The Big Picture | August 2007

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How I Spent My Summer Vacation

Friday, August 31, 2007 | 06:30 PM

While I'm stuck in eastbound Hamptons traffic, you can enjoy this from The Office.

Enjoy your long weekend !

78 Years Ago Today: The New Yorker

Friday, August 31, 2007 | 02:30 PM

in Financial Press | Markets

I was kicking around the New Yorker cartoon bank when I stumbled across this interesting New Yorker August 31, 1929 cover print by Theodore G. Haupt (98 78 years ago today!)

After an amazing five-year run that saw the Dow Jones Industrial Average (DJIA) increase in value fivefold -- far more than the run from 2003 til now -- prices peaked at 381.17 on September 3, 1929, about the time when this cover came out:

Remember, the real mayhem wasn't until a few months later -- Black Thursday, the initial crash was on October 24th, 1929, and Black Tuesday was 5 days later -- October 29th, 1929.

~~~

UPDATE: ~~August~~ September 1, 2007 7:55am

Doh! So much for 14 years of applied mathematics!

I blame fat thumbs on that one -- either that, or smoking way too much dope in college . . .

~~~

UPDATE: September 2, 2007 7:15am

Oh, and speaking of innumeracy . . .

Major Policy Shift -- or Politics as Usual?

Friday, August 31, 2007 | 09:23 AM

Over the past few weeks, market's have been rather volatile, swinging wildly between triple digit gains and losses, closing at the highs and lows of the day. The sub-prime debacle, the credit crunch, the liquidity situation -- all turn out to be pressuring markets. The ongoing fear is that there are more bodies that will be floating up to the surface, and this will eventually crimp the economy.

This entire week has been a grand lead up to Federal Reserve Chairmen Ben Bernanke's major address on Housing woes at 10:00am.

Then, something rather intriguing occurred. Sometime last night, the White House announced that the President will deliver a speech -- at 11:00 am today.

I found that rather curious.

The WSJ reported that the key provision of the policy initiative as an "administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers."

Schaeffers Research notes:

"Traders seem to have packed away concerns regarding a speech by Federal Reserve Chairman Ben Bernanke, focusing instead on aid for subprime lenders being hinted at by the Bush administration. According to The Wall Street Journal, about an hour after Bernanke's speech, Bush is expected to announce plans for a change in the Federal Housing Administration mortgage insurance program to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages. The change would allow 80,000 more homeowners in 2008 to receive federally insured mortgages on top of the 160,000 projected to use the insurance, the Journal reported."
-Bush Trumps Bernanke, Futures Surge Higher.

80,000 homeowners? That's a drop in the bucket of the millions of resetting sub-prime ARM mortgages. Very very small impact, at least as far as housing is concerned.

Still, I find this whole thing terribly interesting. A very minor policy change at the margins, but one with timing that is utterly exquisite. The President's speech:

• Immediately diverts attention from Fed Chair Ben Bernanke's speech;

• Comes right before a 3 day weekend;

• Is on the last day of the month;

• Is on the last day of the fiscal year many financial firms.

It just strikes me as . . . peculiar. Remember, White House chief of staff Andrew Card famously stated: "From a marketing point of view, you don't introduce new products in August." That's as true about wars as it is about major economic rescue plans.

And, we have seen more and more commentary like yesterday's WSJ piece (Bernanke Breaks Greenspan Mold) suggesting that Ben Bernanke understands Moral Hazard, and won't rescue reckless speculators from themselves, at every other taxpayer's expense.

How have these speculators impacted both the Housing and Credit Markets? As the front page of today's WSJ notes, Investors Default On Outsize Share Of Home Loans:

"Investors played a big role in pumping up home prices during the housing boom. Now, they account for an outsize proportion of loan defaults, mortgage bankers and builders say.

A survey by the Mortgage Bankers Association found that mortgages on properties that aren't occupied by the owner -- mostly investment homes -- account for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada, states where overdue payments are mounting fast . . .

The four states were among the favorites of speculators during the housing boom. When the market was hot, many speculators bought homes hoping to flip them for a quick profit. But now that home prices have turned lower, that strategy is backfiring.

