Fwd: Some Thoughts on Market Timing - John Mauldin's Weekly E-Letter

---------- Forwarded message ----------
From: John Mauldin <wave@frontlinethoughts.com>
Date: Thu, Dec 23, 2010 at 5:29 PM
Subject: Some Thoughts on Market Timing - John Mauldin's Weekly E-Letter
To: jmiller2000@gmail.com

This message was sent to jmiller2000@gmail.com.
Send to a Friend | Print Article | View as PDF | Permissions/Reprints
Some Thoughts on Market Timing By John Mauldin | December 23, 2010
In this issue: We Lost One of the Really Good Guys Hundreds of Billions in Losses? Really? Some Thoughts on Market Timing Where Has the Year Gone? New Mexico, Cabo, LA, Winnipeg, Las Vegas, Thailand, and Japan
I am neither a market timer nor the son of a market timer. I left my office in the Texas Rangers ballpark this year, and they went to the World Series. I bought Dallas Cowboys season tickets for the first time in 50 years, as they went down in flames. But I do know a few very good timers, and they are sending out warnings. Today, we look at a few of these, as it might pay to hedge some of your equity portfolio as we go into the New Year. I also answer some questions as to my view of the municipal bond market, given the 60 Minutes report of last week. The answers may surprise you. And as we approach the end of the year, I suggest a place where your help is most needed. I will try to keep it shorter, as there are more important things at this time of the year than the markets. A little housekeeping. I will not be doing an Outside the Box next Monday or an e-letter next Friday. I am off on a little R&R with my youngest son. But I will be back in full swing come the first of the year and will do my annual forecast issue the first Friday evening in January. We Lost One of the Really Good Guys In January I wrote about my friend Walt Ratterman, who was at the Hotel Montana in Haiti when the earthquake hit. Walt's wife Jeanne received an email only 10 minutes before the quake, which placed him in the courtyard, where he would have been OK. After the quake there was an eerie silence as we waited for Walt to call. We all assumed he was helping those injured in the quake and that he and his friends would surface when they got a break. Those who knew Walt understand the passion he brought to many relief operations. Walt was known for sneaking into Myanmar in the bottom of a boat where, if discovered, he would have been summarily executed. Walt was the subject of the documentary Beyond the Call, which showed him braving Afghanistan a month after 9/11, Myanmar, and the most dangerous region of the Philippines. Walt's love of helping people who, for no fault of their own, couldn't help themselves caused him to relocate his family to the West Coast, to be better able to continue his work. Walt traveled the world to help the needy, visiting Asia, Africa, South America, and Central America. Each time, he brought food, medical relief, and solar power, and had a sustaining impact on all the lives he touched. Walt was part of a team brought into Haiti by USAID (United States Agency for International Development) to bring solar power to Haiti. Walt was working there on several projects, including a few hospitals where electricity brought them out of the dark ages, allowing them to perform surgeries and other treatments that were unavailable in Haiti previously. Many of the projects were completed prior to the quake and provided much-needed support for the injured, saving countless lives. The great irony is that Walt almost never stayed in nice hotels. He stayed with those he helped. Alas, for his family friends and the world, we lost him at that hotel. As long-time readers know, I have helped him and Ed Artis raise money for Knightsbridge every year at Christmas, and my readers have been generous. This year the team at Knightsbridge are working on a very special project in the Philippines to create a registry of children with cleft palates and other similar issues, so that it will be easier to find and help them when teams of doctors that they help organize come to repair their faces. Then they will start in other countries like Burma and Vietnam. This very complex series of National Cleft Registries will have a huge impact on the quality of life for thousands of children and young adults suffering from cleft lips and cleft palates in the countries where we will set up these registries. They also have 5 containers of needed medical supplies ready to ship to the Philippines in January alone. Ed Artis, the founder of Knightsbridge, is another one of the really good guys. He was also featured in the documentary Beyond the Call, which aired on many PBS stations and on the National Geographic Channel. These guys take no salary, have no overhead, and donate their time. You can see more about what they do by reading the posts on their Current Missions Blog, located at: http://currentmissions.blogspot.com/ And here is how you can make a donation. Immediate Donations can be made online via PayPal on their web site, which is located at http://www.kbi.org . Or via checks, ONLY made payable to and mailed to: Steps For Recovery P.O. Box 67522 Century City, CA 90067 (A California 501(c) 3 Tax Exempt Corporation Federal ID # 95-4472343) PLEASE ... Clearly mark your donation, if made by check, "FOR KNIGHTSBRIDGE." (Checks that go to the Philippines, where Ed now lives, take forever to get there and get cashed. Steps for Recovery forwards the money to Ed, and you can claim a tax-deductible donation.) Join me in honoring a true fallen hero one last time. Walt Ratterman, Rest in Peace. Hundreds of Billions in Losses? Really? I have been asked what I think about the recent 60 Minutes piece where Meredith Whitney said there would be hundreds of billions of dollar of losses in the municipal bond market. Should we all sell our municipal bonds? The short answer is that all bond risk is specific to the issuer, so you or your surrogates need to do their homework. But in general, I have real doubts that there will be "hundreds of billions" of losses in the municipal bond market. Whitney said she did not expect defaults from the states, so that leaves just local entities. The worst year on record for losses was 2008, with just over $8 billion. The municipal-bond industry insists bankruptcy filings will remain rare. There were 10 municipal filings in 2009 and five so far this year, according to James Spiotto, a lawyer at Chapman & Cutler. Since