blogads for the opinion makers

A great article in today’s WSJ about about accounts receivable. A few months out, this is going to be what puts players like NYT, with huge AR and only a little money in the bank, out of business. NYT has roughly $700 million in billings a quarter; if its AR extends out even 15 days further, its $45 million in the bank is gone.

Thanks to the fantastic Electoral-Vote.com, here’s what the predictions looked like exactly four years ago..

Check here to see what the polls look like in today’s race.

Thanks for the fantastic site, Votemaster! It’s a pleasure and an honor doing business with you through three election cycles.

A friend just sent this. (Trouble is, I’ve already voted.)

Insolvency shadows media companies

The trading trajectory of media company shares over the last month bears an uncanny resemblance to trading in the shares of companies like Bear Stearns and AIG in the weeks leading up to their bankruptcies. Look at the chart here and see how WPO, NYT and CBS have plunged much more dramatically than the overall market.

Media companies face a number of what might be politely called “challenges.” (Or, more bluntly, razor-edged threats resting on their jugular veins.) In a downturn, corporations slash ad spending since this is often their biggest and easiest discretionary spending line item; advertising makes an easy, fat and juicy saving. The advertising contraction’s impact is exacerbated in this downturn, because cash flows are frozen. There’s no doubt that the normal industry AR age of 90 days will stretch out to… 120 days? 180 days? In a normal environment, media companies could borrow to cover the cash flow shortfall, but this is no normal environment. Here’s a graph of the way WPO has traded this week:

Huffington post-mortem

With all this in mind, today’s NYTimes credulous piece about the Huffington Post and its young sibling The Daily Beast was particularly amusing. The journalist takes at face-value the assertion that things are swell.

In the short term, The Huffington Post could make Ms. Huffington even richer than she already is; if the site were to be sold, the value that is often mentioned by people with knowledge of the site’s finances is $200 million. A person briefed on the site’s finances says it is not for sale, but that another financing round of more than $5 million could be closed by the end of the year. Over the last three years the site has raised $11 million — underscoring the site’s ability to attract traffic on a shoestring budget.

$11 million is a shoestring budget?

Here’s that verbiage really means: “has raised $11 million” means Huffpo has lost $11 million since it was founded. And now “raising more than $5 million” means the site expects to lose another $5 million in the coming year or so. That’s success on a shoe-string budget?

In an environment when potential acquirers and competitors are all nearly insolvent themselves (see paragraph one), only the looniest of investors will fund a money-losing Huffington Post for anything less than an punative share of the company.

The optimist’s paradox

Ms. Huffington faces a horrific dilemma that might be called the optimist’s paradox. Huffpo is most likely nearly out of money (hence the need to raise $5 million in coming weeks.) And while a prudent manager who sees her cash running low would trim expenses, Huffington can’t afford the psychological horror of cutting her payroll because this would clearly contradict what she’s busy telling potential investors… that all is well and she’s incredibly optimistic about next year.

So, instead, Huffington has to speed ahead towards the abyss hoping some white knight steps in to build a bridge to profitablity. She has to hold on to her mask of shocking optimism right up to the moment when the last potential sugar daddy steps away from the bargaining table. (And smart potential buyers will, knowing this is a buyer’s market, be tempted to string her along towards the moment of insolvency to increase their negotiating leverage.) If the knight doesn’t arrive in time, Huffington won’t have enough cash to fund even a skeleton operation.

The un-layoff list

Which brings us to the unlayoff list. You’ll no doubt recall the TechCrunch layoff tracker. Companies tracked there have tallied 22k layoff in the last month. Yet, weirdly, those companies are some of the healthiest of the money losing startups. For example, Adbrite cut 40% of its staff… but is now profitable. In contrast, unprofitable startups that are not laying people off are either a) so far from being profitable that they can’t conceive of ways to cut enough costs to get to profitablity or b) trapped in the optimist’s paradox and can’t cut lest they alienate potential buyers or c) both. (Thanks to Sequoia Capital, which has seen plenty entrepreneurs go down this path, here’s a graph.)

We went to the North Carolina State Fair Saturday night for the demolition derby and Sunday morning for some extra baseball tossing. (Won a huge do for two broken beer bottles.)