As a result, some investors have "simply walked away from their mortgages," said Doug Duncan, chief economist of the MBA, echoing recent comments from executives of Countrywide Financial Corp., the nation's largest mortgage lender."

Will we also be bailing out these speculators, too?

A hedge fund manager friend noted: "I don't see anything in Bush's plan that will change the insolvency of the home-buyer. The "system" is illiquid (and that "problem" was addressed by the central banks two weeks ago), but the "borrowers" are insolvent. Nothing I've seen yet changes that fact. Nothing. Besides, has this Administration, which doesn't believe in government programs, ever done anything bureaucratically well...?"

That's a point well taken.

Let's return to the timing: If you were introducing a major economic policy initiative that was going to address a major issue -- wouldn't you wait until Tuesday? Its only 4 days away. This is a huge vacation week, many people aren't around, and all they will hear is that the President did something.

I normally stick to mathematical analysis, preferring numbers to instinct, data to politics. But todays "news" struck me as an exquisitely timed, very clever PR stunt. Not to be cycnical, but this appears to be much more politics than policy, and a lifeline to the big investment banks on the last day the month and (some of their) fiscal years. I suspect hank Paulson had a major hand in the timing.

But a fix for what ails the system? Not even remotely close. That's a function of time and quite a bit of creative destruction. As we noted on Monday, "Capitalism without financial failure is not capitalism at all. . . .

Sources:
Opening View: Bush Trumps Bernanke, Futures Surge Higher
Bush administration to bail out subprime;
Joseph Hargett
Schaeffers Research, 8/31/2007 7:58 AM ET http://www.schaeffersresearch.com/commentary/observations.aspx?ID=20137

Bush Moves to Aid Homeowners
DEBORAH SOLOMON
WSJ, August 31, 2007; Page A4
http://online.wsj.com/article/SB118851742988914064.html

Bernanke Breaks Greenspan Mold
Managing Crisis, Fed Chief Dulls Notion That Turmoil In Market Leads to Rate Cut
GREG IP
WSJ, August 30, 2007; Page A3
http://online.wsj.com/article/SB118841384006012433.html

Investors Default On Outsize Share Of Home Loans
MICHAEL CORKERY and JAMES R. HAGERTY
WSJ, August 31, 2007; Page A1
http://online.wsj.com/article/SB118851838516214091.html

Yahoo! Message Boards

Friday, August 31, 2007 | 06:00 AM

in Corporate Management | Web/Tech

To you folks wondering whether that was really me who posted on a certain small cap, streaming media company at Yahoo's stock message boards: There is a both a long and short answer.

The short answer is yes.

The longer answer is a bit more complicated:

A very good friend of mine from grad school ("J") was a fairly big wig at Yahoo! When his stock vested in 1999 (25% up front, 3% per month for the next 3 years), he asked me for advice. The stock was near $200, and I told him to sell it -- every share he possibly could, as soon as it vested. For the most part, he followed that advice. He did pretty well for himself. J is now the President/COO of another dot com that is privately held, whose service is used by many branded consumer product companies. I suspect they will eventually be bought by another firm much larger than them.

The 2nd factor about the Yahoo message boards has to do with Iomega (IOM). That board was a huge lesson in just how bad Wall Street Research actually can be. It showed how individuals working together via the internet were able to outfox the pros. That, and its one of the few stocks I ever top ticked when liquidating a large position (that's another war story best saved for another time).

Because of J, and IOM, I have always had a special place in my heart for Yahoo!, and the way those message boards were way back in the innocent mid-1990s.