the law was created in the 1930s, there have been only about 600 cases. "Most defaults in the modern era aren't governmental or what we might call municipal at all. The majority are corporate or nonprofit borrowings in the guise of some municipal conduit – nursing homes, housing developments, biofuel refineries – so they could qualify for tax-free financing." (Bloomberg) These are mostly deals where investors are reaching for yield and should pay attention to the source of funds for repayment. It would take a default by almost every major municipal issuer, and a lot of small ones, to create a hundred billion in defaults, something not likely to happen. Will there be some? Sure. There always are. It is just hard to see it being anywhere close to that much in the next few years, which is her time frame. As Joe Mysak of Bloomberg wrote: "And yet – hundreds of billions of dollars in default? The number is in the realm of the fabulous. If pressed, I would say that we might see between 100 and 200 municipal defaults next year, maybe totaling in the $5 billion or $10 billion range. "…'Debt levels for U.S. local and state governments are relatively low, with annual debt service representing a relatively small part of budgets,' Fitch Ratings said in a special report in November. "Entitled 'U.S. State and Local Government Bond Credit Quality: More Sparks Than Fire,' the report said, 'The tax-supported debt of an average state is equal to just 3 percent - 4 percent of personal income, and local debt roughly 3 percent - 5 percent of property value. Debt service is generally less than 10 percent of a state or local government's budget, and in many cases much less.' " That is not to say I don't see risk. I have written often that I think states, counties, and municipalities, hospital and school districts, etc. will come under increasingly intense pressure. The problems with New Jersey, California, Illinois et al. are well-known. We are going to see massive cuts in all sorts of services and public employment and increases in taxes at all levels. As the stimulus to states winds down, the budget pressures will ratchet up. The part of the 60 Minutes presentation I think you should pay attention to is the section with Governor Christie of New Jersey. That is the reality many states face. They are forced to make spending cuts. Sooner or later every state will have to adopt that approach, even California. Although the idea of Jerry Brown facing down unions and slashing budgets is one that does convey a small sense of irony. I think the risk is not from holding municipal bonds (although I am not discounting that risk) but in living in areas where budgets are going to be strained. If I were moving, I would want to check on the financial strength of the state and locality I was moving to. If street budgets gets slashed or taxes raised, if police and fire service becomes an issue, or reduced maintenance of parks, etc., then you might think about another locality. Things will normalize, and Whitney is right to call our attention to the severity of the crisis – getting back to a New Normal will be a bumpy ride for many localities. On the "if there's a crisis there must be an opportunity" note, my friend David Kotok of Cumberland Advisors writes about finding AAA-rated (and checked by his firm) municipal bonds paying 6% tax-free. There is value out there if you or someone who manages your money can look for it Some Thoughts on Market Timing This last week has seen a number of people I highly respect issuing warnings about a stock market correction. Some are from services I get, which I cannot quote without permission, but we are going to review three that I think sum up the current market situation. There are just a lot of warning flags. We will look at John Hussman, the always fascinating Tyler Durden of Zero Hedge, and Jonathan Tepper of Variant Perception in London. As I said at the beginning of the letter, I am not a short-term market timer, and you can't use my writings to time the markets in the short term. But I can pass on wisdom from those I respect. First, from John Hussman, whom I consider a must-read. ( http://www.hussmanfunds.com/wmc/wmc101213.htm) "In recent weeks, the U.S. stock market has been characterized by an overvalued, overbought, overbullish, rising-yields syndrome that has historically been hostile to stocks. Last week, the situation became much more pointed. Past instances have been associated with such uniformly negative outcomes that the current situation has to be accompanied by the word 'warning.' "The following set of conditions is one way to capture the basic 'overvalued, overbought, overbullish, rising-yields' syndrome: 1) S&P 500 more than 8% above its 52 week (exponential) average 2) S&P 500 more than 50% above its 4-year low 3) Shiller P/E greater than 18 4) 10-year Treasury yield higher than 6 months earlier 5) Advisory bullishness > 47%, with bearishness < 27% ( Investor's Intelligence) "[These are observationally equivalent to criteria I noted in the July 16, 2007 comment, A Who's Who of Awful Times to Invest. The Shiller P/E is used in place of the price/peak earnings ratio (as the latter can be corrupted when prior peak earnings reflect unusually elevated profit margins). Also, it's sufficient for the market to have advanced substantially from its 4-year low, regardless of whether that advance represents a 4-year high. I've added elevated bullish sentiment with a 20 point spread to capture the "overbullish" part of the syndrome, which doesn't change the set of warnings, but narrows the number of weeks at each peak to the most extreme observations]. "The historical instances corresponding to these conditions are as follows: December 1972 - January 1973 (followed by a 48% collapse over the next 21 months) August - September 1987 (followed by a 34% plunge over the following 3 months) July 1998 (followed abruptly by an 18% loss over the following 3 months) July 1999 (followed by a 12% market loss over the next 3 months) January 2000 (followed by a spike 10% loss over the next 6 weeks) March 2000 (followed by a spike loss of 12% over 3 weeks, and a 49% loss into 2002) July 2007 (followed by a 57% market plunge over the following 21 months) January 2010 (followed by a 7% "air pocket" loss over the next 4 weeks) April 2010 (followed by a 17% market loss over the following 3 months) December 2010 ….?????" Next we visit with Tyler Durden of Zero Hedge, whom