Though only 2 people in every 100 were wearing stickers, McCain/Palin outnumbered Obama/Biden five to one. Though the crowd was 30% African American, nearly all the Obama stickers were on middle aged white males.

Bloomberg reports:

Companies cut their short-term borrowing for the sixth straight week, for a total contraction of $366 billion to $1.45 trillion, the Fed said Oct. 23, as investors balked at taking on the debt. The market is down 35 percent from its peak of $2.22 trillion in August 2007.

Apparently two thirds or that contraction is in the last 6 weeks. I’m not specialist on monetary policy, and I realize that some of that borrowing was done elsewhere. But, some of it, certainly in the last six weeks certainly was not. If companies are borrowing, say, 10% less than they were a year ago, doesn’t that mean we’ve had at least a 10% contraction in GDP?

We had an awesome time at Citrine and the Highline Friday night.

“In the week ending Oct. 18, the advance figure for seasonally adjusted initial claims was 478,000, an increase of 15,000 from the previous week’s revised figure of 463,000. It is estimated that the effects of Hurricane Ike in Texas added approximately 12,000 claims to the total. The 4-week moving average was 480,250, a decrease of 4,500 from the previous week’s revised average of 484,750.”

Yesterday Adbrite, one of the smartest dotcoms around, laid off 40% of its staff, including two honchos, in an effort to become cashflow positive in anticipation of the coming advertising ice age. As Techcrunch noted

The irony of Adbrite making cuts isn’t lost on us. The company was originally spun off from FuckedCompany.com in 2003 by founder Philip Kaplan. FuckedCompany, of course, brutally chronicled the layoffs and liquidations that marked the end of the 2000 Internet bubble (and was the subject of our 2007 April Fools prank, which was much funnier in the middle of a bull market). If the site were still live today, Kaplan would be writing about this there.

Meanwhile, Clickz has started a “red ink calculator” and here’s a layoff tracker from Techcrunch. And let’s not forget the deadpool.

Google’s CEO Eric Schmidt said yesterday, “All of us are vulnerable. It’s a race between a contraction in advertising, which would affect everybody, and a very positive shift from offline to online.”

Blogads is not immune to an ice age, and we’re looking for notches on our belt to tighten. Meanwhile, we’re pleased to be cash flow positive and profitable since 2004 and the low cost operator in our space serving bloggers who are themselves the low cost operators in the media marketplace.

Update: Meanwhile, a reader writes in to point out that VCs are turning the screws on unprofitable long-shot companies they’ve invested in.

Laura Collins’ profile of Arianna Huffington in the New Yorker included this wonderful oxymoron: “The site has been a triumph. Since the launch, Huffington and Lerer have raised eleven million dollars.”

In people-speak, “raising eleven million dollars” means “spending” eleven million dollars more than you’ve made.

Warren Buffett warns against market-timing:

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Elsewhere, he notes that his investment fund Berkshire Hathaway is not 100% in stocks… why?

Google’s 26% earnings growth in Q3 versus last year seems to have cheered investors, sending the shares up 10% (to $390) in after-hours trading.

Seems like very old news to trade on, since the economy went into a tailspend 90% of the way through the quarter.

and

A pleasant surprise for the economy, last week’s claims didn’t balloon.

In the week ending Oct. 11, the advance figure for seasonally adjusted initial claims was 461,000, a decrease of 16,000 from the previous week’s revised figure of 477,000. It is estimated that the effects of Hurricane Ike in Texas added approximately 12,000 claims to the total. The 4-week moving average was 483,250, an increase of 750 from the previous week’s unrevised average of 482,500.

While the short-term thrill of a gusher of cash is understandable, investors have to be fundamentally concerned at the nationalization — apparently forced in some cases — of some of the linchpin institutions of America’s economy. There are a couple myths to be dispelled:

* “This is not costing shareholders’ money, because the government is just getting a preference share and shareholders aren’t being diluted.” Shareholders’ voting rights may not be diluted, but they are getting less of the banks’ profits than they expected.

