"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

26 January 2007

KBH FINALLY Subject to an SEC Probe-'bout time

So we wrote about this KB Homes outrage in November and now CNBS's Steve Liesman is humping a story that Commerce Dept reported new home sales were up 4.8% in December. But these phony numbers are "seasonally" adjusted and don't adjust for that pesky 45% cancellation rate. All one can say is that these numbers are a bad joke. The warm weather in December got the homies building busily in a normally weak month. So the seasonal adjustment was HUGE !

SEC steps up KB Home options probe
NEW YORK (Reuters) - KB Home (NYSE:KBH - News), whose long-time chief stepped down following an internal probe into stock-options awards, said on Friday that U.S. regulators have opened a formal investigation into its options practices. The company, the No. 5 U.S. home builder, received notice of an informal inquiry in August. It said in a regulatory filing on Friday that it was notified on January 19 that the U.S. Securities and Exchange Commission is now conducting a formal investigation.

In a formal probe, the SEC has the power to subpoena documents and other information from a company. KB Home "has cooperated with the SEC regarding this matter and intends to continue to do so," the company said in the filing. In November, CEO Bruce Karatz retired after 34 years with KB following an internal report that showed the company used incorrect measurement dates for stock option grants from 1998 to 2005. Karatz agreed to repay about $13 million in gains he received from mispriced options.

Karatz, like other heads of publicly traded home-building companies, saw his compensation soar in recent years thanks to the U.S. housing boom. He took in nearly $45.6 million in the fiscal year ended November 30, 2005, including base pay, bonuses, restricted stock and stock option grants, up about 29 percent from $35.3 million in 2004, according to, a compensation specialist.

The U.S. housing market has slowed markedly in the past year.

KB is among more than 160 U.S. companies that are the focus of government investigations or are undertaking internal probes into options practices. The focus is on options that were backdated to increase their value to recipients, mostly top executives.

KB said in December that it expects to restate financial results for 2003 through 2005 and the first half of 2006 because of options pricing errors. It has said it expects a noncash expense of about $41 million spread over several years.

25 January 2007

BBB Crashes while NAR Deletes Criticism of shill David Lereah on Wikipedia

This story really cuts into the housing cheerleading going on.
The NAR is getting more desperate. Someone who is a Wikipedia user sent this information to me: You'll like this. Someone at a NAR IP address, deleted criticisms of David Lereah from his Wikipedia page, Here are the diffs: I restored the deleted material. Basically, someone from the National association of Realtors deleted from Wikipedia's David Lereah page the part that read: Lereah has been criticized for encouraging the rise of the United States housing bubble. According to an interview in the Chicago Tribune, "In October 2005 Lereah was busy calling the bubble believers `Chicken Littles.' Many of the predictions espoused by the `Chicken Littles' are fast becoming closer to reality. David Lereah has lost credibility because of his irresponsible cheerleading."[4] Lereah said that he has been forecasting a decline in sales for some time: "For three years, I've said, `This is the year that sales will come down.'" It is a real low to delete legitimate criticism of Mr. Lereah from Wikipedia. If you type in David Lereah into Google the third hit is this blog. Take that Lereah! The National Association of Realtors (NAR) is an organization that is out to help Realtors receive more money from transactions of housing units. It's stated interest is to help Realtors. They are not here to help the public. They use deception and cheerleading by paid shills like Mr. Lereah to promote their harmful agenda.

MBA: Mortgage Applications Decrease reddit
Source:Calculated Risk (CalculatedRisk) Jan 24, 2007 1:50 p.m. -
Rate spike not likely to help these guys- MBI Begins to Collapse, CORS Next??
The Mortgage Bankers Association (MBA) reports: Mortgage Refinance Applications and Purchase Applications Both Decrease (UPDATE: link added) Click on graph for larger image. The Market Composite Index, a measure of mortgage loan application volume, was 611.3, a decrease of 8.4 percent on a seasonally adjusted basis from 667.2 one week earlier. On an unadjusted basis, the Index decreased 5.7 percent compared with the previous week and was up 3.8 percent compared with the same week one year earlier. The Refinance Index decreased by 9.6 percent to 1848.8 from 2045.8 the previous week and the seasonally adjusted Purchase Index decreased by 8.4 percent to 402.7 from 439.7 one week earlier. Mortgage rates increased: The average contract interest rate for 30-year fixed-rate mortgages increased to 6.22 from 6.19 percent ... The average contract interest rate for one-year ARMs increased to 5.91 percent from 5.85

And now the NAR claims prices are UP YEAR OVER YEAR- Who are they kidding???
Existing-Home Sales Ease, Supplies Tighten In December; 2006 Historically High
Existing-home sales eased but prices stabilized as inventories tightened in December, while 2006 was the third-highest sales year on record, according to the National Association of Realtors®. Total existing-home sales – Total existing-home sales – including single-family, townhomes, condominiums and co-ops – eased 0.8 percent to a seasonally adjusted annual rate1 of 6.22 million units in December from a level of 6.27 million in November. Sales were 7.9 percent lower than a 6.75 million-unit pace in December 2005. There were 6,480,000 existing-home sales in all of 2006, down 8.4 percent from a record 7,075,000 in 2005. The second highest total was 6,779,000 in 2004; NAR began tracking home sales in 1968.

David Lereah, NAR’s chief economist, said home sales remain historically high. “Despite all of the doom-and-gloom stories and dire predictions over the last year, 2006 was the third strongest year on record for existing-home sales,” he said. “It looks like we’re moving beyond the low for the housing cycle last fall, and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices.”
Total housing inventory levels fell 7.9 percent at the end of December to 3.51 million existing homes available for sale, which represents a 6.8-month supply at the current sales pace – down from a 7.3-month supply in November. The national median existing-home price2 for all housing types was $222,000 in December, which is unchanged from December 2005. The median is a typical market price where half of the homes sold for more and half sold for less. For all of 2006, the median price was also $222,000, up 1.1 percent from a median of $219,600 in 2005.
We're getting kinda nervous and here's the new NAR Prezzie to Pump:
According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 6.14 percent in December, down from 6.24 percent in November. The December rate was the lowest since October 2005 when it averaged 6.07 percent. NAR President Pat Vredevoogd Combs, from Grand Rapids, Mich., and vice president of Coldwell Banker-AJS-Schmidt, said the market has clearly settled with some minor monthly fluctuations. “We expect home sales to rise modestly over the course of this year,” said Combs. “Although local markets vary, price appreciation will be below normal in most of the country this year, but we’re looking for slow, steady gains in both home sales and prices through 2008.”

Single-family home sales slipped 1.3 percent to a seasonally adjusted annual rate of 5.44 million in December from 5.51 million in November, and were 7.2 percent lower than the 5.86 million-unit pace in December 2005. In all of 2006, single-family sales declined 8.1 percent to 5.68 million, the third strongest total on record. The median existing single-family home price was $221,600 in December, which was unchanged from a year ago. For all of 2006, the median single-family price was $222,000, up 1.4 percent from 2005. Existing condominium and cooperative housing sales rose 2.1 percent to a seasonally adjusted annual rate of 777,000 units in December from an upwardly revised level of 761,000 in November.

Even condo prices are up, according to NAR????? IN what world?
Last month’s sales activity was 12.2 percent lower than the 885,000-unit pace in December 2005. After setting 10 consecutive annual records, condo sales for all of 2006 fell 10.4 percent to 803,000 units, the third highest year on record. The median existing condo price was $227,000 in December, which was 0.3 percent above a year ago. In all of 2006, the median condo price was $221,800, down 0.9 percent from 2005

24 January 2007

Vasco Data Services (VDSI-NAZ) - Corporate Computer Security Steps Up

Investment Thesis: Chicago-area security company Vasco Data Services (VDSI-OTC) offers a pure play on increased corporate spending on institutional data security as a provider of open standards-based hardware and software security systems. Operating from a strong European franchise, VDSI’s software business in the U.S. is accelerating due to established banking data processor Fiserv (FISV).
Key Investment Drivers:
• Leading player in online verification, the fastest growing segment (+30%) of the information security business;
• Two other competitors acquired last year at big revenue multiples (6-7x) and the industry appears to face further consolidation;
• VDSI has a strong competitive position in Europe due to smart cards and US business is growing rapidly due to alliance with bank processing leader Fiserv;
• Core banking client base has now committed to using “tokens” sold by VDSI and others for online AND mobile user (e.g. client) authentication; and
• Upcoming catalysts may come from eBay and 2007 earnings guidance (+50%).

Online Security Segments Consolidating:

The online verification industry is consolidating and recent deals suggests that corporate adoption of such systems is well underway, and will be integrated into enterprise storage and processing systems. VDSI, RSA (now part of EMC: NYSE) and Aladdin Knowledge Systems (Nasdaq:ALDN) operate in the hot field of user identification and access authorization through, among other things, special “keys” used on VPNs (corporate virtual private networks). In acquiring RSA last summer for $2.1B (6.5x revenues), EMC made a strategic entry into a complimentary field to its core storage business which it anticipates annual potential sales of $1 billion within a few years. IBM's responded last August 2006 by buying RSA competitor Internet Security Systems (ISSX), raising the stakes for other enterprise systems operators. Microsoft (MSFT), Symantec (SYMC), Hewlett-Packard Co. (HPQ), Oracle (ORCL) and SAP (SAP) could all be looking to acquire a mid-sized pure play security company. EMC’s Security Division just reported a 26% revenue gain to a $500m annual revenue run rate, incorporating the RSA acquisition, noting that the “strong performance reflected continued traction for RSA's consumer identity protection solutions as a result of federal guidelines for stronger authentication practices in online banking and concerns over credit card fraud and identity theft.”