I have never met, but meeting him is on my list. He brings to our attention the work of the team at Sentiment Trader. "Courtesy of www.sentimentrader.com we can observe just how irrational the market has become... As to how much longer it can sustain this, feel free to address your questions to the Chairman (Bernanke). "First, we present the confidence of smart and dumb money. Never before has it been as self-gratifying for 'dumb money' advocates (i.e., those who do nothing but 'trade the tape') to exude a sense of complacent all-knowingness. After all, they will always be able to sell just ahead of the wipe out... "For those confused by what the distinction is, here is Sentiment Trader's explanation: "Generally, we want to follow the Smart Money traders – we want to bet on a market rally when they are confident of rising prices, and we want to be short (or in cash) when they are expecting a market decline. We also call this measure the 'Buy Confidence' indicator – it tells us how much confidence we should have in buying the market. "Examples of some Smart Money indicators include the OEX put/call and open interest ratios, commercial hedger positions in the equity index futures, and the current relationship between stocks and bonds. "In contrast to the Smart Money, we want to do the opposite of what the Dumb Money is doing. These traders have proven themselves over history to be terrible at market timing. They get very bullish after a market rally, and bearish after a market fall. By the time the majority of them catch on to a trend, it's too late – the trend is about to reverse. That's why we call this the 'Sell Confidence"'indicator too, as it tells us how confident we should be in selling the market. "Examples of some Dumb Money indicators include the equity-only put/call ratio, the flow into and out of the Rydex series of index mutual funds, and small speculators in equity index futures contracts. "Our Confidence indices are presented on a scale of 0% to 100%. When the Smart Money Confidence is at 100%, it means that those most correct on market direction are 100% confident of a rising market … and we want to be right alongside them. When it is at 0%, it means that these good market timers are 0% confident in a rally, and we want to be in cash or even short when confidence is very low. "We can use the Dumb Money Confidence in a similar, but opposite, manner. For example, if the Dumb Money Confidence is at 100%, then that means that these bad market timers are supremely confident in a market rally. And history suggests that when these traders are confident, we should be very, very worried that the market is about to decline. When the Dumb Money Confidence is at 0%, then from a contrary perspective we should be concentrating on the long side, expecting these traders to be wrong again and the market to rally. "In practice, our Confidence Indexes rarely get below 30% or above 70%. Usually, they stay between 40% and 60%. When they move outside of those bands, it's time to pay attention! "Next up we look at the Options Speculation index, which, not surprisingly, is far beyond the highest it has been in the past 5 years, possibly ever. "While it is rather self-explanatory, here is the official interpretation of the chart: The Options Speculation Index takes data from all the U.S. options exchanges and looks at opening transactions. We total the number of transactions with a bullish bias (call buying and put selling) and also the number of those with a bearish bias (put buying and call selling). The Index is a ratio of the total bullish transactions to the total bearish transactions. The red and green bands on the chart are 2 standard deviations from the one-year average of the index. "Like most other put/call ratios, this is a contrary indicator, so when we see excessive speculative activity (i.e. the indicator moves outside of the upper red trading band), it means that traders are very confident of a rising market, and we usually see just the opposite. "When we see too much risk-aversion and the indicator moves below the lower green trading band, then we're at a pessimistic extreme and we typically see a market rebound shortly thereafter." They go on to give us other indicators of sentiment at the limits, which you can read about here. But this gives you a flavor. And then we come to my friend and the co-author of my new book, Jonathan Tepper of Variant Perception. His firm is usually bullish, but they released a report last Friday that started out: "We recommend hedging equity portfolios and reducing market exposure. Extremes in bullish sentiment, overbought conditions, rising yield levels and extremes in correlation between asset classes spells short-term trouble for equity markets. "Almost all our sell indicators are going off and we recommend hedging portfolios or reducing exposure. The last time all our sell signals went off was in early January and late April. Both cases led to short-term stock market weakness. "Our longer-term cyclical view is intact. We continue to see the US and the world as being in a mid-cycle slowdown. Money growth is accelerating and the diffusion of OECD leading indicators is positive. We would be buyers of global equity markets on any sizeable correction." They then proceed to give us a variety of warnings signs and charts. I will give you just a few of them. "Almost all sell signals going off; hedge portfolios "We are now seeing almost all our sell signals go off and we recommend clients hedge portfolios and reduce market exposure. We have advised clients in the past to hedge their portfolios and reduce exposure when all our sell signals have gone off. The last two times all our sell signals were activated was in January and April. In both cases the stock market performed very poorly one month out. "We have continued to add new tools to our buy and sell signals. As the following chart shows, the sum of our signals is flashing a warning sign. "These signals typically lead to stock market sell-offs and forecast poor returns one month forward." I could do several letters from people I highly respect who suggest that hedging your portfolio might be wise as we go into the New Year. But this has given you a sense of what I am reading. As for actual timing? This market has been skewed by QE2. Things can remain irrational for longer than we would think. I would urge some real caution. As the guys at Variant note, there will be some