Then the touts, shorts, and spammers took over -- and that was all she wrote . . .

~~~

Back to my post: it was a sincere expression of my disappointment on how they have allowed what was a big asset of theirs to fall into disrepair.

Don't worry: I have no plans on posting anything else anytime soon . . .

Eric Bolling Bolts CNBC's Fast Money for Fox?

Thursday, August 30, 2007 | 02:30 PM

in Financial Press | Television

I've been hearing rumors that Eric Bolling has left Fast Money for Fox. That has now been confirmed.

That's really too bad. First, the show had a good chemistry between all the participants, including Bolling. Second, Dylan Ratigan is a pleasure to work with, as is the show's producer, John.

TV Newser reported that Bolling showed up on FNC's Your World with Neil Cavuto on Monday.
Bolling_8.22.jpg
Additionally, Bolling's bio on CNBC.com has been taken down...

Further poking around reveals that the lawyers are now involved. Media Bistro reported that this went to court, and the Admiral got shipwrecked.

"And we're learning new details about how difficult it was for 'The Admiral' to jump ship. TVNewser has learned that NBC retained Proskauer Rose, one of the most expensive law firms in Manhattan, to go up against Bolling. In addition, sources say NBC showed up in court with a team of lawyers and even got CNBC's VP of strategic development Susan Krakower to testify.

Sources say Bolling lost his argument in court, and cannot enter into a contract until his CNBC non-compete expires. And while his last appearance on CNBC was August 21, he showed up on Fox News Channel the next day, which means he may be able allowed to do one-time appearances."

I am not surprised he would lose in court -- big tv stations NBC/CNBC have really good lawyers writing their contracts. I can't imagine they would let someone just walk away.

I thought Eric fit in well with ~~Conan~~ Dylan and the guys . . . I'm surprised after CNBC gave him his tv break like that, he would be so quick to jump ship to Fox.

I guess we can expect to see a bunch of poaching, with anchors going from Bloomberg to CNBC to Fox.

~~~

Also, the NYPost's page 6 has a story about a cat fight (page 6's phrase, not mine) amongst the female anchors of CNBC: NOT ENOUGH HONEY FOR CNBC

ISI's Ed Hyman: Slowing, but "No Recession" Forecast

Thursday, August 30, 2007 | 11:45 AM

in Economy | Financial Press | Television

Paul points us to this Bloomberg interview with ISI economist Ed Hyman. Funny, we were just discussing Ed in the office yesterday. He sees the economy slowing, but does not forecast a recession; Hyman also expects the Fed to eventually take rates down to 4%.

That is not quite our forecast. We see the economy continuing to slow, and a better than even money chance that we slip into a recession (How mild or strong is anyone's guess).

However, given Hyman's historical track record -- he's been the #1 ranked economist by Institutional Investor for the past 23 years -- he is not a guy you really want to bet against.

click for video

Forex Trading Show

Thursday, August 30, 2007 | 10:00 AM

in Currency | Finance | Trading

Exciting news!

I am one of the Keynote speakers at the Forex Trading Expo in Las Vegas on September 15 and 16 at the Mandalay Bay Resort and Casino.

I have never been to one of these, so I am excited to see what they are all about. A few people I have spoken with about these shows -- Tobin Smith, John Mauldin, Paul Kedrosky (who has a tech conference in NY on January) and others were all very positive.

Here is the official blurb:

"One weekend in September can greatly accelerate your learning curve and give you the skills and knowledge you need to make consistently profitable trading decisions. On September 15-16, 2007 in Las Vegas, the Forex Trading Expo will once again bring together thousands of the most dedicated traders in the country to learn what works for successful currency speculators."

Note that the focus is on Currency Trading. I plan to discuss some of the psychological aspects of Trading and variant perception . . .

Should be cool -- believe it or not, I have never been to Las Vegas!

A Historical Perspective of Recent Bear Markets

Thursday, August 30, 2007 | 08:39 AM

in Investing | Markets | Psychology/Sentiment | Technical Analysis

Via Jim Stack's Investech, comes this interesting view of how prior Bear Markets compare relative to the most recent 9% correction.

Jim does something a bit different -- he depicts these prior Bear Makets starting from the most recent July 19 highs:

"Shown on this page are some the most significant bear markets of the past 40 years. In historical terms, they range from the brief and mild (1990) to the long and severe (1973-74 and 2000-02)

As you step through each, try to imagine what it would be like riding the market down – where the DJIA would be by year-end, and how your strategy might be affected if/when the DJIA broke 10,000. This will help you understand your own tolerance for risk in the current market climate, and what each would look like if it started at DJIA 14,000 on July 19, 2007"

Click for larger charts

Now consider that since that July 19 peak of just over 14,000, the Dow has yet to breach even ~~13,000~~ to close with a downside move of 10% (thanks to all who pointed out that my original comment was incorrect).

What is so fascinating to me, given the relative mildness of this pullback, is how much noise we have heard from the crowd -- Sturm und Drang -- as if this was Def Con 1. I like the way Dan Gross describes it, calling out the "motley collection of gazillionaires, conservatives, and industrialists begging the Fed to cut interest rates."