As Microsoft prepares to release its new Vista operating system, many technology analysts are concerned about the security and privacy shortcomings in the new release. So many corporations have already become more aggressive about security of their data, especially since Symantec and other consumer security providers have been unable to prevent security breaches. However, the security business has already gone vertical- online banking and e-commerce customers are being equipped with their own digital passes (or “tokens”) to access information.

Competitors: VascoData Aladdin SafeNet SecureComput
Revs(FY06E) $ 76.5m $ 88.0m $ 290.1m $ 180.5m
Revs (FY07E) $110.0m $ 96.6m $ 316.8m $ 250.2m
EPS (FY06E) $0.33 $ 1.07 $ 0.88 $ 0.25
EPS (FY07E) $0.45 $ 1.14 $ 1.33 $ 0.24
P/E Ratio (F) 31.1x 15.3x 17.7x 26.9x
PEG Ratio .62x 1.10x .83x 1.79x
VDSI: Strong European Positioning and US Strength from Fiserv Alliance:

With a $400m market cap, VDSI is hardly an institutional name. Yet it’s emerging as a world-leader for strong user authentication, with in excess of 550 international financial institutions and approximately 3,300 blue-chip corporations and governments located in more than 100 countries. VDSI’s European business has been booming with online user identification broadly accepted, with a recent VDSI contracts with leading Belgian bank KBC and Allied Irish Banks announced in January 2007. A VDSI smart card addition last year improved its competitive standing. In May 2006, VDSI announced its acquisition of Logico Smart Card Solutions of Vienna, Austria, an authentication storage specialist with extensive experience in smart card based authentication.

New Online and Mobility Applications Compelling Additional Safeguards:
Banking via telephone and wireless mobile devices has become an important delivery channel for financial institutions. As with Internet banking, telephones and wireless devices afford great convenience for bank customers, but unfortunately they too are prone to phishing and other forms of attack. The Federal Financial Institutions Examination Council instituted regulations in late 2005 that banks need to safeguard customer data. U.S. financial institutions had dragged their feet on online authentication but now efforts to increase client protection are being used proactively for differentiation. VDSI is the leading provider of that more than 100 U.S. financial institutions have integrated VASCO solutions into their Internet banking offerings. VASCO's alliance with Fiserv, Inc. (Nasdaq: FISV), a U.S. Fortune 500 company that provides information management systems and services to 17,000 clients in the financial industry, has been a catalyst for the growth. VDSI added 29 banking customers in Q306 and is planning to double its domestic sales force in 2007. Banks represent currently 86% of sales, but a variety of businesses, governments and others use their products worldwide.
VDSI Could Move on eBay PayPal News and Upcoming Analyst Meeting:

Online authentication service and software providers are the fastest growing segment of the security business at 30% annually, with coming news flow likely to highlight VDSI. VDSI and a few other ‘industrial strength’ security providers deliver user authentication software and hardware for the financial world, remote access, e-business and e-commerce via its Digipass hardware and software security products. On January 24, eBay plans to offer PayPal users security tokens in a bid to strengthen the security of its payment service, and Vasco's authentication-token product is likely to be introduced as part of that service. And since the company has beaten analyst expectations by a third in the last two quarters and is poised to conduct a major analyst meeting on January 31, then some hedge funds and larger institutions are likely to take notice. VDSI will report Q406 earnings then and expectations are for revenue of $25.72 million and earnings of 11 cents a share, according to a consensus of First Call analysts. FY 07 earnings are slated to reach $107m in revenues and $0.43 of earnings, but guidance should be increased at the analyst meeting to $110m and $0.45 of earnings. A real catalyst would be a contract signing by a U.S. banking major, such as Citicorp which has been in discussions with VDSI since fall.

Disclosure: TMV owned a long position in VDSI as of 1/24/07

Housing Crisis Deepens on the Coasts

More Californians at risk of losing homes
David Streitfeld of the LA Times details the ongoing disconnect between mortgage loan defaults and household financial crises. Now jump to the bottom and read the CRL study which projects $164B in mortgage losses and 22m homeowners foreclosed.
The number of Californians defaulting on their mortgage loans is rising rapidly, according to figures released Tuesday, providing striking evidence that more people are at risk of losing their homes. Default notices jumped 145% in the last three months of 2006, accelerating a trend that began in late 2005 as home sales started to cool. It was the largest number of default notices in any three-month period since 1998.

"Analysts" don't consider a 8 year record for defaults significant?? How can that be?
Analysts said the increase was not worrisome — yet. But if the number continues to escalate, it could drag down home values in certain communities, they warned. "So far, this isn't alarming," said John Karevoll, chief analyst at DataQuick Information Systems, which compiled the data. But if default notices "keep going up at this rate, it could get nasty fast," he added.

And, amazingly enough, it's first time home buyers who are vulnerable. The mortgage industry abandoned decades' old lending standards to provide "exotic" no-doc loans to people for more they could afford to service. Default notices more than doubled to nearly 40K in Q406 while foreclosures SOARED sevenfold. Analysts???
Home markets that are most vulnerable include the Inland Empire and the Central Valley, both of which drew throngs of first-time buyers even as the housing boom was ending. Such homeowners are the most at risk of losing their homes because they have relatively little equity in their properties, making it harder to refinance their mortgages. Default notices are the initial step in the foreclosure process. In the fourth quarter of last year, lenders issued such notices to 37,273 borrowers across the state, warning them that they were at risk of foreclosure, compared with 15,196 during the same period a year earlier, DataQuick said. But foreclosures also are on the rise. There were 6,078 in the last quarter of 2006, up from 874 a year earlier.

Analysts are unmoved... plenty o'jobs out there...
Today, the economy is healthy and unemployment has rarely been lower. "I really don't see any distress out there," said Chris Comer, a mortgage broker at Pacific Capital in San Marcos, Calif. "Most people getting notices of default are figuring out ways to get those mortgages current by any means possible so they're not kicked out in the street." Most people, but not everyone. James Brown, a 66-year-old retired insurance agent in Salinas, Calif., has a history of heart trouble. When he had an operation in 2005, he said, "the doctor gave me a 50-50 chance I'd die on the table. So I did a stupid thing: I refinanced the house." Brown's goal in tapping his equity was to give his wife, Monica, a $100,000 cushion after his death. But he didn't read the paperwork carefully, and didn't realize that his monthly loan payment would skyrocket. There was also a problem with the operation: It worked. A year or two earlier, that would have been nothing but good news. In the early part of the decade, Brown recalled, "property values went crazy." "People pulled up in Silicon Valley and went to Salinas, and paid here what they had been paying there," he said. But Brown awoke to a different world. With the new loan, his payments went to $4,500 a month from $2,900. The $100,000 in equity he pulled out of the house went to his medical expenses and other bills. The property has dropped in value to $750,000 from $899,000, leaving him without enough equity to refinance. He arranged to sell the place, but the prospective buyers couldn't qualify for a mortgage. In September he gave up and stopped paying the mortgage. He's now in default, speeding toward foreclosure. "Three times a week, they call and say, 'Where's my money?' " he said. "If I hadn't survived, everything would have been fine."

Brown's situation illustrates a potential wild card in the housing market that barely existed a decade ago. Lenders have invented all sorts of newfangled loans, many of which are reset to higher interest rates after a fixed period. The ability of borrowers to repay such loans, particularly in a weak market, is untested.

"People are living on the edge, and they can't help it with the price of houses," said Barbara Swist, a Costa Mesa mortgage broker who is helping Brown sort through his options. "They have good jobs but they bought over their heads, buying into the American dream."

South FL Condo Inventory Soars 111% Watch out for Corus Bankshares !

South Florida home sales up?, prices down-Inventory rises 95% from a year earlier
Home sales in South Florida's Broward County edged up in December, as a massive selection of inventory and lower prices lured buyers into the market, according to statistics provided by the Realtor Association of Greater Fort Lauderdale. Single-family home sales totaled 599 last month, up 1 percent from 593 sales a year earlier. The median home price slid 7.9 percent during the period -- from $379,900 to $350,000. Overall the market appears to be returning to reality," said RAGFL President Christine Hansen. "Home prices are stabilizing and resemble figures from what we would consider 'typical' markets, which is a positive sign." The 10,679 single-family homes listed for-sale last month represented a 95.4 percent increase from the 5,465 listings in December 2005, indicating a strong buyer's market. In the condo-townhome market, total available inventory rose to 14,704 listings last month from 6,968 a year earlier -- a 111 percent increase. The median condo price, however, actually gained 2.5 percent during the period to $199,750.

