wrap up with a statistic from a recent FDIC presentation.

�Bank exposure to mortgage and home equity is now at peak levels, having risen dramatically. If you look at 1998, the total exposure to mortgage and home equity loans was about 25 percent. In the last quarter, the third quarter, it had risen to 37 percent.�

And here�s the why this tidal wave is a killer. The 25 percent exposure was during a period of rising home prices and low inventory levels. The 37 percent follows the first two tidal waves of the highest inventory levels in the history of the United States and prices falling with equity disappearing daily.

I sold three homes last week for one public builder. Each of these homes sold for 40% less than the same homes sold a year ago. How about all of those neighbors when it comes time to refinance? The appraiser is going to look at current sales prices, and the bank is going to ask for additional funds to meet the equity requirements. Ouch. Where�s the Kool Aid?

Mish:
Let's take a look at Scenarios for the Next U.S. Recession, a PDF put out by the FDIC in conjunction with Meredith Whitney, Executive Director, CIBC World Markets, a subsidiary of Canadian Imperial Bank of Commerce.

Bank Exposure to real estate.

Bank exposure to mortgages and home equity is now at peak levels, having risen dramatically. If you look at 1998, the total exposure to mortgages and home equity loans was about 25 percent. In the last quarter, the third quarter, it had risen to 37 percent.

Yes, the above chart is slightly out of date but the accompanying text was not. All in all the article is one of the best reads on the current mortgage mess you can possibly find.

The conclusion to the article is that we will have a "segmented consumer recession that will impact 10% of U.S. consumers". I dismiss such a limited impact because it does not address a rolling cascade of layoffs that I believe are coming as a result of the housing slowdown. Nonetheless the case is presented extremely well along with charts and data that everyone can use to draw their own conclusions. Time will tell which scenario is correct.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/