Thanks, Jim -- great stuff.

Overcompression

Wednesday, August 29, 2007 | 09:00 PM

in Corporate Management | Digital Media | Music | Technology

Music sucks today.

Not the bands -- theres lots of great stuff out there, its just much harder to given the death of radio.

No, we are talking about the quality of recorded music. Its bad, and getting worse. And, we have proof of exactly how bad it sucks: Overcompression

As reported by Institute of Electrical and Electronics Engineers (IEEE), recored music has increasingly grown louder, at the expense of dynamic range -- the differences between the softest and loudest portions of any recorded music sample.

IEEE reports on "the smoking gun of the loudness war is the difference between the waveforms of songs 20 years ago and now." Below you can see two examples:

A waveform from the late 80s / early 90s:

A waveform from now:

For those people interested in this sort of thing, there is a full article on this: The Future of Music. See also The CD Turns 25).

UPDATE: December 28, 2007 9:27 AM

See this new article:

The Death of High Fidelity
In the age of MP3s, sound quality is worse than ever
ROBERT LEVINE
Rolling Stone, Dec 26, 2007 1:27 PM
http://www.rollingstone.com/news/story/17777619/the_death_of_high_fidelity

Source:
The Future of Music
Suhas Sreedhar
August 2007
http://spectrum.ieee.org/aug07/5429

Blogrunner

Wednesday, August 29, 2007 | 03:15 PM

in Financial Press | Web/Tech | Weblogs

Interesting form of combined media/blog outlet: Blogrunner.

Essentially, it lists top stories by topic (Politics, Business, Media, Technology, Economy, Law, Science, Health, Movies, Books, Religion, Entertainment, etc.)

Blogrunner then excerpts and links blog posts that comment on those stories.

Kinda like Google News, only annotated via blogs . . .

Wall St.net Podcast

Wednesday, August 29, 2007 | 10:56 AM

in Podcast | Web/Tech | Weblogs

Dennis Olson and I had a far ranging discussion about how I came to blog, and what else I read . . .

click for podcast . . .

http://www.wallst.net/mp3_podcasts/153.mp3

Quote of the Day: Free Trade

Wednesday, August 29, 2007 | 09:00 AM

in Derivatives | Psychology/Sentiment | Trading

Bill King reminds us that decades ago Milton Friedman chided those that worry about the US trade deficit by asserting the US gets real products while all that foreigners garner for their efforts is dubious paper...Eventually foreigner will get it and adjust. That process might have already commenced.

The folks at GATA retort: Free and fair trade: They give us Poisoned food and toys, we give them fraudulent securities . . . Everybody wins!

UPDATE: August 29, 2007, 10:09am

I see the NYT covered a related issue:

Calls Grow for Foreigners to Have a Say on U.S. Market Rules
HEATHER TIMMONS and KATRIN BENNHOLD
NYT, August 29, 2007
http://www.nytimes.com/2007/08/29/business/worldbusiness/29regulate.html

Rising Defaults on Credit Card Bills

Wednesday, August 29, 2007 | 07:43 AM

in Consumer Spending | Credit | Economy | Psychology/Sentiment

This can't be good:

"US consumers are defaulting on credit card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.

Credit card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate - a measure of cardholders' willingness and ability to repay their debt - fell for the first time in more than four years."

I suspect that there is a big swath of folks who can no longer refi their homes . . . So after their rates reset 300 bips or so, they take cash advances to pay the mortgage -- then default on the Credit card debt, rather than the mortgage.

However, as FT notes:

"But it is not clear that the borrowers defaulting on their credit cards are the same people defaulting on their subprime mortgages, it added. This is in part because underwriting standards in the credit card sector have been more robust than in the mortgage industry.Also, many highly leveraged subprime borrowers, with little or no equity in their homes, may choose to default on a mortgage before losing their credit cards."

(I have been meaning to get to this issue for some time. Let me see if I can dig up a chart on this to put it into some perspective . . .)

One other thing:

"Recent increases in credit card losses can in part be ascribed to a steady rise in personal bankruptcy filings since 2005. According to the Administrative Office of the US Courts, quarterly non-business bankruptcy filings have been rising since the first quarter of 2006.