* “This happened in prior bailouts.” In fact, the FDIC has in the past been scrupulous about obtaining shareholder approvals for partial nationalizations. Here’s Irvine Sprague, chair of the FDIC at the time, on the government’s takeover of First Pennsylvania in 1980:although it may not have been legally required… the only fair thing to do was to give the shareholders a vote on the plan. They were going to take the hit if we put the plan into effect. Beyond fairness we … knew that full public disclosure and a shareholders’ vote was the best eefense against any possible lawsuit.”Meanwhile, two of the banks that did not need the government’s help are trading up. Wells Fargo is up 7.5% at $32.7 and JPMorgan is… ahh JPM is actually down 3% at $40.6. Guess JPM’s shareholders are smarter.

Silicon Valley venture capital giant Sequoia has summoned its CEOs to say… beware! Here’s an e-mail someone forwarded me this AM

> Sequoia just held a MANDATORY meeting for all CEOs. Second time in their
> history. Last time it was when the Internet bubble popped. Thought you
> might find the following interesting–notes from one of the CEOs in
> attendance
>
> * *
>
> * *
>
> ****These are someone’s notes from the meeting. Keep this note in your
> in-box and read it every day. I’m serious folks, this is for our
> survival.****
>
>
>
> Speakers:
>
> · Mike Moritz, General Partner, Sequoia Capital /(he moderated the
> speakers)./
>
> · Eric Upin, Partner, Sequoia Capital /(Eric ran the $26-Billion
> Stanford Endowment Fund and knows a few things about Economics and
> investing.)
>
> · Michael Partner, Sequoia Capital /(Michael was recruited to
> start Sequoia’s very first hedge fund, coming from Maverick Capital and
> Robertson Stephens.
>
> · Doug Leone, , General Partner, Sequoia Capital
>
> Slide projected on the huge conference room screen as people assembled
> inside the conference center to take their seats: *a gravestone with the
> inscription: RIP, Good Times.*
>
>
> *_Mike Moritz:_*
>
> * *
>
> · We are in drastic times. Drastic times mean drastic measures
> must be taken to survive. Forget about getting ahead, we’re talking
> survive. Get this point into your heads.
>
> · For those of you that are not cash-flow positive, get there now.
> Raising capital is nearly impossible if you’re too far off of cash flow
> positive.
>
> · There will be consequences for those who hesitate. Act now.
>
>
>
> *_Eric Upin:_*
>
>
>
> · It’s always darkest before it’s pitch black.
>
> · Survival of this storm means drastic measures must be taken now,
> so you will have the opportunity to capitalize on this down turn in the
> future.
>
> · We are in the beginning of a long cycle, what we call a “Secular
> Bear Market.” This could be a 15 year problem. [many slides on
> historical charts of previous recessions, averaging 17 year cycles.]
>
> · The credit market [versus the Equity markets] are the issue and
> will take time to recover.
>
> · Inflection point: Make changes, slash expenses, cut deep and
> keep marching. You can’t be a general if you turn back.
>
> · This is a global issue and not a ‘normal’ time.
>
> · There is significant risk to growth and your personal wealth.
>
> · *Advice:*
>
> o Manage what you can control. You can’t control the economy, but you
> can control everything else.
>
> § Cut spending. Cut fat. Preserve Capital.
>
> § Don’t trust your models and spreadsheets. All assumptions prior to
> today are wrong.
>
> § Focus on quality.
>
> § Reduce risk.
>
>
>
> *_Michael Beckwith:_*
>
>
> · Note: Michael had a lot of slides that were charts, data points
> and comparisons.
>
> · A “V” shaped recovery is unlikely [?]
>
> · Cuts in spending will accelerate in Q4/Q1. Look at eBay—this is
> just the beginning.
>
>
>
> *_Doug Leone:_*
>
>
> · This is a different animal and will take years to recover.
>
> · Getting another round if you’re not profitable will be rough.
>
> · Do everything possible to get to cash flow positive. Now.
>
> · Nail your Sales and Marketing message.
>
> · Pound your competitors shortcomings. They’re hurting and they
> will be quiet. Take the offensive.
>
> · In a downturn, aggressive PR and Communications strategy is
> key.
>
> · M&A will decrease dramatically and only lean companies, with
> proven sales models will be acquired.
>
> · *Spectrum discussion:*
>
> o Capital Preservation ß———————————-à Grab Market
>
> o Everyone should be far to the left (capital preservation)
>
>
>
> · *Requirements of our companies:*
>
> o You must have a proven product
>
> o You must cut expenses. Now and deep.
>
> o Your product should reduce expenses and drive revenue
>
> o Honestly assess your solution vs. your competitors.
>
> o Cash is king
>
> o You must get to profitability as soon as possible to weather this
> storm and be self-sustaining.
>
> / /
>
> · *Operations review:*
>
> o *Engineering:* Since you already have a product, strongly consider
> reducing the number of engineers that you have.
>
> o *Product:* What features are absolutely essential? Choose carefully
> and focus.
>
> o *Marketing:* Measure everything and cut what is not working. You don’t
> need large Product Marketing, Product Management teams.
>
> o *Sales & Business Development:* What is your return on this
> investment? The Valley has gotten fat with Sales people: Big bases, big
> variables. Cut base salaries on sales people, highly leverage them
> with upside (increase variable) and make people pay for themselves via
> increased sales productivity. Don’t add sales people until you’ve
> achieved your goals with sales productivity. Be disciplined.
>
> o *Pipeline:*/ /Scrub the shit out of it and be honest with yourself.
>
> o *Finance:*/ /Defer payments, what is essential? Kill cash burn.
>
>
>
> · *Death Spiral */(Nobody moves fast enough in times like these,
> so get going and research later.)/
>
> o The death spiral sucks you in, you’re in it before you know it and
> then you die.
>
> o Survival of the quickest.
>
> o Cutting deeper is the formula for survival.
>
> o You should have at least one year’s worth of cash on hand.
>
> o *Tactics:*
>
> § Assess your situation. Drop your assumptions, start with a blank page
> and start zero-based budgeting.
>
> § Adapt quickly
>
> § Make your cuts
>
> § Review all salaries
>
> § Change sales comp
>
> § Bolster your balance sheet—if you can add $5M to your coffers, take it
> and save it.
>
> § Spend like it’s your last dollar.
>
> · *Get Real or Go Home.*
>