The downside from the "lure of the American dream" is also the opinion of the Center for Responsible Lending, a nonprofit advocacy group based in Durham, N.C. Last month, the center issued a lengthy analysis explaining how millions of so-called sub-prime loans would soon turn bad. Sub-prime loans are made at higher rates — and include more onerous terms — to borrowers who don't qualify for lower-cost "prime" mortgages. Sub-prime foreclosures would increase the most, the authors concluded, in states that had seen strong price appreciation during the boom. That would include New York, Virginia, Maryland and particularly California. The borrowers most at risk are naturally those who bought most recently
The Center estimates that a quarter of the sub-prime loans made in the Central Valley city of Merced last year will result in foreclosure. That would be the highest rate in the country, based on the center's calculations. Eight other California cities, including Vallejo, Bakersfield, Fresno and Stockton, were among the top 15 projected foreclosure rates. That geographic focus is consistent with Tuesday's DataQuick numbers. The Central Valley, with about 6.5 million people, had 8,531 defaults and 1,646 foreclosures in the last three months of 2006. Los Angeles County, with 10 million people, had fewer of each. For the state as a whole, the Center for Responsible Lending projects a failure rate of 21.4% for 2006 sub-prime loans, a level exceeded only by Nevada and Washington, D.C. Foreclosed homes are typically sold at a discount, which can hurt property values of nearby houses.

Report Reveals 2.2 Million Borrowers Face Foreclosure on Subprime Home Loans; Homeowners to lose at least $164 Billion in Sub-Prime Loans
A new CRL study reveals that millions of American households will lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market. The “Losing Ground” study is the first comprehensive, nationwide review of millions of subprime mortgages originated from 1998 through the third quarter of 2006. CRL finds that despite low interest rates and a favorable economic environment during the past several years, the subprime market has experienced high foreclosure rates, and we project that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

21 January 2007

Why Backdating Equals a Criminal Windfall

Broadcom TRIPLES its executive stock option ("ESO") charge to $2.2BILLION! And the stock soars 7% on that sanguine news. Options issues to purchase 240 MILLION Shares. UFB!

Stock option errors result in $2.22B charge for Broadcom
Broadcom Corp. will take charges of $2.22 billion to correct accounting flaws related to misdated stock option grants. The restatement of financial statements from 1998 to 2005 with the Securities and Exchange Commission completes the company's investigation into the stock-option grants. The restatement is the largest so far among companies that have looked into its grant practices. According to the company, the charge so large because the company issued options to purchase nearly 240 million shares to employees from June 1998, the time of the company's initial stock offering, through May 2003, "a period of unprecedented market volatility."

ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date. Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest. Backdating allows executives to choose a past date when the market price was particularly low, thereby inflating the value of the options.

An example illustrates the potential benefit of backdating to the recipient. The Wall Street Journal (see discussion of article below) pointed out a CEO option grant dated October 1998. The number of shares subject to option was 250,000 and the exercise price was $30 (the trough in the stock price graph below.) Given a year-end price of $85, the intrinsic value of the options at the end of the year was ($85-$30) x 250,000 = $13,750,000. In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.

Funny, this article details how options backdating awareness has existed since 2003 or earlier, if you believe Wal-mart insiders.
David Yermack of NYU was the first researcher to document some peculiar stock price patterns around ESO grants. In particular, he found that stock prices tend to increase shortly after the grants. He attributed most of this pattern to grant timing, whereby executives would be granted options before predicted price increases. This pioneering study was published in the Journal of Finance in 1997, and is definitely worth reading.

In a study that I started in 2003 and disseminated in the first half of 2004 and that was published in Management Science in May 2005 (available at, I found that stock prices also tend to decrease before the grants. Furthermore, the pre-and post-grant price pattern has intensified over time (see graph below). By the end of the 1990s, the aggregate price pattern had become so pronounced that I thought there was more to the story than just grants being timed before corporate insiders predicted stock prices to increase. This made me think about the possibility that some of the grants had been backdated. I further found that the overall stock market performed worse than what is normal immediately before the grants and better than what is normal immediately after the grants. Unless corporate insiders can predict short-term movements in the stock market, my results provided further evidence in support of the backdating explanation.

19 January 2007


A very worthwhile read on the housing market.

Any serious analysis of the USEconomy must begin with an update on housing. In a nutshell, both housing starts and permits have fallen significantly, new home construction remains at high levels, inventories persist at near record levels, and consumer expenditures are overdue for a grand plunge. The banking distress has begun, let it be known. To call a housing bottom here is perilous, absurd, and probably highly inaccurate. Regard any such bottom proclamation as extremely biased, replete with vested interest, and probably intentionally falsified with a clear bias. Check the person’s employer. In my view, the housing bust has at least two and three more years of bleeding damage to go.

Nothing has changed on the imminent risk from the housing decline to the US banking system and USEconomy. Among the various corners of the banking system, losses have been finally felt with mortgage portfolios and their bonds. The big banks, which serve both as creditors and counter parties to hedge funds, have unloaded substantial amounts of mortgage bonds at a discount to their clients in secret deals to elude public detection, otherwise seen as the initial writedowns. They wish to avert a public panic. With 40% of banking system assets tied either to MBS bonds or to home loan portfolios, the regional banks will suffer huge losses. Home valuation at a national level cannot be reduced by a few trillion$ without corresponding asset loss in the mortgage bonds. Expect at least one regional bank to go bankrupt. Certain large bank subsidiaries might go bust, absorbed by the parent with huge losses incurred. Others will be gobbled up in convenient acquisition mergers to hide the effect. We are perhaps only several months away from banking systemic distress from the housing bust. Deep public concern is still at least one or two years away, which will reach a peak when their certificates of deposit are deemed at risk or seized. Gold will love that. Imagine millions of people in doubt, seeking real safety no longer perceived available in banks!

The most recent high profile mortgage distress signal came from HSBC, the world’s third largest bank in marketcap size behind Citigroup and Bank of America. What an unmitigated disaster their acquisition was in 2003 of Household International, a lender to subprime borrowers. HSBC increased their loan loss reserves to $1.38 billion in Q3 from $1.25 billion in Q2, and reported a 3.99% delinquent rate (over two months past due) for mortgages, car loans, and credit cards. They admit not to doing their homework before the acquisition of Household, a financial firm specializing in deadly adjustable mortgages. Concern over an infectious spread from the mortgage divisions of banks to the unsecured loan portfolio is acute. The word ‘implosion’ fits very appropriately to describe what has begun in the mortgage finance sector, worthy of the photo from a website ( which tracks the littered dead within the industry.

The KILLING FIELD list in the mortgage industry grows like a Who’s Not Who: OwnIt, Harbourton Mortgage Investment, Mortgage Lenders Network, Secured Funding, Origen Wholesale Lending, and more (see my report). Add several others like the subsidiary at H&R Block which has taken huge losses. Others will fall without any doubt whatsoever. The only question is the location, impact, and time required to spread the acidic damage. What is striking about the list is not the lack of recognition of their names, but rather the prominence of some of their creditor broker counter parties, big Wall Street names. Lenders relaxed standards in order to sustain business and their own jobs, not to mention bonuses and origination fees per loan. The inside word is that a credit crunch approaches quickly. The crisis will undoubtedly become a massive fraudulent enterprise where aggressive lenders will be accused of having pushing reckless home loans to people who were totally uncreditworthy. The issue was also fees for bond market underwriters, who rushed to convert loan packages into mortgage bonds, quickly offloaded to the unsuspecting public or foolish Wall Street firms. Watch more pushback by savvy Wall Street, and lawsuits like the one filed last summer by Bear Stearns to reject defective bonds.

The Center for Responsible Lending estimates that 2.2 million American homeowners will likely lose their homes via foreclosure. Default rates are terrible in many regions of the nation, not confined in any way since a systemic problem. One in five subprime mortgage customers who purchased homes in the last two years is likely to enter foreclosure, amounting to 1.1 million people. The most alarming conclusion made from the study, after analysis of more than six million mortgages since 1998, is that the risk of default is independent of the credit score of the borrower. The failures are occurring regardless of income and past credit history. In 1994, only 5% of mortgages underwritten were risky subprimes. Now the subprimes comprise over 25% of the mortgage industry, totaling over $600 billion in 2005. Abuses of negative amortization, piggyback loans to cover down payments, and other stretched deals are discussed in the January Hat Trick Letter report, as are the key specific factors tipping homeowners over the edge into foreclosure. The most dangerous bank system risk might not be the failures so much as the skewed internal underwriter risk controls, and policy for loan loss reserves. Piggyback loans are insane since they directly enabled loans which would not have been approved. They are called “silent seconds” since their loan-to-value lenders only report the first mortgage. Mortgage industry data is thus skewed and biased. Shocks are next.


Early damage has finally begun to grip the ABX index for “BBB” credit insurance. The credit default swaps (CDS) market concerns standard insurance for the vast collection of bonds, including many types of mortgages. Foreclosures mean deceased returns on investment within mortgage portfolios for banks. The BBB type refers to subprime mortgage loans, as measured from a broad basket of size and regional locations. The ABX index has fallen suddenly in the late autumn and continues to fall. Relative to its own market, a drop of over 5% is large indeed. As quasi-insurer having invested in CDS contracts, your risk premiums rose and you profited like with a stock held. The index indicates a sudden decline in high risk mortgage conditions. The mortgage industry is unraveling precisely as my forecasts indicated last year. The concept of the credit default swap contracts is exactly the same as those pertaining to the General Motors bonds collateralized to car loans in summer 2005. As the bonds are damaged, the CDS contracts rise in value. The BBB index below absolutely screams of a widening crack in the mortgage industry, certain to extend into the banking system balance sheets. The scale of the BBB index is inverted to reflect fallen value of the mortgage portfolios.
Most USEconomic growth in this hollow recovery is attributed to equity extractions by an estimated 75%. In fact, it is tied to the major bulk of growth. Since the early 1990 decade, quarterly cashout loans against home equity have jumped by a remarkable 10-fold rise over a 10-year period. To claim its removal will be insulated from the overall USEconomy makes no sense whatsoever. This is the stuff of recessions. Home mortgage equity withdrawal has been sliced by 71% in the most recent four quarters reported up to 3Q2006. The impact will be felt broadly and deeply, especially at a time when adjustable mortgages are reset to higher monthly payment requirements.