Scott Hoyt, economist at Moody's Economy.com said: "Consumer credit quality will continue to deteriorate as debt burdens and financial obligations rise, house prices continue to fall, credit standards are tightened, labour markets loosen modestly and gasoline and other energy prices remain high."

The Chicago Tribune adds:

"Now that the easy money in home mortgages is all but over, consumers may soon be caught in a financial squeeze with their credit cards.

That's the worry among some economists and credit counselors as home lending has shifted abruptly into low gear this summer. That leaves homeowners owing big sums to Visa or MasterCard without an important escape hatch -- the ability to pay down the plastic by dashing off a check from their home equity line of credit or rolling the debt into a new, bigger mortgage.

"You're not going to be able to get that mortgage loan. You'll be stuck with the higher interest credit card debt," warns Carl Steidtmann, chief economist with Deloitte Research. "We will have to live within our means. I know it's a troubling phenomenon. But we're not going to be able to spend at levels well above our income levels."

This is worth watching, as it can reveals the degree of actual financial stress the consumer is under . . .

Source:
Defaults on credit card bills in US rising
Saskia Scholtes
FT, August 28 2007 03:00
http://www.ft.com/cms/s/0/f37a80c6-54fe-11dc-890c-0000779fd2ac.html

The next credit crunch?
As home loan market tightens, mounting credit card debt could spur new crisis
Susan Chandler
Chicago Tribune, August 26, 2007
http://www.chicagotribune.com/business/chi-sun_crunch0826aug26,0,4784210.story

Media Appearance: Kudlow & Company (8/28/07)

Tuesday, August 28, 2007 | 04:15 PM

in Media

Tonite, its the regular show with Larry back from vacation. My pal Herb Greenberg of Marketwatch is on, as is Keith Wirtz of Fifth Third Bancorp.

Special appearance tonite: Dennis TOP TICK Kneale.

You may recall that the last time Dennis and I were on together, he pounded his chest about how right his uber-bullish calls were -- on July 17, 2007. Two days later, the market topped and rolled over. Yes, thats correct, Dennis Kneal's hubris-filled chest pounding PRECISELY nailed the market's recent top.

As I noted the very next day:

"It is inevitable that when a scribbler who does not manage money for a living begins to pound his chest about calls he made -- economic calls that have so far proven to be incorrect -- we are seeing a warning sign. When the crowing has been emboldened by a 1,400 point market run, all it means is that we were overdue for some sort of correction."

-The Dennis Kneale ~~Correction~~ Top !
http://bigpicture.typepad.com/comments/2007/07/the-dennis-knea.html

Don't take my word on it -- here is a chart:

The moral of the story: NEVER MAKE THE TRADING GODS ANGRY !

Fundie Analysts

Tuesday, August 28, 2007 | 01:15 PM

in Earnings | Markets | Psychology/Sentiment

Merrill Lynch cut its rating on the brokerage stocks to “neutral” from “buy” -- including financial-services giants Citigroup, Lehman Brothers Holdings, and Bear Stearns.

Yet another example of the old Wall Street saw about Fundamental Analysts:

Don't need 'em in a Bull market, don't want 'em in a Bear market.

(with my apologies to my fundie friends)

The Ongoing Impact of the Housing Sector

Tuesday, August 28, 2007 | 11:45 AM

John Mauldin is away this week, and so I contributed to his Outside The Box series in a post called "The Ongoing Impact of the Housing Sector."

The fun part of writing that was assigning blame for all of the problems in the credit market. As it turns out, only a few people are actually responsible:

* Federal Reserve (FOMC)
* Borrowers
* Mortgage brokers
* Appraisers
* Federal Government
* Fannie Mae
* Lending banks
* Wall Street firms
* CDO Managers
* Credit agencies
* Hedge funds
* Institutional Investors (pensions, insurance firms, banks, etc.)
* And back to regulatory role of the Federal Reserve

Other than those few groups, I don't know who else desrves the blame . . . ; )

Case-Shiller Home Price Index Posts a Record Annual Decline

Tuesday, August 28, 2007 | 09:56 AM

in Real Estate

The above chart is through June 2007

We should be hearing from the bottom callers any day now:

“The pullback in the U.S. residential real estate market is showing no signs of slowing down,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “The year-over-year decline reported in the 2nd quarter of 2007 for the National Home Price Index is the lowest point in its reported history, which dates back to January 1987. On a regional level 17 of the 20 metro areas are showing declines in their annual growth rate from what was reported in May.”