Here’s the powerpoint:

Bankers of the world unite, you have nothing to lose but your bad investments. Well, at this late hour it looks like some odd plan is coming together that makes Uncle Sam a shareholder in some of America’s biggest and most secure banks.

U.S. Said to Invest in Citigroup, Goldman, Bank of America
Oct. 13 (Bloomberg) — The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, according to people briefed on the matter.

The banks are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., said the people. One of the people also said Merrill Lynch & Co. will receive an investment.

This is perverse not only because we’re now edging towards communism, but because the government is having to bail out what have been perceived as some of the smartest, best run and least debilitated financial institutions — Wells Fargo, JPM, Goldman. Like the decision to make an unlimited guarantee money market funds a few weeks back — which had the perverse consequence of nearly provoking a flight out of regular bank accounts with FDIC limits up to only $100k — this makes all other financial instituations look bad in comparison and further destabilizes the banking system. Sure the Brits have done something similar, but they have far fewer banks.

No doubt there’ll be a new tournequet applied to this gangrenous band-aid by tomorrow evening, but for now, this looks silly and dangerous.

For businesses, the question remains — can I get a loan to pay my staff or expand my business? — or will banks simply hoard cash as Japanese banks did throughout the 90s?

And the answer, until the Fed and Treasury start simply mailing everyone blank checks, is no loans unless you’re a government-owned bank.

But the day of free money for all grows closer. this suggests we should all be hoarding shotgun shells, seed corn, water purification tablets, jerry cans of gasoline, cartons of cigarettes, boxes of antibiotics… any goods that are more actually usable (and therefore tradeable) versus the previously useful fiction of currency or credit.

Update:Well, I went back to the same article and there are some new disturbing details (see my bold face.)

U.S. Treasury Said to Invest in Nine Major U.S. Banks (Update1)

By Robert Schmidt and Peter Cook

Oct. 13 (Bloomberg) — The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, according to people briefed on the matter.

The companies are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., the people said. One of the people also said Merrill Lynch & Co. will receive an investment.

The injections represent a new approach for Treasury Secretary Henry Paulson’s attempts to prevent a financial market meltdown from sending the U.S. economy into a prolonged recession. He’s following similar interventions by European leaders and using broad powers Congress gave him earlier this month to save the country’s banking system.