Let it be known that banks and brokerage houses are shifting risk to hedge funds en masse, whose managers are traditionally more insane and driven by steroids. Nowhere is the Weimar trait more evident than in global credit and their derivative growth, whose magnitude is permitted to grow unchecked by collusive if not corrupted government agencies without any regulation.

Uber-blogger immobilienblasen explains further that the US housing forecast by the biggest bond investor in the country, PIMCO, is insanely sanguine. "PIMCO believes the most likely scenario for the U.S. in 2007 is that growth will remain below trend at about 2%, owing to the influence of the ongoing housing market correction and its expected impact on the labor market and consumer spending. That should all add up to a soft landing for U.S. growth and the global economy after the strong growth of the past few years. But we see the risks as skewed to the downside in the U.S., owing to the potential for a sharper-than-expected slowdown in housing that spills over into other sectors of the U.S. economy and slows consumer spending ( While we believe the rest of the world can take in stride a U.S. soft landing, a harder landing in the U.S. creates the potential for greater spillover effects and a harder landing for the global economy."

18 January 2007

Capital One Financial (COF) Big Miss...Lowered Guidance

Capital One-COF reports Q4 EPS $1.14 vs. consensus est of $1.24
COF sees 2007 EPS $7.40-$7.80 vs. consensus est of $8.11, which includes $430M of costs and charges. The company plans on buying back $2.25B worth of shares starting in Q2. So what will support the shares in the near term??? When you listen to the call, the quarter would have been a lot worse without the 42% gain Y-Y in the credit card business to $337m. Of course, the loan charge-off and allowance for future losses soared, but no wire service carried these negative details.

Capital One quarterly results, 2007 forecast, miss analyst estimates; North Fork benefits delayed
COF75.82, -0.71, -0.9% ) said. The company said it expects to make between $7.40 and $7.80 a share in 2007. Analysts were expecting fourth-quarter profit of $1.24 a share and 2007 earnings of $8.11 a share on average, according to a Thomson First Call survey. Capital One said it's still targeting $275 million of pre-tax synergies from its North Fork acquisition, but said most of these savings will be realized late in 2008 because of the "challenging" interest rate environment and the time it will take to convert to a single deposit platform and brand.

Downsizing is complete from the North Fork and Hibernia acquisitions with $8.5B in loans sold off in 2006, half out of COF and $1.5B of legacy housing loans from Hibernia and $4B of residential whole loans out of North Fork plus $5.5B of short-term residential housing securities. What a mess !!

CORS Missed and Conversion Lending Nearly Ceased

Condo lender Corus (or Porous) Bankshares (CORS-NYSE) missed last night and warned further about the condo lending opportunity and the real estate outlook in total.

"It should be no surprise that Corus, with a loan portfolio invested almost exclusively in loans to condominium developers, is feeling the effects of the nationwide slowdown in the housing market. Evidence of this slowdown is clear from the 39% decline in our pipeline of Pending Loans as compared to December 31, 2005. However, when analyzing our loan originations, it is important to differentiate between conversion loans and new construction loans. Our origination of construction loans in 2006 totaled $3.3 billion, which was up 24% from the amount of construction loans originated in 2005. Unfortunately, the conversion of apartments to condominiums all but ceased and, as a result, originations of conversion loans dropped dramatically in 2006 to only $546 million. The first quarter of 2006 was the last time we originated a meaningful amount of conversion loans, and we don't anticipate that changing in the near future.

"Aside from the effects on our new loan origination volumes, the slowdown in the housing market is also impacting Corus in terms of credit quality of loans already on our books. We have seen various projects that are experiencing slower sales of condominium units and/or lower prices than the developer or we would like. While construction projects are clearly not immune to the forces of the slowdown, conversion projects are presently displaying more obvious signs of weakness. We currently have two condominium conversion loans where we have discontinued the accrual of interest. While we have had other loans that have displayed signs of weakness, borrowers or their financial backers have been willing to step up to the plate and invest additional dollars, sign financial guarantees or take other actions that ultimately strengthen the loan from our perspective.

Where's the detail, Glick-boy??

"When foreclosure appears to be the best course of action for addressing a problem loan, we will not hesitate to do so. We believe that our loans were underwritten conservatively, leaving room for our loan amounts to increase or the collateral values to decrease and still have the Bank get repaid in full. As a result, we have no intention of agreeing to a workout if a borrower approaches us with the attitude that we should leave him in control of the project and give him all of the upside if the market turns around, but leaves the Bank to take all of the downside risk.

Here's what they said in October:

"Aside from the effects on our new loan origination volumes, the slowdown in the housing market is also impacting Corus in terms of credit quality of loans already on our books. We have seen various projects that are experiencing slower sales of condominium units and/or lower prices than the developer or we would like. While construction projects are clearly not immune to the forces of the slowdown, conversion projects presently seem to be displaying more obvious signs of weakness. [b]So far, we can report that we have only one condominium conversion loan which is nonaccrual and one additional loan listed as a Potential Problem Loan. However, we have had numerous other loans that have experienced meaningful problems, but in these cases, the borrowers or their financial backers have stepped up to the plate and invested additional dollars, signed financial guarantees or taken other actions that have strengthened the loan from our perspective." (For now.)

Hmmn, I smell a rat here..

"We have yet to experience any situation where we have had to foreclose on a property nor have we incurred any losses, but it would not surprise us if we did. We believe that our loans were underwritten conservatively, leaving room for our loan amounts to increase or the collateral values to decrease and still have the bank get repaid in full. However, we will not hesitate to foreclose if the borrower does not support a loan that is in distress. In general, we would not agree to a work-out if a borrower approaches us with the attitude that we should leave him in control of the project and give him all of the upside if the market turns around, but leaves the bank to take all of the downside risk."

17 January 2007

Warm Weather "Borrows" from spring building activity

"U.S. Jan home builder sentiment highest since July" screamed the headline but the actual number still pointed to deteriorating conditions; oh, and the report came from an industry trade group. AND, we are just barely off a 15 year low from last September 2006.
NEW YORK, Jan 17 (Reuters) - U.S. homebuilder sentiment improved in January to its strongest since July 2006, as price cuts, lower mortgage rates and incentives fostered demand, the National Association of Home Builders said on Wednesday. The NAHB/Wells Fargo Housing Market index rose to 35 in January from an upwardly revised 33 in December, marking its highest reading since 39 in July 2006, the group said. Economists polled by Reuters had forecast the index would rise to 33 from an originally reported 32 in December. Readings below 50 mean more builders view market conditions as poor than favorable.
The index hit a 15-year low of 30 last September as five years of double-digit price gains and rising interest rates squeezed housing affordability.

And the SPIN ZONE, from the "chief economist" of NAHB: LOL, why not give the guy a title like "Pumper Extraordinaire" or "Liar in the House"
"Builders are starting to see that the worst is behind them and that buying conditions have improved to the point that greater optimism is warranted," NAHB Chief Economist David Seiders said in a press release. WHAT The "upturn in demand" reflects lower mortgage rates since mid-2006, energy prices that sank from record highs, solid employment and household income growth, home price reductions and builder incentives, he said. Average 30-year mortgage rates dipped to 6.14 percent in December 2006 from 6.24 percent the prior month, and from last year's high of 6.76 percent in July, according to mortgage finance company Freddie Mac [FRE.N].

Now they are up to 6.25% and likely to rise.

Two of the NAHB's three component indexes rose in January and one was unchanged. The gauges of current single-family home sales and prospective buyer traffic each rose 3 points, to respective readings of 36 and 26. The measure of expected sales in the next six months was unchanged from 49, which was upwardly revised from an originally reported 48. "Builders are responding to increased buyer interest at the end of 2006 and beginning of 2007," said NAHB President David Pressly, a home builder from Statesville, North Carolina. "This bodes well for the upcoming spring buying season." Home builders have paid a price for a return toward stabilization. Late last year, the NAHB said that three out of four builders were offering substantial incentives to limit cancellations and push unsold homes out of their inventories.
Some economists think the U.S. housing correction still has room to go on the downside through the first quarter, though the sector may be near its trough. U.S. housing starts in December are seen having slipped to an annualized rate of 1.560 million units from 1.588 million in November, based on a Reuters survey of economists. Unusually warm weather boosted building in past few months months, probably borrowing from spring-time construction activity, several economists said. "Clearly you can see that inventory levels are historically high and we need to reach a point where there's a more normal balance between new home sales and inventory levels" before sustained building growth can return, said Young Kim, economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

What will the Fed do? They can't really honestly explain why rates CAN'T be cut. explains...
Naroff, president of Naroff Economics Advisors Inc., added that the Fed's rate-setting committee "just started worrying about economic growth. The members may now jump back on the inflation-watch bandwagon." In other words, observers were thinking that the Fed would soon cut short-term interest rates, and now observers wonder whether the Fed will raise short-term rates to head off a rise in the inflation rate.On Monday, those observations were confirmed when Donald Kohn, vice chairman of the Federal Reserve, told Rotarians in Atlanta: "I believe it is still too early to relax our concerns about whether the run-up in price pressures in the spring and summer of last year is truly unwinding and whether it is unwinding rapidly enough to forestall a pickup in inflation expectations."