opportunities to buy back in. Where Has the Year Gone? And with this missive, I sign off for the year. I will greet you again come the New Year and a new decade (although technically, I know, this will be year two of the second decade). Thank you for letting me into your world each week. It is one of my great pleasures. New Mexico, Cabo, LA, Winnipeg, Las Vegas, Thailand, and Japan Just a month ago it looked as if I would not be traveling all that much in the first part of 2011. That has certainly changed. Next week I go to Angel Fire, New Mexico with my youngest son Trey, where he will snowboard and I will read and do a little writing. Then we (Tiff, Ryan, and my granddaughter Lively) are off to Cabo San Lucas, where we will join the management team of Altegris for some planning for the New Year, as well as some R&R. Then to LA on the 15th for one day for a fundraiser with my friend Lee Stein. Then on to Winnipeg on the 21st for a speech. Then at the beginning of February I'll be in Las Vegas for an event with Steve Blumenthal and his team at CMG. I'll fly from there to Phuket, Thailand, and then spend a few days with my good friend Tony Sagami, who lives near Bangkok. I have never been and really look forward to it. And then a few weeks later I'll be in Tokyo with Chris Woods and CSLA, at their conference. And Europe in March. Wow! How did that happen? All the kids are gathering at Dad's for Christmas. The house is already filling up. We finally got a tree up this afternoon and decorated. Tomorrow is the shopping I have put off for weeks. And then baking and cooking for Christmas. (Yes, I bake cakes and roast prime. I am actually quite good at it. Better than my market timing!) It is good for Dad to have all seven kids, spouses, and grandkids, as well as my 93-year-old mom at home! It does the heart good! Meeting my friends in Pensacola last week reminded me how it is that the friends we make on our journey are our true riches. Timing? The issue there is making the time to enjoy them. It was good to meet with the Old Lions. I intend to do it more! Have a great week. It is a wonderful time of the year and we should all enjoy it. Your ready for some down time analyst, John Mauldin John@FrontlineThoughts.com Copyright 2010 John Mauldin. All Rights Reserved
Share Your Thoughts on This Article
Send to a Friend | Print Article | View as PDF | Permissions/Reprints
Thoughts From the Frontline is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.JohnMauldin.com. Please write to johnmauldin@2000wave.com to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.JohnMauldin.com. To subscribe to John Mauldin's E-Letter please click here: http://www.frontlinethoughts.com/subscribe To change your email address please click here: http://www.frontlinethoughts.com/change-address If you would ALSO like changes applied to the Accredited Investor E- Letter, please include your old and new email address along with a note requesting the change for both e-letters and send your request to wave@frontlinethoughts.com. To unsubscribe please refer to the bottom of the email. Thoughts From the Frontline and JohnMauldin.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin's other firms. John Mauldin is President of Business Marketing Group. He also is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA, SIPC. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Note: Joining the Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at www.MauldinCircle.com or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs may or may not have investments in any funds cited above. John Mauldin can be reached at 800-829-7273. EASY UNSUBSCRIBE click here: http://www.frontlinethoughts.com/unsubscribe Or send an email to: wave@frontlinethoughts.com This email was sent to jmiller2000@gmail.com Thoughts from the Frontline | 3204 Beverly Drive | Dallas, Texas 75205

Fwd: Apple, Google, NewsCorp and the Future of Content - John Mauldin's Weekly E-Letter

---------- Forwarded message ----------
From: John Mauldin and InvestorsInsight <wave@frontlinethoughts.com>
Date: Mon, Dec 20, 2010 at 7:48 PM
Subject: Apple, Google, NewsCorp and the Future of Content - John Mauldin's Weekly E-Letter
To: jmiller2000@gmail.com

	Contact John Mauldin Print Version Volume 6 - Issue 51 December 20, 2010 Apple, Google, NewsCorp and the Future of Content Quick housekeeping note: IF I write an e-letter this week it will be earlier in the week. There will be no letter's next week then we launch the first Saturday morning in January with my annual predictions letter. And just for fun, one of my readers said that the title of last week's letter should have been "Kicking the Grenade Down the Road." Better check that pin! Now, this week's OTB. I am fascinated to watch the world change at an ever accelerating pace. Today's Outside the Box looks at some of those changes, specifically the future of Apple, Google and media. I found this to be a fascinating exchange. Whether you are an investor in tech or simply a consumer of media services ( and if you area reading this, you are), the world id getting ready to change in ways that boggle my mind at least. I shot this week's OTB to my friend David Brin, the sci-fi writer, social critic and one of the world's leading futurists. Here is what he said: "John, I found the Whalen interview brilliant and very informative.  I always like guys who take the big, big picture. (Note: I bought AAPL in 1983 at 20.... after Splitting twice, it is now at 320, so I am biased by happiness.) "It does seem to me that Whalen touches on a key point when he says: It will be interesting how this all gets monetized." "He correctly sees the monopolistic control model of content-delivering "pipes" collapsing into a vast lake of content. Though this won't benefit the content owners, either. Moreover, the makers of specific mobile hardware will matter less and less. Money will still be made by each year's best device maker, but it will remain a hardscrabble, highly competitive world. Device-making will not be a robust business model for steady and ongoing profit." This is an interview of Michael Whalen (see more on him below) that was done by my fishing buddy friends at The Institutional Risk Analyst. Chris Whalen is one of the honchos there and he rounded up his brother for the interview. Contact numbers for them (and a free trial subscription) are at the end of the piece. So put on your thinking cap and let's jump in. Your thinking high-speed wireless broadband is the future analyst, John Mauldin, Editor Outside the Box Apple, Google, NewsCorp and the Future of Content Interview with Michael Whalen In this issue of The Institutional Risk Analyst, we speak to Michael Whalen, [Emmy] award winning composer and new media observer about the outlook for the business of creating and delivering content.  