“They’ve decided they need to do something drastic and this is drastic,” said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine.

None of banks getting government money was given a choice about it, said one of the people familiar with the plans. All of the banks involved will have to submit to compensation restrictions, said the person.

The government will also guarantee the banks’ newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the person said.

Allocating Money

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Goldman and Morgan Stanley will each get $10 billion, while State Street and Bank of New York will get injections of about $3 billion each, people said.

Financial institutions are struggling to regain the confidence of investors, counterparties and clients after bad loans caused more than $635 billion of writedowns across the industry. Falling share prices have made it harder to raise equity while surging borrowing costs have made debt refinancing harder.

Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair scheduled at 8:30 a.m. press conference tomorrow in Washington. Paulson’s initiative follows an announcement in Europe that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.

The press conference at Treasury will address “a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets,” the department said in a e-mailed statement.

Chief executive officers of major U.S. banks met with Paulson to discuss the options for helping markets. Stocks in the U.S. earlier today rallied the most in seven decades, pushing the Standard & Poor’s 500 Index up 11.6 percent.

One other unintended consequence of this top-down approach — restricting salaries will mean all the smart folks flee banking.

Let’s not forget what started this mess… housing. Bad loans to improvident people repackaged into silly instruments sold to greedy bankers playing with other people’s money. (Now your money.) Here’s a fun blog that details how far out of whack the housing market is even as it “adjusts.” (Thank you Jesse.)

By Horsesass.org, home of the following two ads.

In London, Goldman Sachs is down 20% ($81) and Morgan Stanley is down 30% ($8.70). Both are now well below the lows of the panics of the 17th and 27th, before the bailout package and before either had access to the Fed’s lending window.

In other words, “let me out God, and I promise I’ll never buy investment banking shares again.”

The print version of the New York Times had a great graph of the way the market has sold off in the last hour of trading Tuesday, Wednesday and Thursday. Nobody can bear the overnight risk.

Odds are the entire trading day is like those panic hours.

A brave (or reckless) buyer at 3.30 PM might be nicely rewarded Tuesday morning… if the world survives the long weekend.

UpdateTurns out I was wrong about Monday being a bank/trading holiday. But the prognosticating was decent.

The Nikkei is down 11%.

Today US stock traders, bank account holders, corporate treasurers, money market fund managers will spend their minutes and hours thinking about the fact that at the close of business, they’ll be facing 72 hours of pitch-black handcuffed misery waiting for the markets to open Tuesday.

Many folks will choose to cash out at any price rather than face the claustrophobic uncertainty of those 72 hours.

In every bear market, there comes a moment when reasonable people say “Enough is enough. Let us take a stand. Prices are now 20% lower than they were a month ago. The market is cheap. We will buy and show that we are wise.”

These reasonable people are called suckers. They mistake “cheaper” for “cheap.” They’re trading the market looking in the rear view mirror. Watching the sunny day behind them, they don’t notice the tornado just ahead.

I write this because stocks are up in overnight trading because IBM’s Q3 results were good and IBM projects strong numbers going forward.

I.B.M. said its third-quarter net income rose 22 percent, to $2.05 a share, which was 3 cents higher than analysts’ consensus estimate, as compiled by Thomson Reuters. …

I.B.M. went beyond saying it did well last quarter. It also reaffirmed its previous guidance for its profits for the entire year, despite the weakening economic outlook in the United States and elsewhere.

The company expects to earn $8.75 a share for 2008, a 22 percent increase over 2007.

Just what the suckers need to hear.

“Valuations look attractive,” said Espen Furnes, an Oslo- based fund manager at Storebrand Asset Management, which has the equivalent of $48 billion. “It’s time for a rebound, the stock market has just fallen too rapidly. IBM’s numbers show that it’s not all doom and gloom out there.”

No, Oslo based Espen Fumes IBM’s numbers show that Q3 was OK and IBM economists and treasurers haven’t absorbed (or can’t yet admit to themselves) that things have changed.

See Espen, it’s like the seasons. Plants that grow in the summer doesn’t grow in the winter. Animals that eat those plants either hibernate, migrate or die. Espen doesn’t know it yet, but it’s now officially winter. Winter, Espen, is a silly time to plant seeds or buy swimming suits. And its a silly time to buy stocks. Even if the market does rally 10% in the coming week — and it easily could — the downside risk is still far greater than the upside.