16 January 2007

ANOTHER home financing firm issues earnings warning

Indymac profit shrinks as housing slows; Financing firm issues earnings warning. One can hardly be surprised as NDE has a reputation as 'lender of last resort'.

NEW YORK (MarketWatch) - Indymac shares fell Tuesday after it issued a profit warning as the U.S. housing slowdown takes a bite out of the company's mortgage business. The company said it expects to keep its dividend at 50 cents a share for the quarter. It's also exploring a stock buyback plan "to enhance shareholder value." Shares fell 4% to $41.71 in early trades. Indymac (NDE $43.55, -0.02, 0.0% ) said it expects fourth-quarter net income of 97 cents a share, lower than its earlier forecast of $1.30-$1.40 a share. Analysts surveyed by Thomson First Call forecast earnings of $1.34 a share, on average. "This shortfall reflects the challenging times being faced by the mortgage and housing industries and the difficult nature of forecasting earnings in our business," the Pasadena, Calif. company said.

Indymac cited higher credit costs related to loan loss provisions, secondary market reserves and market-to-marker delinquent loans held for sales and residuals and non-investment grade securities. The financing firm said its net interest margin is being squeezed by loans held-for-sale and its thrift investment portfolio in the wake of an inverted yield curve in the bond market.
Its loan production mix has shifted toward fixed rate mortgages and intermediate term fixed rate loans vs. variable rate loans. It also cited a decline in its servicing/interest only securities portfolio and other factors. Offsetting these factors was a tax benefit.

Empire State index falls to lowest level since summer '05

Further confirmation that a recession is underway. While manufacturing has been weak for three years, these types of indicators point to broad-based weakness in the supply chain and in the employment outlook. Here's a further indication of the growing gap between rich and poor in this country.

WASHINGTON (MarketWatch) -- Manufacturing activity in the New York area fell sharply in January to its lowest level since the summer of 2005, the New York Federal Reserve Bank said Tuesday. The Empire State index fell to 9.1 in January from 22.2 in December. The decline was worse than Wall Street expected. Economists were forecasting the index to slip to 20.0 from the initial reading of 23.1 in December. See Economic Calendar. There were few silver linings in the details of the report. The new orders, shipments and employment indexes fell sharply, while the inventories index dropped to its lowest level in well over a year.

The Empire State index is of interest to traders primarily because it's seen as an early forecast of the national Institute for Supply management factory survey due out in two weeks. In December, the ISM manufacturing climbed back above 50, a sign of contraction in activity, after falling below the benchmark for the first time in five years in November. In January, the new orders index fell to 10.3 from 22.5 in the previous month. Shipments fell to 16.1 from 27.6 in December. The employment index dropped to 6.9 in January from 18.6 in the previous month. The prices paid index rose to 35.1 from 28.1 in December.

Not surprisingly, the Bloomberg report is more realistic and offers more detail. The keys to consider are the outlook by manufacturers and stockists. They are working down inventories fast.

New York State Manufacturing Slows More Than Forecast

Jan. 16 (Bloomberg) -- Manufacturing growth in New York state slowed more than forecast this month as new orders and sales deteriorated. The Federal Reserve Bank of New York's general economic index fell to 9.1 in January, the lowest in 19 months, from a revised 22.2 in December, the bank said today in New York. A number greater than zero signals expansion. The U.S. housing slump is curbing demand for manufactured goods, and factories are restraining production to work off bloated inventories. An index of employment fell to the lowest since July, suggesting New York state's manufacturers are scaling back hiring plans.

Here's an amusing quotation wit this analyst's 20-20 rear view vision. What do you think he was saying to his brokers in the fall when the reports first deteriorated sharply? Statistical anomaly? "There was a big inventory buildup in the second half of last year, and it's about time for a pullback," said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ''We're looking for the inventory correction to slow down the rate of growth in the first quarter.'' No kidding?
The New York Fed's index was projected to fall to 19.3, the median of 42 estimates in a Bloomberg News survey of economists, from an originally reported 23.1 in December. Forecasts ranged from 13 to 26. The index measuring the outlook for six months from now fell to 32.5 from 41.9, today's report showed.

It's unusual for the outlook to fall below 40 since there's so much survey bias here.
The New York Fed's gauge of new orders dropped to 10.3, the lowest since June 2005, from 22.5 in December. The shipments index fell to 16.1 from 27.6. Manufacturing employment fell to 6.9 from 18.6. Today's report reflects revisions to data stretching back to 2001, when the index was started. A gauge of inventories fell to minus 19.2, the lowest in more than four years, from minus 7.9 the previous month as the state's manufacturers worked off stockpiles at a faster pace. An index of prices paid for raw materials rose to 35.1 from 28.1. A measure of prices received rose to 19.2 from 13.5. The New York survey offers an early clue to the state of manufacturing nationwide, which accounts for about 12 percent of the economy. Today's survey will be followed on Jan. 18 by a similar report from the Philadelphia Fed. The Institute for Supply Management releases its nationwide manufacturing report Feb. 2. This month's ISM report showed manufacturing unexpectedly expanded in December after shrinking for the first time in more than three years in November. Stockpiles at manufacturers increased in November to 1.24 months at the current sales pace, the highest since August 2003, a separate report showed. A Federal Reserve report on industrial production, which also includes mining and utilities, will probably show an increase of 0.1 percent for December, according to a Bloomberg survey ahead of the Jan. 17 release.

Guess what the Fed will do? Nothing, I'd bet. They can't cut rates as it would crush the dollar but they can push up short and intermediate market rates to prop the long bond market. Paulson and crew likely view a rate increase (or tax increases for that matter as politically unpalatable.
The Federal Reserve, which has left its key interest rate unchanged for four straight meetings after increasing it 17 times, is counting on a slowing economy to help subdue inflation. At the Dec. 12 meeting, policy makers pointed to manufacturing as an ''additional source of downside risk to economic growth in the near term,'' according to minutes released on Jan. 3. Still, they ''continue to expect the economy to expand at a rate close to or a little below the economy's long-run sustainable pace.'' Growth slowed in the third quarter to a 2 percent annual rate, dragged down by the biggest decline in home building in 15 years. The pace probably picked up to 2.5 percent in the fourth quarter, according to a Bloomberg News survey of economists early this month.

15 January 2007

Q4 2006 Foreclosure Data Alert

When Robert Toll says "we're dancing on the bottom" of the housing 'correction', take a look at what the real data says about the industry outlook- don't call it a "bubble" or you get labeled 'unaware that housing consists of a series of regional housing markets.' Yeah, and that problem of no-doc ARMs was regional too.

Number of Foreclosed Homes Returned to Lenders at Auction up more than a factor of 10 since July 2006
by Sean O'Toole

Coming 4th Quarter Foreclosure Activity Reports and their implications for housing, lending institutions, and the economy. The last credible data that was widely published on foreclosure activity in the US was by DataQuick on October 18, 2006 for the 3rd quarter. Most of the reports you have read in the press since then about foreclosure and its implications for housing, sub-prime lenders, asset backed securities, and the economy in general were based on that report.

On one hand, the report was alarming. For Q3’06, CA foreclosures were up 111.8% from Q3’05 and 28.3% from the prior quarter. Despite this strong upward trend, most articles invariably followed up this data with a statement such as: Foreclosures are still at historically low levels, and the effect on today’s market is negligible.

When DataQuick says "historically low levels," they also disclose that they’ve only been tracking foreclosures since 1992, a key fact that many folks who use DataQuick's data don't know is very important. The reason that the start date of comparable foreclosure data for the last cycle is so important is that about two years after the last housing cycle bottom, foreclosures were already declining. If housing were indeed in the process of "bottoming out" now, as many forecast, then foreclosures should be starting to decline now. Instead, they are rising rapidly. Note the DataQuick data also show that foreclosures peaked in Q1’96, which correlates reasonable well with the bottom for the housing market. Foreclosures do not appear to be peaking, so it is unlikely that the housing market is near a bottom, yet.

As such it appears that DataQuick’s data spans a period of time that began during a period of increased foreclosure levels in the last cycle. As a result, we don’t have a clear picture of comparable foreclosure rates for the housing cycle period we are in currently compared to the last cycle, so no one can say whether current levels are "historically low" or not. Even if they are, that may well be a sign of a market peak rather than a bottom, implying further market volatility rather than market stability as usually inferred from the data.

In the coming weeks, as we see the Q4’06 foreclosure report released, it will be interesting to see how easily apparently alarming data can again be brushed aside as insignificant for the housing market, lending institutions, hedge funds and the economy. Unfortunately, due to a lack of sufficient historical data, and lags in current foreclosure data, I suspect this will the case.

Metrics 2.0 » "Manufactured" Economic Indicators: Consumer is FINE!

This presentation is truly amazing. Take a bunch of paid-for press on the "happy consumer" and ignore all the household stresses EVERYDAY people face: high inflation, high debt, frequent mystery charges of 21.75% by your ubiquitous credit card company, job losses in white collar industries, and big "help" from pharma (e.g. PPA) and tobacco (e.g. nicotine education).

Confident Consumers See Brighter Future in 2007: RBC CASH Index
(includes graph)
U.S. consumer confidence soared at the start of the new year, as Americans are feeling much more optimistic about their economic future than they were at the close of 2006, according the RBC CASH (Consumer Attitudes and Spending by Household) Index.
Overall consumer sentiment increased more than eight points this month, as the RBC CASH Index for January released today by RBC Financial Group, jumped to 95.3, compared to 86.9 in December and 78.2 one year ago.