Since graduating from Berklee College of Music, Michael has taught a business for music class that has saved thousands of young artists from making terrible mistakes with content and other contractual rights.  Think Frank Zappa and Warner Brothers.   And yes, Michael is IRA co-founder Chris Whalen's younger brother.  The IRA: So Michael, let's start with kudos for the call on iTunes years ago. You first gave your brother a heads up about Apple Computer's (AAPL) move into music via iTunes a decade ago, correct? Whalen: Thanks. Yes...back in 2000 - 2001, I saw that Apple was getting ready to take a monumental step by shifting its business away from just computers and software towards mobile devices. To see how big a deal this decision was, you have to travel back to that time… When people thought of downloadable music the first thing they thought of was Napster (remember them?) and to the general business community the idea of all entertainment being sold and distributed digitally through a SIMPLE platform was "risky" and truly visionary. The music business was all about CDs (still) and the traditional model of physical product. Interestingly, iPod was not first to market. The digital music players that did exist beforehand were clunky and big. In 2001, concepts such as iTunes and the iPod made it look like Steve Jobs and the management at AAPL were crazy or at least losing "confidence" in their core business. People asked with more than a tone of criticism: "why diversify"? "Has Microsoft (MSFT) beaten you"? Now 10 years later, their gamble looks like genius. It was… The IRA: Indeed. How do you view the AAPL strategy going forward, especially with the apparent decision to let Droid handset take overall share? Is AAPL still well advised to keep proprietary control over the hardware and not allow third-party produces to make handsets that run the AAPL OS?  Click here ( http://us1.irabankratings.com/mobile/home.asp ) to see IRA's new digital widget for handsets. Whalen: I think handicapping the handset/mobile device market with just a hardware conversation is short-sighted, frankly. In my opinion, the near-term future is all about content streaming. The profit margins in these handset devices is so small that staying in the game will be very tough if you are not already in it and buying your way into the market may not pay off because the margins might not cover the cost of entry unless you are hugely successful. For investors interested in AAPL, watch what they do with their huge new cloud-computing center in North Carolina. As already reported in the media, this facility is going to go far beyond simply turning iTunes into a streaming subscription service. AAPL is going to start to be very visibly aggressive with all that cash they have and this location is but a bellwether of other centers and a very interesting future that is unfolding. The IRA: Do tell. So, to ask the same question from a different perspective, will AAPL push all content to all devices or just the iPhone/pod/pad? Maybe layers?  Your reply suggests that the hardware origin no longer matters, even for AAPL. Whalen: Hardware only matters as a platform for content streaming and customized applications. The future is here right now: the iPad, iPhone and even the new Macbook Air have no hard drives.... they have flash drives which suggests that the data you need to operate the device can live on a flash drive or the data will be usable at the other end of a network someplace. AAPL has aggressively inserted "data pushing" into nearly every app now. So, from now - - look 24 months into the future when the mobile phone companies finally have their networks together here in the USA and we are talking about something ever more huge on the horizon: imagine making broadcast television and radio totally irrelevant - - even to captive audiences like commuters, which has been the life blood of radio. People will be able to stream any kind of content in any definition in real time -everywhere in the United States. Countries like Korea and Japan are years ahead of us in this technology. However, the USA is "entertainment thirsty" and on the move. The real question is how much will this new streaming content cost and where will the market balk when it is so used to getting so much content for free now. The IRA: So are we talking about the end of proprietary channels and exclusivity, even for companies like AAPL? The Google (GOOG) sponsorship of Droid looks to us like a very smart way to essentially abscond with the relationships of the carriers. AAPL has pushed content onto PCs via iTunes. Will they also attempt to push content to ALL handsets or is their opportunity defined by the AAPL hardware and OS? Whalen: No, I think AAPL's days of dreaming that they will be the only hardware game in town are over.... They are crushing people with design and marketing now. However, in the last 12 months you can feel a change in the wind. Their stance in the media and in their marketing has shifted as well. They have learned that Droid is real and that iPhone will not dominate the market in terms of total share. They have blown open the tablet computing market with the iPad - but so many other devices are out and coming to market. So, yes, we're talking about delivering content across all platforms. The IRA: The IRA is now running on a new Droid 2 via Verizon (VZ). Lost the Blackberry and MSFT Outlook all on the same day. Free at last, free at last. OK, so let's open the scope a bit and go back to our conversation last week about Fox, NBC, etc. If the handset is the means of receiving content, what happens to TV or even cable? Our friend Joe Costello on the archein21@googlegroups.com thread reminded us over the weekend of the comment by Level Three to the Bloomberg News report that Comcast (CCS) is going to charge Netflix more for movies. Hello? Was the Comcast/NBC deal an astute way for General Electric (GE) to run away from a declining business? Whalen: Yes. GE was brilliant in getting out of traditional television now. CCS doesn't yet see that