Realty site Zillow notes a potentially giant (think 3-4 years of typical home sales volume) shadow inventory building nationwide in the housing market. If true, this would predict continued downwards price pressure across the US for some time to come as supply would bump every time there's any apparent uptick in the market, driving prices back down.

Particular interesting is the column for the Northeast -- although home prices here have declined less than in the West or the Southeast (after growing as much or more over the past decade) the percentage of homeowners that said they were at least "somewhat likely" to put their home on the market in the next 12 months if prices stabilized was almost 40%. That's over six years worth of "normal" home sales volume waiting on the bench, looking to get into the game.

(This is a continuation of my series on understanding and analyzing web service and software businesses. If you'd like to start from the beginning, go to part one, "Core Value Proposition.")

User Acquisition

For a web services business, user acquisition is the "input" to the machine you've built by creating appropriate value proposition for users and monetization for the business. I'm covering acquisition last for a number of reasons:

• Without value for users and monetization, how many users you can acquire is irrelevant
• Acquiring traffic is easy, assuming you can spend money on marketing -- it's converting those leads into revenue that can then drive further traffic acquisition that's difficult

(This is a continuation of my series on understanding and analyzing web service and software businesses. If you'd like to start from the beginning, go to part one, "Core Value Proposition.")

Monetization

If you've created a service that has a compelling value proposition, and delivers on that promise for its end users, you've succeeded at the most difficult part of building a growing online business. Turning it into a profitable online business, however, takes more than simply making users happy. You have to find a way to generate revenues from your users that doesn't unnecessarily compromise that core value proposition.

There are two primary ways of generating revenue from an online service:

• Direct service charges
• Advertising revenue

If IBM opens at zero, it loses 652.95 points. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE and Alcoa combined.

The more I think about this article about the DJIA from The Big Picture, the more it bothers me.

The Dow Jones Industrial Average (DJIA) has always been my least-favorite of the broadly-quoted marked indices, despite being the one that the mainstream media follows most closely. First of all, it's price-weighted -- a relic of the days when the index was calculated by hand rather than computers. If one of the components splits its stock (which should be an entirely inconsequential even from an equity value and market cap perspective), it suddenly has half the weight in the index it did before, simply because it now has half the stock price and twice the shares. Second, the index only has 30 "representative" stocks, and it's not transparent why some companies are included and others are not -- it's not the top 30 largest companies, as some might think.

Now there are number of financial and industrial giants whose stocks have fallen below the $10 minimum that DJIA gives as its guideline for when a component will be replaced. (A $3.50 price for Citigroup means that it has 1/25th the weight of IBM, trading at over $90.) With the financials underweighted in the DJIA but in reality continuing to drag down the markets, the DJIA is now going to increasingly outperform the broad market... and the press will likely continue to report the "Dow" as the gospel for the state of the market until they either focus on this situation, or the index is corrected and fallen angels like Citigroup and GM are kicked out to the curb.

As long as the mathematical analysis of the risk of ruin lies beyond the understanding of the CEOs, the money managing organizations can stay competitive by employing their latest version of a return-boosting Martingale, without admitting to themselves or to others that they have been peer-pressured into the financial equivalent of selling their soul to the Devil.

-- Semyon Dukach, The real cause of the financial crisis, and the real solution -- an MIT Blackjack Team perspective

In the bond industry, they have a saying: "YBG, IBG" -- You'll be gone, I'll be gone. Remuneration and favoring of short-term performance will always encourage investors to pursue low-risk, high-cost bets in the market. It reminds me of all the funds out there with side-pocket vehicles for things like earthquake insurance. In 9 out of ten years, they are adding a healthy bit of "alpha" to their perceived returns. But in that 10th year, look out.

"The perfect storm of ultra-low rates, securitization, lax lending standards and triple AAA ratings -- these are the key to how we ended up with the previous boom, followed by a bust, and ultimately, the credit freeze."

Barry Ritholtz at The Big Picture provides the most non-political, straightforward and easy-to-parse explanation of the real estate mortgage bubble and subsequent credit crisis I've seen to date.

It's been a sad weekend (and month) watching Lehman Brothers circle the drain and ultimately go under last night.

For those that don't know, I worked as an investment banker at Lehman Brothers for four years, leaving earlier this year. Generally, the employment agreement for most bankers includes not discussing the job outside of the work context (and, accordingly, not blogging about it) so I've never said too much about it online.

Lehman was a truly outstanding company to work for and a great group of people to work with. I was always proud to be associated with the bank and I am still proud to have worked there. There was truly a focus on doing the right thing, not just for the client or the bank but the right thing, period. When I was in business school, out of all the banks that came to talk, only Lehman's CEO Dick Fuld took any time in to address the issue of ethics in his speech.

Obviously, there was some very serious mismanagement resulting in today's bankruptcy filing. But I hope Lehman won't be put in the same category with companies like Enron or Worldcom that mailed because of malfeasance and deception. As far as I'm aware, and as far as any of the present reports indicate, Lehman was simply a company that played hard right up to the final whistle in the face of a broad macroeconomic downturn and broad credit crisis. One wonders who may be next now that Lehman, Bear and Merrill are gone.

Frustrated emergency-room doctor Paul Hochfeld explores why U.S. health care costs so much and argues that a single-payer system is a good solution.

"The majority of Americans want some form of a national health plan. Lobbyists continue to foster the political wisdom (myth?) that embracing anything that resembles a single payer system is political suicide. Reality check: our health care system will remain broken until the focus shifts from profits to health. That won't happen until somebody, other than insurance companies, takes control. This is now a political problem. Our citizens need to make enough noise and put enough pressure on our politicians to get them to listen to us, instead of the lobbyists."

Marissa and I watched "A Crude Awakening" last night via Apple's iTunes movie store. (It's quickly becoming apparent to me that downloading is so far superior to the NetFlix model it's not even funny. I'd rather watch what's available via download than pick from the broader NetFlix catalog but have to wait 2 days for it to arrive, and there's never an inventory issue.)

The movie is definitely worth watching, regardless of your view on the "peak oil" theory and/or climate change. Frankly it doesn't even touch on the environmental / "Inconvenient Truth" component of fossil fuel usage - it simply examines the history of production peaking in the US and other previous "oil center" nations and the reasons why the current leading producers have heavy incentives to overstate their reserves (and may be doing so by 100% or more of their actual remaining reserves.) It also touches on the immense economic implications this would have for the markets and world economies, both developed and developing -- the global economy is massively dependend on the availalability of cheap energy, especially for the transportation of raw and finished goods worldwide. There would also be huge implications for newer cities in the US and abroad that developed around the "car economy" - think anywhere but the East Coast and maybe Chicago, basically.

One of the best quotes: "...will my grandchildren know what it's like to fly in a airplane?"

"A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income. Aside from the financial toll, the moral toll is comprehensive. Here is the government, the guardian of order, telling people that they don't have to work to build for the future. They can strike it rich for nothing."

David Brooks - The Great Seduction by Debt - NYTimes.com

(At the same time the government is doing this, they're criticizing housing lenders for encouraging people to gamble on rising housing prices continuing to ascend. I'm not a fan of the subprime lenders, but at least the odds there were a little better than the lottery.)