Highlights of the January survey results include: China Celebrates?

Consumers' economic outlook has skyrocketed during the past month, as seen in the RBC Expectations Index, which stood at 83.8 in January, a dramatic increase from December's 55.0.
31% of Americans believe their local economy will be stronger six months from now, up from 24% in December.
40% of Americans said they believe their personal finances will be stronger six months from now.
Consumers' evaluations of the current local conditions softened slightly during the past month, producing a one-point drop in the RBC Current Conditions Index, bringing it to 94.3 in January.
21% rate their local economy as strong (down from 26 per cent in December).
The RBC Investment Index for January stands at 83.2, a nearly one-point increase from the 82.5 level in December. Currently,
32% of consumers report they are more comfortable making a major purchase like a home or car, compared to 31% last month.
38% Americans reporting they believe the next 30 days will be a good time to invest in real estate, compared to 36 per cent in December.
44% of Americans believe the next 30 days will be a good time to invest in the stock market, a slight increase from the 41 per cent level in December.
Confidence in job security remained stable, with the RBC Jobs Index for January stands at 126.3, compared to 126.5 in December.
43% of consumers report they are more confident about current job security than six months ago
The RBC CASH Index is a monthly national survey of consumer attitudes on the current and future state of local economies, personal finance situations, savings and confidence to make large investments. The Index is composed of four sub-indices: RBC Current Conditions Index; RBC Expectations Index; RBC Investment Index; and, RBC Jobs Index. The Index is benchmarked to a baseline of 100 assigned at its introduction in January 2002. This month's findings are based on a representative nationwide sample of 1,002 U.S. adults polled from January 8 - 10, 2007, by survey-based research company Ipsos Public Affairs. The margin of error was plus or minus 3.1 per cent.

The entire RBC CASH Index report can be viewed at:

Related Commentary:

Consumers see brighter future in 2007 - BusinessWeek
Consumers Greet New Year with Confidence - CIO Today
US consumer confidence increases as expectations soar at start of the year - Yahoo! News (press release)
Global Business Confidence Up For 2007 - India Tops at 97%; EU Ahead of US: Grant Thornton
..."Medium to large privately held businesses around the world are considerably more optimistic about the prospects for their economies in 2007 - with an optimism/pessimism balance percentage of +45%, up from +39% last year, according to International Business Report (IBR) from Grant Thornton International published today."...

Grant Thornton International survey:
Individual Country Summaries:
Please note that these summaries are currently from IBOS 2006.
IBR 2007 summaries will appear here in May 2007.
This section allows you to download the country summaries in pdf format.
Please click on the country links.

US Economy Adds 167,000 Jobs in December; Payrolls Rose 1.8 million in 2006

Nonfarm employment increased by 167,000 in December, and the unemployment rate was unchanged at 4.5%, according to the U.S. Department of Labor. Over the year, payroll employment rose by 1.8 million. Average hourly earnings rose by 8 cents, or 0.5%, in December. The number of unemployed persons (6.8 million) was about unchanged in December, and the unemployment rate held at 4.5%. Over the year, these measures declined from 7.3 million and 4.9%, respectively.

Job gains occurred in several service- providing industries, including professional and business services, health care, and food services. Professional and business services employment continued to expand in December with a gain of 50,000. Health care added 31,000 jobs in December.

Total nonfarm payroll employment increased by 167,000 in December to 136.2 million, following increases of 86,000 in October and 154,000 in November. Employment in financial activities was up by 153,000 over the year. In the past 12 months, food services added 304,000 jobs

In December, both total employment, at 145.9 million, and the employment- population ratio, at 63.4%, were little changed. Over the year, the civilian labor force edged up in December to 152.8 million.

More discussion around the web:

U.S. Economy Adds 167,000 Jobs, More Than Forecast; Income Growth Quickens - Bloomberg
US December non-farm payrolls up 167000, unemployment rate still ... - Forbes
Job growth accelerates to 167000 in December - MarketWatch
Job growth surprisingly strong in December - Reuters

Shilling: A Dozen Reasons To Worry (For Non-worriers)

What’s ahead for stocks and the economy in 2007? Setting aside unknown elements like major terrorist attacks or natural disasters, (Shilling) believes seven phenomena are shaping the investment climate this year. A. Gary Shilling makes money for his subscribers by going against the grain--and he's usually right. He was out of tech stocks by 1999 and dumped the homebuilders last year. (Their promo, not mine). These points are excerpted from the December 2006 issue of Shilling's "Insight" investment advisory letter.

The world is awash in financial liquidity mainly due to appreciated house values, the negative U.S. corporate financing gap and the American balance of payments deficit. Inflation remains low despite higher energy prices. As a result, investment returns are low. Speculation remains rampant despite the 2000 to 2002 bear market. So, investors are accepting more risks to achieve expected returns. And then there’s the insatiable U.S. consumer, who, thanks to the booming housing market, continues to spend freely.

In this climate, I foresee 12 investment themes, seven of which are likely to unfold in 2007, while four will probably work but maybe not until next year:

-- Housing prices will collapse. The housing bubble is deflating as sales of new and existing homes slide, prices begin to drop and housing starts decline. A bigger price plummet may start soon as many speculators give up on appreciation dreams and throw their properties on the market, triggering a downward spiral. Alternatively, interest rates on the adjustable rate mortgages of many sub-prime borrowers will adjust up dramatically this year and force them into defaults and house sales. Unlike earlier U.S. housing booms and busts that were driven by local business cycles, such as the rise and fall of the oil patch along with oil prices in the 1970s and 1980s, this one is national and, indeed, global. And since houses are much more widely owned than stocks, the bubble’s likely demise will shake the economy more than the earlier bear market in stocks.

-- The Fed will ease when house prices collapse; meanwhile, the yield curve will remain inverted. Once the Fed embarks on an interest rate-raising campaign, it almost always keeps going until something big happens, and that something is normally a recession. This time, we’re betting that the bursting of the housing bubble beats the Fed to the punch. Once housing is in a shambles, either falling from its own weight as we expect or due to central bank action, the Fed, of course, will patriotically ease as the economy hits the skids. The yield curve inversion, the only meaningful effect of the Fed’s current campaign that we can find, rightfully worries many because they have preceded every recession since 1950 with only two fake signals.

-- U.S. stock prices will fall, perhaps below the 2002 lows, in the midst of a major recession. A major decline in housing prices and activity will almost surely precipitate a full-blown U.S. recession. That, in turn, will send corporate profits down after a spectacular advance over the last five years. Without this robust growth, stocks are vulnerable.

-- China will suffer a hard landing due to domestic cooling measures and U.S. recession. China is attempting to cool her white-hot economy, which grew at an estimated 10.5% rate last year, but is having difficulty. A major U.S. recession will shrink Chinese exports dramatically as U.S. consumers buy less of everything, especially imports. So between domestic economic cooling efforts and a U.S. recession, a Chinese business slump is in the cards for 2007.

-- Weakness in U.S. and China will spread globally, dragging down economies and stocks universally. The U.S. economy dominates the world, not only because of its size but also because America is the only major importer. Most other countries are running trade surpluses, and the U.S. is the buyer of first and last resort for their excess products. The Chinese economy is closely linked to America’s, and a U.S. recession, combined with Chinese domestic economic restraint measures, insures a global downturn. Other major economies in Japan and Europe simply can’t pick up the slack.

-- Treasury bonds will rally. Yields rose a bit over the last year, but surprisingly little in view of continued economic growth and further Fed tightening. Downward pressure on Treasury yields will result when the Fed reverses gears and eases once housing is clearly in retreat and a recession is evident. I expect the current yield on the 30-year bond to decline in 2007 and ultimately reach my long-held target of 3%.

-- The dollar will rally, but only after the recession becomes global. The greenback last year remained strong against the yen but not against the euro. The dollar may be weak early this year, but strength would come later in the year as U.S. consumers curtail spending, imports fall and, as a result, foreign economies become weaker than the U.S. Later this year, the dollar should gain against the euro and yen and also against the commodity currencies, the Canadian, Australian and New Zealand dollars, which will suffer as global recession slashes commodity demand and prices.

-- Commodity prices will nosedive. Commodity prices showed unusual strength in recent years and not just in the energy sector. Industrial metals prices have skyrocketed. So have livestock and grains of late. Even precious metals have reached prices not seen since inflation was raging in the late 1970s.

In the long run, we don’t see any constraints that will prevent the normal reaction to high commodity prices--increased supply that will depress prices. In energy, Hubbert’s Peak devotees believe the world is running out of crude oil so prices will skyrocket in the years ahead. But we’re convinced that human ingenuity will, as in the past, prevent a Malthusian outcome. The ongoing fall in U.S. home sales and likely collapse in prices will have very negative effects on building materials prices. Lumber and copper prices have already nosedived.

-- Maybe global and chronic deflation will commence in 2007. The global recession I foresee, coupled with deflationary forces already at work, will cause major price indices in the U.S. and elsewhere to fall this year. That alone doesn’t guarantee chronic deflation. Inflation usually declines in recession, so the proof will come in the recovery that follows in 2008.