We still do not know — and IBM forecasters certainly do not know —

Plenty of folks bought Lehman Brothers at $20 a share in August because “Hey, it’s trading at a 60% discount to its price in May, this is crazy cheap!” They discovered crazy cheap can, in hindsight, be crazy expensive when shares are headed in a matter of days to $0.17.

Well, at least one market is booming. Usage in news articles of the phrase “since the Great Depression” (as in “worst credit crisis” or “deepest fall” or “fastest decline” or “most serious crisis”) is up 20 fold in the last six weeks.

Google news returns 32,487 uses of the phrase today, up from 1534 mentions in September.

In general search, Google now returns 2,320,000 results for the phrase “since the great depression” versus 588,000 mentions in September.

I want the best, I want the brightest.

Or there’s this…

Sitting in DCA waiting for my delayed plane back to RDU, I picked up a copy of yesterday’s Wall Street Journal. I was struck by a few things:

* Of the 18 stories the paper’s first six pages, only three weren’t detailing some new aspect of the financial maelstorm. One of these was the paper’s traditionally off-beat/ironic front page stories, this time titled “Abandoned Houses Used to Shelter Troops Often Prove Deadly in Iraq.”

* The commercial paper market has contracted 10% since July, to $1.6 trillion.

* “AT&T, which had $8.5 billion in commercial paper outstanding at the end of June, said that for a two-day period around Sept. 18, just after the bankruptcy-court filing of Lehman Brothers, it only issued overnight commercial paper. Currently, the telecommunications company says it has access to a range of maturities as long as 30 days.”

* “Fed data indicate that more than 80% of U.S. commercial paper outstanding in early October was due to mature in one to four days. In normal times, that proportion is between 40% and 50%.”

* “In limited action Tuesday the [Icelandic] krona traded well below the peg, swinging between 180.49 131.01 kronur per euro before closing at 150.16 kronur, down 22.234 kronur, or 12.9%.”

* “At the end of July, Japan held Treasury securities valued at $593 billion, slightly more than $519 billion of such securities held by China, according to Treasury Department data.”

* “About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody’s Economy.com. The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm’s chief economist, Mark Zandi, who adds that “it is very possible that there will ultimately be more homeowners under water in this period than any time in our history.” Among people who bought within the past five years, it’s worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.

* “Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter, according to the Mortgage Bankers Association. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.”

* “Falling values have contributed to a sharp pullback in mortgage lending. In the third quarter, mortgage lending fell to the lowest level in eight years — down 44% in a year — says the publication Inside Mortgage Finance.”

* “In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.”

* “The Federal Reserve said total consumer borrowing contracted at a 3.7% seasonally adjusted annual rate during August to $2.577 trillion. Consumer credit, which includes most consumer loans except for real estate, had increased 2.4% in July.”

* “In the Fed’s latest data, total consumer credit declined 0.3% in August from July, or about $7.9 billion, marking the largest decline ever in dollar terms. Nonrevolving credit — such as loans for cars, vacations and education — declined at an annual rate of 5.4% to $1.61 trillion. Revolving credit — largely credit-card borrowing — declined at a 0.8% annual rate to $969 billion. Except for a sudden 4.3% annualized decline in January 1998, which partially offset a strong month before it, consumer borrowing hasn’t seen sustained declines since the period around the 1990-91 recession. At the worst point during that recession, in December 1990, consumer credit declined at an annual rate of 8%.”

* “The outlook has dimmed so quickly that economists are having a hard time keeping their projections current.”

* “Consider guitar strings. D’Addario & Co., based in Farmingdale, N.Y., is a major producer, selling strings both in retail stores across the U.S. and overseas, as well as to factories, mostly in Asia, which make guitars sold by U.S. retailers. James D’Addario, the company’s chief executive, said string exports to Asian factories surged 40% earlier this year, in part, he believes, to ramp up for the Christmas season, which had been expected to be strong for guitars. A big part of that demand is due to the latest version of the Guitar Hero videogame. But as U.S. consumers, nervous about their jobs and savings accounts, slash spending, the chances of strong holiday sales have dimmed. “I’m expecting there’ll be warehouses full of guitars at the end of this year,” said Mr. D’Addario.”