During this cycle, Boston was the first metro area to report negative year-over-year returns, back in April 2006. In June 2007, Boston showed an improvement in its annual rate of decline from the value reported in May, –3.9% versus –4.3% reported in May. Boston has shown improvement since the beginning of the year, where its annual growth rate measured –5.5%. More data however, is needed to determine whether Boston, whose growth rate turned negative before other metro areas, is truly the first metro area to turn around.

Note that its a clean sweep: decreases in every city measured, on a year over year basis:

Table courtesy of TFS Derivatives Corp

Sources:
Case-Shiller U.S. National Home Price Index Posts a Record Annual Decline in the 2nd Quarter of 2007
S&P, Aug 28, 2007 09:00 AM EST PDF
http://www2.standardandpoors.com/spf/pdf/index/csnational_release_082857.pdf

Existing Home Sales Slowest in 5 Years
Martin Crutsinger
AP Economics Writer, Monday August 27, 5:11 pm ET
http://biz.yahoo.com/ap/070827/economy.html?.v=13

Home inventories rise to 16-year high
Rex Nutting
MarketWatch, 12:15 PM ET Aug 27, 2007
http://tinyurl.com/2v89t7

Construction Employment, Contractors, Jobs

Tuesday, August 28, 2007 | 07:15 AM

in Consumer Spending | Employment | Real Estate

As I mentioned in earlier this year, we sold our house, and moved late March.

Since settling in, we started some work on a house that was 50 years old, pretty much all original condition. We extended a half bath into a full bath, renovated the upstairs bathroom (Mrs. Big Picture called it "The ugliest bath in America"). We put in Central A/C; In the den, we had to replace the rotting sheetrock in one wall, and we added high hats, tiled the floor with slate, lots of other little items. An old tree that was hanging dangerously over the main part of the house had to be pulled down, and as long as we were doing that, we yanked out all of the overgrown shrubs in the front of the house.

What's been amazing -- and very different than the last renovation work we did 3 years ago -- is just how quickly and easily contractors have been to find:

• The tree folks removed two big old trees, and ground the stumps down to sawdust -- a week after we hired them;

• The bathroom and tile guys were supposed to start late August - and due to cancellations, they began work a month early. They are just about done -- 4 weeks before they were scheduled to start;

• Keyspan Energy installed the Central A/C -- only a week after giving us an estimate, a crew of 6 guys came to the house and installed a 3 1/2 ton Trane unit, and all the venting;

• On Friday, we spoke with the painter, who was highly recommended by friends. We needed them to pull down old Wallpaper, spackle, prep, and paint the full interior. When are they going to start work? They began yesterday. Oh, and they were exceedingly reasonable;

In short, every contractor we spoke with, booked, or began work was unbelievably available, flexible on time, negotiable on price.

Perhaps this recent headline has something to do with it: Construction job losses could top 1 million.

While BLS is reporting that construction job losses are de minimis, the reality int he real world is that Job losses in the construction sector are significant. Unlike what you may have heard, I do not believe nonresidential commercial construction is anywhere near offsetting the loss on the residential building side:

"Construction employment fell about 15 percent in both the 1990s and 1980s recessions, and it dropped about 18 percent in the recession of the mid-1970s, according to the Bureau of Labor Statistics (BLS).

In each case, the sector's declines were far steeper than overall job losses, and recovery took longer. But in the 2001 recession, declines were relatively modest as consumer-led demand offset weak business spending.

About 7.7 million Americans are employed by construction companies, according to the BLS, down about 75,000 from a peak in September 2006. The sector's unemployment rate of 5.9 percent compares with 4.6 percent for the overall labor force. A 15 percent decline now would mean more than 1 million jobs lost."