-- Maybe U.S. consumers will start a saving spree, replacing their 25-year borrowing and spending binge. The money extracted from, first, stocks, and more recently, from houses are behind the drop in the U.S. consumer saving rate. With stocks likely to again fall significantly, a significant fall in house prices seems almost certain to precipitate a shift from a quarter century borrowing-and-spending binge to a saving spree, unless another source of money can bridge the gap between consumer incomes and outlays. But no other sources, such as inheritances or pension fund withdrawals, are likely to fill that gap.

-- Maybe deflationary expectations will become widespread and robust. Deflationary expectations spread and intensified in 2006 as consumers waited for lower prices for cars, airline tickets and telecom fees before buying. Christmas 2006 sales depended heavily on slashed electronic gear prices. Deflationary expectations may become widespread and robust when chronic deflation becomes established and consumers wait for lower prices before buying. Zeal for saving will augment this.

-- Speculative areas beyond housing may suffer in 2007. Housing is not the only area of heavy risk-taking. A great disconnect between the real economy and the speculative financial world has existed since the late 1990s, fed by mountains of liquidity sloshing around the world, expectations of and demands for oversized investment returns, and low volatility, all of which have encouraged risk taking. Anticipated stock volatility remains at rock bottom. Spreads between yields on junk bonds and Treasurys are tiny as ample financing and loose lending keep corporate defaults at record lows.

The huge gap between speculative financial markets and economic reality has persisted for a decade. It will probably be closed with many tears in the next recession, only adding to its depth.

Fleckenstein Highlights Home Loan "House of Cards"

Long time market bear, Bill Fleckenstein, says that the mortgage finance bubble is now unwinding. "Fleck" warned early but correctly about the tech bubble in 1998 and 1999, and was also right about the rollover of U.S. real estate starting summer 2005. He quotes a source saying it's fraud, not to mention a complete abandonment of home lending standards, that is the trigger:
Bird's-eye view of a bitter housing brew
This week brings an update on the deterioration, via comments from two very knowledgeable friends. One of them, a former top executive at a subprime lender (whose chronicling of the unwind has been amazingly accurate and timely), told me that serious issues are developing, and that large companies like New Century Financial (NEW, news, msgs), Accredited Home Lenders (LEND, news, msgs) and NovaStar Financial (NFI, news, msgs) will, in his words, "hit the wall" very soon. He writes:

"We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built . . . in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant -- worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily. "The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.

Not surprisingly, financial instruments tied to over-leveraged borrowers are beginning to "blow out". The little followed ABX index tracking mortgage derivatives is signalling that the collapse is now underway:
In the beginning, there was financial darkness
I am not as sure as he is that it will take "years" to play out. The damage will last for years, but the crackup that precedes the big damage will happen this year, I think. Meanwhile, the other friend, a broker who deals in the financial dark matter universe, noted that the risky BBB-minus tranche of the June 2002 ABX.HE (a synthetic version of assets backed by U.S. home loans) just traded at a new low -- down more than eight points from early September. (For a review and the key definitions, please see my September column "Voodoo debt and the coming recession.") Its credit-default swap has now blown out to 477 basis points. Although the BBB-minus tranche is just a fraction of the $1 trillion subprime market, it seems impossible to me that a train wreck there will not have ramifications. Here is how this friend described where he thinks we are -- and what comes next:
"The subprime trade continues to evolve. Stage one was the turn in the housing market in July 2005. Ironically, stage two occurred in September 2006, a month after home builder stocks bottomed, when spreads on subprime home-equity loan securitizations started to widen. I think we are now into stage three, where some of the bigger listed subprime lenders start to get hit. That might bring the ongoing problems in subprime to a wider audience. Stage four is when a top-three-listed subprime lender goes broke, leaving various Wall St. firms saddled with bad loans. Stage five is when the market really gets it, and eurodollars (at least for a time) start to rally hard as the market fears some kind of financial turmoil. We're not there yet, as we are just now entering stage three, but do not take your eye off subprime for a second."

Russ Winter has generously documented in the Wall Street Examiner the sub-prime disaster that the Fed should be doing something about now; rather than just pumping liquidity into the bubble.
What the Riskloves haven’t quite looked at or even remotely addressed are late 2004 and 2005 vintage loans with a toxic demeanor. As mentioned the 2006 subprime market is large, and conditions in that vintage are worsening quickly. The next chart shows the amounts involved in the last three years with this genre. Subprime made up 25% of the total mortgage market in 2005 and 2006, and about 20% in 2004. Indeed 93% of all subprimes in 2005 were purchase originations (see second chart). That’s $665 billion worth, pretty much the whole blue block in the chart, and ditto for 2006. Poo poo it if you must, but there were about $1.9 trillion subprimes originated in 2004-2006. Add in a trillion in second mortgage HELOCs and lord knows how many midprime and/or Alt A pay options, and you have ground zero for a credit bust of biblical proportions.

14 January 2007

Top Ten U.S. Areas by Share of Adjustable-Rate Mortgages

Some "top ten" data on the share of adjustable-rate mortgages in different U.S. jurisdictions. Scary stuff.

1. Nevada, 43%
2. California, 40%
3. District of Columbia, 35%
4. Arizona, 33%
5. Florida, 33%
6. Colorado, 33%
7. Illinois, 28%
8. Washington, 27%
9. Maryland, 26%
10. Virginia, 26%
Source: Mortgage Bankers Association

11 January 2007

Vote of Confidence?? Market Ignores ALL

US Sec of State Condy: Iraq PM is 'on borrowed time', BBC
Condoleezza Rice at Senate committee hearing
Ms Rice was pressed by senators about her confidence in Mr Maliki. US Secretary of State Condoleezza Rice has said that Iraqi PM Nouri Maliki is living on borrowed time", but that she is confident he can give Iraq security. Ms Rice was testifying to a Senate hearing about President Bush's new Iraq strategy, announced on Wednesday. Democrats and some Republicans in Congress have criticized the plan, with one senior Democrat, Senator Joe Biden, calling it a "tragic mistake". As part of the plan, Mr Bush will boost US troop numbers by more than 20,000. Later Defense Secretary Robert Gates promised to increase the overall strength of the armed services by recruiting an extra 92,000 troops.

But how come no one in finance world listens to one sane voice- REPUBLICAN Senator Chuck Hagel??

"I think this speech given last night by this president represents the most dangerous foreign policy blunder in this country since Vietnam if it's carried out. I don't think anybody has a definite idea of how long a surge would last," he told a news conference. I think for most of us in our minds we're thinking of it as a matter of months, not 18 months or two years." He added that the US could revise its plan if Iraqi leaders failed to keep to its commitments. "The timetable for the introduction of additional US forces will provide ample opportunity early on, and before many of the additional US troops actually arrive in Iraq, to evaluate the progress of this endeavour and whether the Iraqis are fulfilling their commitments to us," he said.

Welcome to a Middle East War...

Earlier, Ms Rice warned that the US would take action against countries destabilising Iraq. Her statement came hours after US forces stormed a building in the northern Iraqi town of Irbil. Iran said the target had been its consulate, and several Iranians had been arrested. Tehran has condemned the raid. ON TO IRAN !!!

10 January 2007

Margin Debt is now back to bubble levels

, according to Minyanville. The Wall Street Journal recently ran a story on the high levels of margin debt at firms tracked by the New York Stock Exchange. With a big month-to-month jump, debt rose to $270 billion, which is a level eclipsed only by March 2000 - the height of bubble-mania in U.S. equities. Scary stuff, but unfortunately the Journal didn’t drill down one more layer, which changes the picture considerably.

The NYSE doesn’t just track the liabilities sitting in brokerage accounts (margin debt), but that’s all that ever gets reported. Unbeknownst to most, the NYSE also tracks assets called free credits. This is money available for customers to withdraw, which is accumulated when customers deposit funds or sell stocks. The chart above shows the comparison in these figures between now and the bubble years.

Hungry Investors Boost Margin Debt
January 2, 2007; Page R15

A rising stock market encouraged investors to go into debt to trade stocks, leading to an increase in the level of so-called margin debt in 2006. Such debt is accumulated by investors who trade "on margin" with funds borrowed from their brokers. As tracked by the New York Stock Exchange, margin debt rose to $270.52 billion in November from $221.66 billion at the end of 2005, the first time in more than six years that margin debt has topped $270 billion. December numbers will be available later this month.

That 22% increase left margin debt not far from the record of $278.53 billion, reached in March 2000 as the Nasdaq Composite Index was setting a record high. Last year's rise in margin debt occurred against a bullish backdrop for stocks, with widely followed market indexes notching double-digit percentage gains. Market analysts track margin-debt activity as an indication of investors' appetite for speculative trading.

A potential pitfall for those trading on margin is a sharp decline in stock prices, which can expose investors to margin calls, requiring them to post additional collateral or see their brokers sell their securities. Some market watchers consider high levels of margin debt worrisome because a wave of margin calls triggered by a sharp market decline could exacerbate the selling pressure on stocks.

Of Course, Collateralized Debt Issuance is Soaring
Collateralised debt issuance jumps
Financial Times, By Gillian Tett and Paul J Davies in London,January 11 2007 22:14
The issuance of securities linked to debt portfolio funds, known as collateralised debt obligations, swelled dramatically last year – a trend that could be helping to prolong the easy conditions in credit markets. Some estimates of activity in this notoriously opaque sector suggest that more than $2,500bn of were issued last year. That was six times higher than in 2004, according to the Bank for International Settlements.