they were wooed by the memory of how profitable television once was. Those days are dwindling quickly. However, I see many TV execs puffing their chests saying how great the upfronts were in the Fall and how the shows they're making are retaining market share. This is simply not true. Have you checked-in with those advertisers lately? The rush of eyeballs leaving TV is amazing. The data hasn't yet caught-up to where the market is sprinting. You'll see in the next 12 - 18 months very popular new content streaming directly from the servers of the people who made the show onto devices - - maybe they'll use iTunes, FaceBook or even GOOG for aggregation and this new show will completely circumvent the traditional television structure for production, marketing and broadcast. Technology has caught up and the game has changed for TV. Said another way, the TV and film businesses are changing as radically now as the music business did (and continues to change) ten years ago. Consumers had to wait for the network bandwidth to catch up before the change in video & film product became feasible. Now it is... As for other TV outlets, you are going to see MUCH MORE leasing of broadcast space - a la "American Idol" or "Survivor". Networks will be leasing the time (space) in "primetime" with certain financial overrides if a show is wildly popular, etc. It will be interesting to see if the FCC starts coming down on networks who are no longer standing by the programming on their digital bandwidth as theirs - but simply a tenant. Imagine a now future where broadcast TV is only truly valuable for live events, captive live programming like "Idol" and sports. The networks don't want to tell you that this future is here NOW. The research data will be here soon - but investors waiting for the eyeballs to be counted before making decisions will be late to the next party. The IRA: We used to have discussions with Alan Schwartz and the technology bankers at Bear, Stearns & Co. years ago about whether the pipe or the content ruled the model. Now we see that the pipe is becoming an infinite lake whereon we must all learn to differentiate our brand in a sea of brands, brands that have global potential reach as you said. In terms of content delivery, is this just taking our TVs with us in a mobile sense or is it more transformative? Look at Twitter as the extension of AIM on a global scale, but is there a global peer-to-peer network here? Whalen: There are two ways to look at the end of television as we have known it for 70 years.... The first is that mobile devices killed television because Americans are dealing with life on the run. The traditional picture of the family all gathered with their dinners together in the living to watch an evening's entertainment does NOT happen. If you're not working in TV like me, you may not get what a big deal this is. Television producers are scrambling to change EVERY part of how television is created for an audience whose life is literally on the run. The IRA: Yes, but can you run, talk and text at the same time? To us, humans are no more able to multitask than computers. Is this really productive? Or are we all becoming insane thanks to the manifold "benefits" of technology? Whalen: Here's two examples: cameramen are changing shots to work for a 3" screen by reframing distant shots that might look weird on a portable device to use more close-up and medium shots and sound is being adjusted to work for the dynamic limitation of headphones. We have already started seeing two versions of shows - one for TV and one for your handset. This combined with shrinking dollars for production and almost ridiculous competition - it's true that the pipe that is now a lake that is turning into a ocean - very, very fast. Secondly, the TV at home and the home computer are merging - literally. The new GOOG TV product is a pretty good structure for managing the expectations and simplicity needed for a broad-audience. As a music professional, I like the Sony (SNE) Internet TV. It's pretty slick for hardware but it's just a stop on the way to a device that must transform itself from regular TV, high def, a gaming device, straight internet and wirelessly interface with all our mobile stuff at once. I have found it very interesting that AAPL hasn't jumped into this fray given their "digital home" strategy. I think Steve Jobs is waiting for the market to sort itself out before he brings something to market or perhaps I am right and the game on the hardware war is over… The IRA: Correct, AAPL and GOOG clearly have the advantage of incumbency here. But back to your earlier point, so all of the content creators basically become syndication platforms for all of the "delivery devices" regardless of what OS they are running? And does this help artists, authors and other content creators economically? Is this the final epitaph for the "studio model"? Whalen: Correct... OS is no longer a marketplace "battlefield" how it was 5 or 10 years ago and the whole notion of what operating system your computer is running has been pushed to the background just as handsets have just been pushed to the background as we discussed before… Therefore - not surprisingly, I believe that we are all content creators in the future we are walking into. I don't mean making videos on YouTube or Vimeo - - I mean that content itself will be made by the audience and the "artists" of our new future will be there to provide inspiration, elements and focus. In other words, all artists will be brands that will have their audiences doing the work of executing content that is inspired by the brand itself. The IRA: So we are all just virtual brands as in The Matrix? Whalen: Yes. It will be interesting how this all gets monetized. Just as J-Lo has her name on a perfume now or Madonna opens a chain of Health Clubs (not kidding) - this is just the beginning of the fusion of marketing - licensing - brand imaging - content and distribution. It will test the existing, IMHO ridiculous, copyright laws we have and to the wall. Don't believe me? OK… Well, the future of content/brand creation and licensing is going to shock you even in a few years. That said, I am not sure how all this "helps" artists and creators/owners of content in the short or long terms. One of things I have been saying in my lectures on music business, in my writings and seminars is that this whole digital wave that is breaking is about resetting expectations. We