Of Messes, Medicine and Enemas

Summary: CPI 9 month SAAR & last 3 month figures showing double digit stagflation is out of control. The inflation "concern" should keep the Fed from cutting, but...

The housing debacle continues as starts fall to a 14 year low, with permits and completions off approx 30%.

The potential economic impact will probably encourage the Fed to cut another 25 bps. The Fed is between a rock and a hard place...

Further rate cuts will devalue the dollar, increasing commodities costs, spurring stagflation, increasing the supply of bonds which must be sold to cover the deficits.

A higher supply of bonds means lower prices and higher yields, thus increasing interest rates and furthering the housing debacle and home value declines.

If the Fed does not cut, the dollar and stagflation stabilize and rates stay where they are, but only temporarily.

Housing values will still decline due to severe over -pricing and -supply. The economy falters, dollar falls and interest rates rise.

Either way, there will be an economic train wreck in which the dollar suffers and interest rates will rise.

We repeat, no amount of rate cuts and market chicanery can stop the impending train wreck.

The Feds handling of the situation in trying to engineer a softer landing, irks us, as they could worsen the situation.

Buying into the statistical mis & dis information leads to an illusory and delusional state of denial.

Taking a hard stick to the markets (higher rates) would put an end this tomfoolery and prevent a slow painful bleed out.

What this economy needs is a Volcker like enema, the dance should be ended, pay the piper already.

Take the punch bowl away, make the markets take their medicine now and get the pain over with. There is no painless magical incantation or mantra.

On the other hand, as much as we poke and chide Benny & The Inkjets,

we do not envy their inheritance of the mess that Greenspan and misallocation of capital through global yield chasing have made.

CPI Sep +0.3% vs prior -0.1% Full Report

Inside the number: Core CPI Sep +0.2% vs prior +0.2%.

For the 1st 9 months of 2007, energy commodities +20.6%; milk +19.3%; eggs +43.9%; grocery store foods +6.7%; transportation +6%; medical care +5.1%

CPI-W adjusted 3 months ending Sept: Dairy +24%; Fuel +20.9%; Educational Books +13.4%

George Goncalves, a chief debt strategist with Morgan Stanley:

"Even though the Fed is concerned about housing spillover, it is in a tough spot with inflation staying sticky."

Disgraceful... FYI, In January, Social Security benefits for nearly 50 million Americans are going up 2.3%, the smallest increase in four years.

It will mean an extra $24 per month in the average check. I pity the poor Americans that paid into and are dependant on this insolvent system.

The cost of living increase should be 12.3%, this kind of statistical larceny is unconscionable and is truly a national disgrace.

Housing Starts Sep -10.3% at 1.191M vs prior 1.327M Full Report

Inside the number: A 14 year low, YOY -30.8%; YTD -25.2%. Single Family Homes -1.8%; YOY -30.8%; YTD -27.7%

SFR YOY: NE -20%; MW -28%; S -32.4%; West -32.2%
SFR YTD: NE -20.7%; MW -28.3%; S -27.8%; West -29.2%

Building Permits Sep -7.3% at 1.226M vs prior 1.322M; YOY -25.9%; YTD -25.3% Single Family Homes -7.1%; YOY -28.6%; YTD -28.5%

SFR YOY: NE -16%; MW -19.3%; S -30.4%; West -34.6%
SFR YTD: NE -20.1%; MW -27.5%; S -29.5%; West -29.4%

To confirm the gravity of the situation: SFR Housing Completions -11.6%; YTD -25.8%; YOY -34.9%.

No relief in sight... The National Association of Realtors cut its home-sales forecast for the 10th time this year...

and according to Realtytrac, foreclosures doubled in September from a year earlier.

Yesterday D.R. Horton, the second-largest U.S. homebuilder, said that net orders in the quarter plunged 40%, to the lowest in almost six years.

Cancellations rose 48% as net orders were 6374 vs 10,430 last year. Kevin Rendino, who runs the $8.1 billion BlackRock Basic Value Fund:

"The housing situation is going to continue to plague the U.S. economy. It's going to be a lot harder for companies to hit earnings."

Making cents... Blackrock Q3 profits surged. BlackRock founder Laurence Fink: "We are holding neither sub-prime mortgages nor commercial paper.

We pulled out of short-term debt one-and-a-half years ago, because we thought market prices did not make sense anymore.

Problems are more in money market funds, in liquidity and in the mortgage business ... I think we will see more problems, especially in Europe
."

Reporting for duty...

IBM met the number, beating the number: Intel, Yahoo!, Seagate, CSX Corp, Altria Group, Coca-Cola, JPMorgan Chase, United Technologies, and Abbot Laboratories.

JP Morgan Chase net income down 70% on writedowns. The firm reduced the value of leveraged loans and collateralized debt obligations on its books by $1.64 billion.

PMI this... MGIC Investment Corp., the largest U.S. mortgage insurer, posted its first quarterly loss after more than $300 million of writedowns.

Q3 net loss of $372.5 million vs a profit of $130 million. Lenders often require homeowners to buy private mortgage insurance if they put down less than 20 percent in cash or if their credit rating is weak.

Fitch Ratings said it may downgrade MGIC's claims-paying ability because mortgages insured in 2007 appear to be performing as bad or worse than 2006 loans.

After the bell: Ebay, anticipated writedowns WaMu $975 Million, B of A $1.1 Billion.

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