09 January 2007

Why Stocks Will Fall- by Doug Kass

H2-2006 was a miserable time for bears, in fact, it was WORSE than bubble excesses of 1999 and early 2000. The financial state of our nation has deteriorated massively in six years. $9.2 TRILLION in debt and so much off balance sheet financing that OMB Director Rob Portman can only mouth the mantra that we'll balance the budget by 2009. Up until recently, it hasn't mattered and ANY 50 point Dow correction has been met with +1200 ticks to bring it back even. It's even gotten to the point where CNBS Booyah pitchman Jimbo Creamer boasts at 2:30 that "the market will close green", even when it's down 80 then. Who's handing him a crystal ball???

Needless to say, short players like Doug Kass are apoplectic. Buddies in the market tell me, "stop tilting at windmills!" But just read what Doug has to say and maybe even PermaBulls will see there's reason to be a bit more "prudent". Who was that PRUDENT MAN that they once modeled the responsible asset manager after???

I didn't need Bob Dylan to remind me that you don't need a weatherman to know which way the market's wind has been blowing. Well, maybe I did during the last half of 2006, when I regularly got slapped around by the market as disbelief was suspended despite growing signs of escalating economic and geopolitical risks. Many argue in their recent emails to me -- and I am paraphrasing the author Gay Talese (Honor Thy Father, Unto the Sons, etc.) -- that I am something of a restless voyeur who sees the warts on the world, the imperfections in companies and industries. They argue that gloom is my game, the spectacle my passion ... and that normality is my nemesis. It seems to appear to many, based on some of their more recent communiqués, that my market observations resemble an account of the traffic on I-95 from the point of view of the accidents. Not true.

I actually yearn for normality. To this observer, normal would be mean reversion in 2007 for home prices, consumer spending, credit losses, corporate profit margins -- and in stock prices. Indeed, with an odd year here and there being the exception (2000-02), we have been in a bull market for the past 25 years. During that period -- and with perfect hindsight -- the best financial advice regarding equities and bonds was also the most concise: The interest rate analyst could have confined himself to saying down and the equity market analyst to saying up.

The fact of the matter is that Wall Street investment strategists and analysts, commentators in the media, and portfolio managers (most of whom are mandated to be fully invested) are almost constitutionally incapable of an ursine market moment or criticizing the securities that they own. While three days of trading does not make a trend, the early signs for 2007 indicate that the times might be a-changin' (toward normality), and I am looking forward to the opportunity of profiting from a more normal two-sided stock market.

Thus far in January volatility appears to be on the ascent, and the broad decline in commodities seems to be a statement of our economy's health. Although the notion of a more normal market is in the eyes of the beholder (in my case, an ursine one), we do know that normal is not ignoring disturbing signs; normal is not going without a 2% correction since July; normal is not going through a 10% correction in more than 900 trading days. The hedge fund crowd -- many of whom invest/trade at the altar of momentum -- are now much longer than at any time in the advance, and despite last week's modest correction, the remnants (i.e., short-sellers) have more or less folded their tents. From my perch, that is abnormal, as are the aforementioned positive skeins in share prices and the general notion that cash is trash!

Notice that Doug won't tell JoeSixPack (JSP) to go short..or even to take their 401Ks to cash. But who just got slaughtered in these new commodities Exchange Traded Funds (ETFs)??
Your Path to Precious Commodities
By Roger Nusbaum Contributor,1/8/2007 2:04 PM EST
One thing that has been clear about ETFs is that new product innovation will allow individual investors to access parts of the market that had not been easily available. The folks at PowerShares, in conjunction with Deutsche Bank, have rolled out a couple of products so far, and on Friday they rolled out seven new commodities-based ETFs.

MTH-Meritage orders drop 48%, sales down 60%,massive charges

So, surprise, Meritage Homes MISSED-big time. But look at the stats they reported:
* Backlog- down
* Net Sales orders (units)- down 42% to 1,201 homes from 2,072
* Net Sales Value ($)- down 51% to $356m from $723m
* Average selling prices dropped by over 15% from $348,938 to $296,420 per home
* Cancellations up to 48% (but what of those $1 options to purchase sold) Are cancellation rates actually closer to 75%??
* Claimed backlog of $1.2B is down 45% from $2.2B last year
* Backlog home carrying value is $325,645 per home which is almost 10% high than the actual ASP of homes sold in the recent quarter.

So, what are they expecting? A sudden surge in the ASPs of their carried homes? So maybe the backlog is under $1B or maybe a lot less with writeoffs to come...

Jan 9 (Reuters) - Meritage Homes Corp. (MTH.N: Quote, Profile , Research) said it expects land and inventory charges in the fourth quarter to reduce earnings by $1.25 a share to $1.50 a share. Net sales declined to 1,201 homes totaling $356 million in the latest fourth quarter, from 2,072 orders totaling $723 million in 2005 period, the home builder said in a statement.

And MTH is redefining the concept of "profit"

The company said it expects to remain profitable for the quarter. It added it estimated land and inventory charges at $55 million to $65 million, pre-tax.

Meritage says home orders plunge, estimates charges

BOSTON (MarketWatch) -- Meritage Homes Corp. (MTH :meritage homes corp com
News , chart, profile, more Last: 43.42-0.81-1.83%) As a percentage of quarterly gross sales orders, cancellations rose to a record 48%, the residential builder said.

Meritage Homes Q4 Results and Updated Estimated Impairment Charges
Tuesday January 9, 9:00 am ET
SCOTTSDALE, Ariz., Jan. 9, 2007 (PRIME NEWSWIRE) -- Meritage Homes Corporation (NYSE:MTH - News) today reported preliminary fourth quarter results and provided an update on estimated impairments of inventories and write-offs of option deposits, in advance of its scheduled earnings release later this month. Chairman and Chief Executive Officer Steven J. Hilton commented on the results, ``Based on our closings this quarter, we expect to report our 19th consecutive record year of revenue growth, a record we are proud to have achieved considering the challenging housing market of 2006. Even so, we saw a further decline in total home sales this quarter as demand remains slow in most of our markets.''

Hello, this guy must be working at a different company. Talk about "rose colored glasses !" Spin Away ! On November 9th, 2006, CEO Steve stated at a UBS-sponsored investor conference MTH could see between $15 million and $30 million of charges in its fiscal fourth quarter related to land options and real-estate write-downs, based on recent analysis. But today, he opined, ``As a result of the slower absorption rate and lower sales prices we are experiencing in many markets, we're estimating land and inventory charges this quarter of $55-65 million pre-tax."

Net sales declined to 1,201 homes totaling $356 million in the fourth quarter 2006, from the fourth quarter record of 2,072 orders totaling $723 million in 2005. Cancellations of orders represented 22% of the quarter's beginning backlog, compared to 13% of beginning backlog cancelled in the fourth quarter 2005. As a percentage of fourth quarter gross sales orders, cancellations represented a record high 48% of orders in 2006 compared to 32% in 2005. The Company is in the process of finalizing its quarterly analysis to ascertain the amount of charges required to reflect write-offs of lot option deposits and asset impairments based on current market conditions. While not yet concluded, Mr. Hilton offered this update. ``As a result of the slower absorption rate and lower sales prices we are experiencing in many markets, we're estimating land and inventory charges this quarter of $55-65 million pre-tax. These charges would reduce our earnings by $1.25-1.50 per diluted share, but we expect to remain profitable for the quarter.``We continue to actively renegotiate a number of option contracts that would enable us to move forward on projects that are no longer feasible at the land prices in the original contracts. But when these negotiations are unsuccessful, we must sometimes make the difficult decision to forfeit the option deposit and leave the project. We plan to continue to operate cautiously until we are confident that housing demand is strengthening in our markets,'' concluded Mr. Hilton.

Ummmm, there are some other "risk factors" to disclose. Their note prices may "fluctuate" in the future.
Meritage's business is subject to a number of risks and uncertainties, including: fluctuations in demand, competition, sales orders, cancellation rates and home prices in our markets; potential write-downs or write-offs of assets or deposits; interest rates and changes in the availability and pricing of residential mortgages; housing affordability; our success in locating and negotiating potential acquisitions; successful integration of acquired operations with existing operations; our investments in land and development joint ventures; our dependence on key personnel and the availability of satisfactory subcontractors; materials and labor costs; our ability to take certain actions because of restrictions contained in the indentures for our senior notes and the agreement for our unsecured credit facility; our lack of geographic diversification; the cost and availability of insurance, including the unavailability of insurance for the presence of mold; our potential exposure to natural disasters; the impact of construction defect and home warranty claims; demand for and acceptance of our homes; changes in the availability and pricing of real estate in the markets in which we operate; our ability to acquire additional land or options to acquire additional land on acceptable terms, particularly in our start-up markets; our exposure to obligations under performance and surety bonds, performance guarantees and letters of credit; general economic slow downs; consumer confidence, which can be impacted by economic and other factors such as terrorism, war, or threats thereof and changes in energy prices or stock markets; inflation in the cost of materials used to construct our homes; our level of indebtedness and our ability to raise additional capital when and if needed; legislative or other initiatives that seek to restrain growth or new housing construction or similar measures and other factors identified in documents filed by us with the Securities and Exchange Commission, including those set forth in our Form 10-K/A for the year ended December 31, 2005, and our Form 10-Q for the quarter ended September 30, 2006, under the caption ``Risk Factors.'' As a result of these and other factors, the Company's stock and note prices may fluctuate dramatically.

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