have deluded ourselves for 75 years about what artists, creative people and copyright owners should and can make financially. The IRA: You said the other day that you see the golden age of American music and film, in terms of the position of artists, going back to the future to the Middle Ages. Could you elaborate? Whalen: Frankly, I think we're going back to the 19th century in terms of the "status" of artists. They'll be figureheads. Imagine: like Paris or Vienna of the 1900s, we'll have wealthy patrons and small clutches of people who support the art of "real" artists. In this environment, the work we will try to sell is simply a loss leader and an inducement for us to perform or create a "custom" song, TV show or film... Yup, it's all here now... What will be really interesting is what happens next… I am not pretending to be the "Grim Reaper" but I think the record business, the film studio system and the television networks are over as we think we know them. I think there is a new business emerging in gathering creative investment, content and creative marketing.... It will be in a structure that's more akin to a stock market than the traditional structure we've seen for artistic and creative content and the platform for it will be the digital ocean we have already discussed. Based on the "buzz", there will be a "futures" market and the idea is commoditized and funded in days - not months or years. For decades, most record companies and networks have been little more than funding sources for artists - now the truly visionary artist won't even need these ancient businesses - the market itself will generate everything it needs to create content efficiently. It's a little overwhelming the change that is here now vs. five years ago and that will be coming in torrents in the next few years. Amazing. The IRA: Likewise it is interesting to see the way that the service providers, Verizon for example, and the handset maker, Motorola (MOT) and HTC, in the case of the Droids, are losing leverage to the GOOG's of the world. The entire Droid 2 is GOOG enabled. You don't even need to install the Moto drivers. And VZ pathetically tries to recapture eyeballs via a media player that is also irrelevant. How does AAPL avoid marginalization? Or is that the wrong question? Whalen: It's a great question and it's a clue to AAPL's strategy in the near term. iTunes is but a platform and you can see that its already outgrown itself and will transform into something new soon... So, the next step in our "digital ocean" conversation is either the savvy investor interested in media will be controlling content or they will try owning the content. So, we've already discussed that owning copyrights is probably irrelevant in the long term - therefore, the future is all about owning the rivers that feed the "ocean" of content. Said another way, Wall Street really needs to get that the future of media is not about hardware or even the proprietary OS... I know we all get enamored of gadgets and thingies. The market is about to make all of that history. The IRA: We've heard that before. How do you see the delivery/payment relationship changing? Whalen: Well, you can assert that AAPL's strategy and that spooky HUGE building in North Carolina has something to do with controlling tracts of copyrights without the need of OWNING them. This of course begs the question: how? What if iTunes or whatever AAPL calls their new streaming service is broken into TWO parts - the actual delivery and streaming of the programs, etc. and on the other side - - the administration of the copyrights in the digital realm including collecting fees and licenses from OTHER PLATFORMS. This would be HUGE.... revolutionary and it hasn't happened on this scale since Edison tried to own the whole content "jungle" himself at the turn of the 20th century. Mr. Edison didn't have to deal with 17 companies who will be screaming "antitrust, antitrust" when AAPL wheels this out… In this possible future, the fusion will be complete and unlike any paradigm that we have ever seen. The IRA: Exactly. You have different models growing in this jungle. Is the AAPL path a fully integrated model? Does Jobs have to have exclusive control over content to monetize his audience? For example, to subscribe to my friend Tom Keene at Bloomberg, you must use iTunes... Do you like the AAPL path or Goog? Or is it too soon to tell? Does Facebook triumph?  We have friends who think Facebook eats everyone's traffic. Whalen: I think everyone is waiting for a GOOG - AAPL face off. It's not going to happen... AAPL can BUY GOOG. In the end, I see the directions of these companies being very different. They have crossover now.... The mobile ad marketplace is particularly interesting area of crossover. But these two companies will have less and less crossover over the next few years. In this new "jungle", some of old players must be removed (bought) or merged and sold off. Isn't it amazing what is happening to MSFT? They are now a gaming company and they are specializing in mobile Internet products for cars. Wow. MSFT didn't play the whole OS thing or software thing very cleverly - did they? But I really do think it's too soon to tell. Facebook is valuable now to people - - I think the next 6 months will be very telling. Facebook is still a new "toy" to many. They will have to figure out how to keep the page relevant as the river of content that we've been discussing steals eyeballs... Maybe the river flows through Facebook?  