According to BLS economist, Chris Goodman, there is a closely correlation between construction spending and nonresidential commercial construction job cuts -- on about a 6 month lag. "Construction spending in June fell for the first time since January, while private residential construction posted its 16th straight monthly drop."

~~~

During the boom, contractors were unbelievably busy, non-negotiable -- and bit difficult, given all the demand. Not surprising, that is no longer the case these days.

Anecdotal evidence for sure -- but the degree and severity of the change has been quite astonishing . . .

Source:
Construction job losses could top 1 million
Nick Zieminski
Reuters, Sun Aug 26, 2007 12:34PM EDT
http://www.reuters.com/article/ousiv/idUSN2636970820070826

The CD Turns 25

Monday, August 27, 2007 | 11:27 PM

in Digital Media | Music | Technology

We love lists at TBP. The 25th anniversary of the CD is a convenient excuse for these fascinating yet irrelevant data points about the development of CD technology.

Via the BBC, consider this:

• The compact disc project was launched following Philips' failure with its video disc technology in 1978.

• The video disc was one of the first commercial products to take advantage of laser technology that could read information from a disc without any physical contact.

• Research into the video disc began as far back as 1969, and itself was inspired by Italian Antonio Rubbiani, who had demonstrated a rudimentary video disc system 12 years earlier.

• In 1970 Philips began work on what was called the ALP (audio long play) - an audio disc system to rival vinyl records, but using laser technology.

• Lou Ottens, technical director of the audio division at Philips, was the first to suggest that the ALP be made smaller than the dominant vinyl format and should aim for one hour of music.

• The project initially flirted with the idea of quadraphonic sound but a disc with one hour of music had to be 20cm in diameter and so the plan was abandoned.

• In 1977 Philips began to take the development of a new audio format much more seriously. A new name for the product was discussed and names considered included Mini Rack, MiniDisc, and Compact Rack.

• The team settled on Compact Disc because it was felt it would remind people of the success of the Compact Cassette.

• In March 1979 Philips conducted a press conference to show off the audio quality of its CD system in production and also to impress upon rivals how well it was progressing.

• Philips first CD player cost more than £1,000 in today's money

• A week later Philips travelled to Japan after the Japanese Ministry of Industry and Technology (MITI) had decided to convene a conference to discuss how the industry could create a standard for the audio disc. The company left Japan having agreed a deal with Sony.

• Philips' plan for a CD with a 11.5cm diameter had to be changed when Sony insisted that a disc must hold all of Beethoven's 9th Symphony.

• The longest recording of the symphony in record label Polygram's archive was 74 minutes and so the CD size was increased to 12cm diameter to accommodate the extra data.

• In 1980 Philips and Sony produced their Red Book, which laid down all the standards for compact discs. From that time on the companies worked separately on their own CD equipment but in the early days agreed to share components.

• In April 1982 Philips showed off a production CD player for the first time. "From now on, the conventional record player is obsolete," said Lou Ottens.

• The first commercial CDs pressed were The Visitors by Abba and a recording of Herbert von Karajan conducting the Alpine Symphony by Richard Strauss.

• US record labels were initially very sceptical about the CD. A year after launch there were 1,000 different titles available.

• In 1985 Dire Straits' Brothers In Arms became the first CD to sell more than one million copies. It is still the world's most successful CD album.

• In 2000 global sales of CD albums peaked at 2.455 billion. In 2006 that figure was down to 1.755 billion.

Sources:
How the CD was developed
BBC, Friday, 17 August 2007, 10:30 GMT 11:30 UK
http://news.bbc.co.uk/1/hi/technology/6950933.stm

Compact disc hits 25th birthday
17 August 2007, 11:07 GMT 12:07 UK
http://news.bbc.co.uk/1/hi/technology/6950845.stm

Who Knew?

Monday, August 27, 2007 | 02:30 PM

in Credit | Psychology/Sentiment

via Misstrade

New Home Sales= Zero Gains, +/-

Monday, August 27, 2007 | 11:49 AM

in Data Analysis | Economy | Psychology/Sentiment | Real Estate

"The U.S. Commerce Department said Friday that new home sales rose 2.8% in July after falling 4% in June."

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That was how most of the MSM covered Friday's New Home Sales.

The problem is, it is not correct.

First, let's start with the actual data release, via Commerce:

Sales of new one-family houses in July 2007 were at a seasonally adjusted annual rate of 870,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.