* “The events in New York have slammed the budgets of neighboring states. In Connecticut, home to many Wall Street employees, the state budget hole has more than doubled in a month to $300 million, the governor’s office announced in late September. New Jersey Gov. Jon Corzine is convening lawmakers to sift through ideas for stimulating the state’s economy and to close a $1.7 billion budget shortfall. In Wall Street’s home state, Mr. Paterson has called for lawmakers to return to the capitol for a special session Nov. 18 to close a deepening budget deficit, projected at $1.2 billion for the current year. The state’s 2008-2009 budget totals $120.9 billion.”

* “New York’s budget relies on the financial sector for 20% of overall state revenue. Wall Street bonuses and capital-gains tax revenue from the sale of stock or other assets have kept coffers flush. But the state’s budget division now projects a 43% decline in bonuses and a 35% drop in capital gains.”

* Finally, some comic relief from a VP candidate: “The [television] pundit was saying, ‘The only reason she’d be going there is ’cause they’re scared, so they gotta go there and shore up votes,’” she said. “I so wanted to reach into that TV and say, ‘No, I’m going to Nebraska because I want to go to Nebraska.’”

* “No bank is solvent in a run. No bank is solvent on a mark-to-market basis when there is little or no resale market for most loans at anything but firesale prices.”

Timothy Aeppel, the guy who penned the “consider guitar strings” line, deserves a Pulitzer in the one-line-summary-of-a-global-crisis award category.

Last week I turned for advice to my wisest friend, the guy in Geneva who lends VCs money at exhorbitant rates and who is usually two years ahead of the pack. Where is money safe amid the global tumult? He replied:

I am a busy making sure all the hatches are battened down
properly. My only thought at the moment is that innovation continues irrespective of
the macro-climate (maybe that is me whistling just to keep my spirits up….) Will report in when I have something half useful to say.

He’s made this point before by phone; when capital and commodities become unmoored, human capital is one of the only stable and reliably tradable goods left.

Today key financial bellweathers of weakness Citibank and Morgan Stanley closed lower than in the pre-bailout panics of 9/17 and 9/27.

With the cavalry already here and out of bullets, what’s next?

A buddy who is tight with the hedge fund crowd writes:

One of the bigger concerns percolating is the fear that many hedge funds will soon close. A combination of factors create the perfect storm: large redemptions at the end of Q3, the SEC ban on selling stock short and efforts to reduce leverage. With your performance down significantly, many funds are way below their high water mark and won’t be earning a performance fee for months. And without leverage (or with less leverage), it’s going to be hard to even justify the 2% management fee and 20% carry you charge. Unless your fund has more than a $1 billion in assets, it will be hard to generate the management fees needed to keep talent and sustain your operations. A large consolidation of the industry and many closures could be the story over the next six months.

Many VCs will run dry, which doesn’t bode well for companies needing more funding to reach profitability:

Before the market meltdown it might have been OK for a pension fund or university endowment to park money in an underperforming VC fund as a limited partner. But going forward, all bets are off.

Venture capital operates via commitments. A limited partner pledges a certain amount to a fund, and as the VC firm needs it, it makes capital calls to get that money to fund its portfolio companies. If you don’t pony up when asked, you typically lose all your prior investment and are frozen out going forward. After the dotcom crash, capital calls came from VC firms and some limited partners simply said no - whether it was because they were wiped out in the Internet implosion, or they didn’t want to throw good money after bad.

It could be worse this time around. “My expectation is that it will start first in some private equity funds, that there will be a substantial miss on a capital call, and we’ll see it next in venture capital,” says Paul Kedrosky, an investor and academic focused on the future of risk capital and writer of the business blog Infectious Greed. “No one is going to stiff Kleiner Perkins, but the second or third-tier guys will get stiffed all day long.”

Time for some of our idiot competitors, until now coasting on greed, OPM and an association with “The Blogs,” to shutter.

Spectrum Yarn is laying of 200 textile workers because of lack of financing.

Assume this is happening in 100 other factories this week, 2 per state, that puts initial unemployment claims at 520k next week. If you see other specific reports of credit related closings, mail me or leave in the comments.