AAPL and Facebook have been talking and they NEED each other. AAPL's Ping social network is a non-starter and Facebook has no real access to content. We'll see.. The IRA: So where does this leave Ruppert Murdoch and NewsCorp (NWS)? And you mentioned the impending changes at the New York Times web site to a paywall model. Our friend Felix Salmon at Reuters has been following the transition with his usual attention. Whalen: I think Ruppert has to make a major move soon. Hulu is not the move. NWS is OK - now, say the next 12 - 24 months. However, so much of their content is delivered on old formats (TV, newspapers, magazines, Film Studio). He doesn't have his own platform now that will be attracting the audience that would feed on this content. NWS might have more time in some foreign markets - but in the US, Europe and Japan - the content river or lake as you suggested is getting ready to wash his old proprietary distribution empire away. Mr. Murdock might need to sell pieces to concentrate on his "core" - but the real players have been getting ready for this game for 3 - 5 years. Unless he's about to unveil some secret strategy which would have been leaked by now - he will have to pay a premium to be at this table with GOOG and AAPL. That said, the NYT is about to try to MAKE their digital content a tiered paid subscription model with some free views. They must find a way to monetize their sinking ship. But frankly, I think the idea is going to crater. No one wants to PAY for text - and a little video. Even from the New York Times. Their public arrogance as "the world's newspaper" might be covering a private fear for what happens when this "hail Mary pass" doesn't pan out. They have so much debt and their revenues are shrinking. Maybe GOOG or AAPL buys them? They don't NEED to - newspapers don't hold the allure or relevance they once did. Also, in the "fusion" model I outlined before - news will be delivered in a completely new way. It no longer needs to be "presented" by a credible looking news figure. Instead, news will be raw and the "commentary" will be generated by the audience themselves. Imagine the kind of stuff that people write as comments on video clips on YouTube or Facebook now but taken to the 10th power. The audience of the near future doesn't want to be walked through their news. Here's the new context for the new news: 1st person point of view as personal experience. Maybe you could say the news as "video game"? (laughs) Not quite… The NYTs has had a successful career as a shaper of stories - I think that is less important now and will go away quickly. Honestly, I think anyone in the newspaper business should be on Craig's List looking for a new gig. The IRA: So, neither AAPL nor GOOG wants to own content. Fox has been spending a lot of $$ to create general, business content focused on the web, but they are competing for eyeballs with all of the other "islands" of content. Is NewsCorp, NYT essentially in the same boat as the artists your described? Whalen: That's an interesting comparison. I think the big adjustment for these massive media companies is that I as a content provider will be EQUAL to them in this new paradigm. Already, my content can draw as many eyeballs as theirs. Regular people have videos on YouTube now that have tens of millions of views. I have a concept that I call "bendable content". In the new "ocean" of content that we will all swim in soon - all content will be "bendable". Bendable means that all media can be played on any device, anywhere, anytime. It also means that that the material can be reordered, edited, manipulated and re-contextualized. Yes, someone at the US Copyright office is weeping now. If you have a sophisticated computer, you can do all this manipulation NOW. In this new future, you'll be able to do this on a handset or a tablet computer and get the content back OUT there - wherever that is! How do you monetize this? We'll see. Investors may have to stop asking that question like there will always be a transaction out there that can be tracked. In the new media ocean - part of the service that you are pay for monthly will be reconstructing content. The IRA: This returns to our question of the peer-to-peer dynamic, almost a global Napster for all content and free. Whalen: Yes my brother. All of this kind of talk scares the crap of the TV networks and Film studios who have lasted so long by keeping their grip on content. In the new future - that conversation is OVER because the audience is demanding now that it be over. The future will simply be created by the people for the people - it's nice, isn't it? It's been by controlling content that's been keeping the "big" boys relevant - I'm surprised that they have lasted this long as purveyors to the public with their content and programming and news. The slow economy has slowed down our sprinting towards this future and finishing the work of building the networks that will carry all of this content - especially the wireless networks. But these walls are tumbling down now. What I like about the possible future we are talking about is how it's a VALUE conversation versus a captive one or a proprietary one. The Internet "attitude" has changed the rules for all these players by making content king and choice the other important metric. That said, the digital administration fence that Steve Jobs (or someone able to capture the digital ocean) might throw around "lake" of content may have us move from one kind on controlled experience to another... Will there be a toll taker in this future? Probably… It might even have an AAPL logo on it. We'll find out very soon The IRA: Thanks Michael. John F. Mauldin johnmauldin@investorsinsight.com You are currently subscribed as jmiller2000@gmail.com. To unsubscribe, go here. Reproductions. If you would like to reproduce any of John Mauldin's E-Letters or commentary, you must include the source of your quote and the following email address: JohnMauldin@InvestorsInsight.com. Please write to Reproductions@InvestorsInsight.com and inform us of any reproductions including where and when the copy will be reproduced. Note: John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Plexus Asset Management; Fynn Capital; and Nicola Wealth Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements. Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC and InvestorsInsight Publishing, Inc. ("InvestorsInsight") may or may not have investments in any funds cited above. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Communications from InvestorsInsight are intended solely for informational purposes. Statements made by various authors, advertisers, sponsors and other contributors do not necessarily reflect the opinions of InvestorsInsight, and should not be construed as an endorsement by InvestorsInsight, either expressed or implied. InvestorsInsight and Business Marketing Group may share in certain fees or income resulting from this publication. InvestorsInsight is not responsible for typographic errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided "AS IS" without any warranty of any kind. Past results are not indicative of future results. We encourage readers to review our complete legal and privacy statements on our home page. InvestorsInsight Publishing, Inc. -- 14900 Landmark Blvd #350, Dallas, Texas 75254 © InvestorsInsight Publishing, Inc. 2010 ALL RIGHTS RESERVED