This is 2.8 percent (±12.0%)* above the revised June rate of 846,000 and is 10.2 percent (±12.3%)* below the July 2006 estimate of 969,000.

That seems pretty straight forward -- except the way it was reported ignored the statistical reality.

Commerce noted what the margin of error and statistical significance was. They included this small caveat about the actual data:

Estimated average relative standard errors of the preliminary data are shown in the tables. Whenever a statement such as “2.5 percent (±3.2%) above” appears in the text, this indicates the range (-0.7 to +5.7 percent) in which the actual percent change is likely to have occurred. All ranges given for percent changes are 90-percent confidence intervals and account only for sampling variability. If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.

So the correct answer to the question "What were New Home Sales in July 2007" is as follows:

There was no statistically significant change from June to July. According to the Department of Commerce, the range was -9.2% to +14.8%.

There was no statistically significant change on a year-over-year basis, either. Commerce reported a range from -22.5% to +2.1%.

This is not how it gets reported.

I am not sure if it is a case of innumeracy or of the media wouldn't have a story about New Home Sales otherwise. As the Commerce Department itself reported in the footnotes, Friday's New Home Sales were statistically meaningless.

Even the nearby chart has the illusion of precision

Existing Home sales were out today, and may come in for the same treatment later this weekend.

Note: This is before we even factor in the cancellation factor after the jump:
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UPDATE August 27, 2007 2:21pm

I see that Northern Trust's Paul Kasriel comments:

Gain in New Home Sales Is Inconsistent with Reports from Home Builders

Today’s report that suggests a recovery in sales of new homes is not anywhere close. At the same time, the increase in sales and price are suspect because the financial press has a number of stories everyday about home builders reporting significant declines in sales and earnings, a plethora of incentives to move sales, cancellations of contracts, and so on. Cancellations of contracts to purchase homes are not reflected in this report. It is reasonable to assume that excluding cancellations leads to overestimating sales of new homes and underestimating inventories of unsold homes. Also, the home builders (see chart 4) survey for August showed the second lowest reading in the history of series. We need to see reports of future months and watch out for revisions of estimates of home sales.

Sources:
NEW RESIDENTIAL SALES IN JULY 2007 (PDF)
AUGUST 24, 2007 AT 10:00 A.M. EDT
http://www.census.gov/const/newressales.pdf

How does the Census Bureau handle cancelled sales contracts?
http://www.census.gov/const/www/salescancellations.html

Gain in New Home Sales Is Inconsistent with Reports from Home Builders
Northern Trust Global Economic Research
August 24, 2007
http://tinyurl.com/2rnbcb

Continue reading "New Home Sales= Zero Gains, +/- "

"Capitalism without Financial Failure is Not Capitalism at All"

Monday, August 27, 2007 | 07:19 AM

in Credit | Derivatives | Federal Reserve | Psychology/Sentiment | Real Estate

Jim Grant with a very worthwhile read in ~~this~~ yesterday morning's NYT: The Fed’s Subprime Solution.

Grant notes that credit boom and bust cycles "have occurred in every institutional, monetary and regulatory setting," and (correctly IMO) places the blame on the "human race, first and foremost. Well-intended public policy, second. And Wall Street, third — if only for taking what generations of policy makers have so unwisely handed it."

How does this manifest itself?

"Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today — not only in mortgages but also in a variety of other debt instruments. First, they overdo it until the signs of excess become too obvious to ignore. Then, with contrite and fearful hearts, they proceed to underdo it. Such is the “credit cycle,” the eternal migration of lenders and borrowers between the extreme points of accommodation and stringency.

Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons.

One is the sheer size of the debt in which people have belatedly lost faith. The issuance of one kind of mortgage-backed structure — collateralized debt obligations — alone runs to $1 trillion. The shocking fragility of recently issued debt is another singular feature of the 2007 downturn — alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does."

The end game has yet to be written. However, it may not be a replay of the 1990s. Grant suggests that Bernanke is not the same sort of Central Banker that Easy Al was:

"Now comes the bill for that binge and, with it, cries for even greater federal oversight and protection. Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich."

Joseph A. Schumpeter would be proud . . .

Source:
The Fed’s Subprime Solution
James Grant
NYT, August 26, 2007
http://www.nytimes.com/2007/08/26/opinion/26grant.html