The Big Picture | June 2005

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Parsing the Fed

Thursday, June 30, 2005 | 04:11 PM

click for larger graphic

Verbatim Text Of Federal Reserve's Interest Rate Decision

Thursday, June 30, 2005 | 02:19 PM

in Economy | Fixed Income/Interest Rates

The Fed speaketh:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/4 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually. Pressures on inflation have stayed elevated, but longer-term inflation expectations remain well contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

I nominate this for the most understated phrase on the planet: In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/4 percent.

Mortgage Rates versus Fed Fund Rates

Thursday, June 30, 2005 | 01:59 PM

in Fixed Income/Interest Rates | Real Estate

The Conundrum continues:

I cannot find my notes on where this is from, but it looks like the WSJ:

DESPITE THE FEDERAL RESERVE'S rate raising campaign started June 30, 2004, fixed mortgage rates are lower now than they were a year ago.

The average rate on a 30-year fixed mortgage is 5.66%, down from 6.30% a year ago, according to Bankrate.com's national weekly survey of large lenders. As for one-year adjustable-rate mortgages, the rate is 4.69%, up slightly from 4.43% in June 2004.

While fixed mortgage rates don't move in lock-step with Fed actions, they do tend to be responsive to rate decisions. So the decline in mortgage rates has surprised some economists. At the beginning of the year, economic forecasts from several associations called for fixed mortgage rates to end 2005 near 6.5%. Now, some economists are revising their estimates downward, to 6%.

What's different? One factor is that the core consumer price index, a key inflation indicator that some say has a direct effect on mortgage rates, increased rapidly during the second half of 2004, and economists expected the pace to continue.

But the CPI has plateaued in 2005, remaining at 2.2% through May. "It put inflation fears away and has allowed long term rates to remain low," says Lawrence Yun, economist for the National Association of Realtors. --Steven Sloan

Strange things are afoot with GDP

Thursday, June 30, 2005 | 07:31 AM

in Economy | Real Estate

Naaf741_economy06292005200926 I do not want to become a "nattering nabob of negativity," but I cannot shake the idea that yesterday's GDP numbers had a certain odor about them.

Maybe I'm just an economic curmudgeon.

Perhaps I am too "reality-based" in my perspective.

I simply cannot compromise my belief in hard data (versus hedonics and seasonal adjustments and/or revisions).

Nor can I manage the suspension of disbelief so common amongst the economic cheerleading crowd, both in the private sector, at the Fed, and amongst the elected and appointed government officials.

Look, I understand that a certain degree of economic positivity is required -- for consumer confidence, as well as to prevent the gold bugs and survivialist crowd from scaring everyone into the bomb shelter. I have no desire to cross over to the tinfoil hat wearing fraternity. I accept the necessity of some measure of 'happy' bias in the government models.

But at what point do we cross the line from maintaining a healthy optimistic outlook to cynically manipulating data in boldfaced contradiction of reality?

Unfortunately, I think that line was crossed in yesterday's revised GDP data:

GDP Components: Q1 Final (Est 3) Q1 Prelm(est 2) Q1 Adv(est 1)]
Real GDP +3.8% +3.5% +3.1%

Here's the thing: Within GDP data, the revision of the Residential Housing is simply too hard to believe: This is data that's widely available from the NAR amongst others. To get there, you need a significant DROP in home prices. That's right, a drop in home prices. The revision from +8.8% to +11.5% is simply enormous. I cannot say for sure that its unprecedented -- but I cannot recall it being this huge in recent memory.

I am not the only one: The (subscription only) MNSI specifically observed:

The Commerce Department said exports and investment in residential structures were revised higher in Q1 . . .The structures revision was due to downward revision to the one-family house price index which resulted in more real sales and less inflation -- an almost unbelievable result given that the housing market is on fire with home prices posting double-digit appreciation on the year in some areas. (emphasis added)

Yesterday's upwardly revised GDP data is believable only if you accepty the premise that HOME PRICES WENT DOWN IN Q1 2005.

Otherwise, the data was gamed.

Follow the bouncing ball: The revisions to GDP inflation accounted for virtually all the net positive
revisions to growth.

How? The GDP implicit price deflator. For the quarter, it was was revised downward from 3.16% to 2.89% (a drop of 0.27%). That accomplishes a neat little trick: By (artificially) reducing the rate of inflation, the BEA spikes real GDP growth by the same amount, and total GDP growth revised upward from 3.48% to 3.76% (rounded up to 3.8%), an increase of 0.28%.

The deflator was revised downward from an annualized 3.3% to 1.1%, an astonishing drop of 2.2%, and real housing growth revised from 8.8% to 11.5%, an incease of 2.7%.

Yet year-over-year housing inflation in the GDP is at just 5.2%. Cranking that number up to reality raises inflation, lowers GDP, and spoils everyone's party.

Forget taking the punchbowl away, this crowd is spiking it with LSD.

Its not like I do not admit when I am wrong. Hell, I expect to be wrong.

But this is beyond the pale.

GDP numbers, IMHO, have now entered the realm of Santa Claus, the Easter Bunny, and honest politicians. They are all fictional characters.

(I hope to have some more on this later)

Sources:
NAR Data on Home Sales Q1
http://www.realtor.org/Research.nsf/files/REL0505EHS.XLS/$FILE/REL0505EHS.XLS

First-Quarter GDP Is Revised Upward on Housing Surge
By JEFF BATER
DOW JONES NEWSWIRES, June 30, 2005; Page A2
http://online.wsj.com/article/0,,SB112004797007972800,00.html

ANALYSIS: US Q1 GDP Rev +3.8%: Prices Dn, Expts & Res Inv Up>
By Joseph Plocek
Market News Service International
Wednesday, June 29, 2005 8:31:18 AM (GMT-04:00)

Lehman '10 Uncommon Values' Picks

Wednesday, June 29, 2005 | 01:09 PM

in Investing

Lehman Brother's is out with their annual "10 Uncommon Values" portfolio.

This year's list:

Allstate (ALL)
Applied Materials (AMAT)
Bed Bath & Beyond (BBBY)
Dell (DELL)
Dow Jones (DJ)
Freddie Mac (FRE)
Microsoft (MSFT)
Pfizer (PFE)
Phelps Dodge (PD)
Wal-Mart (WMT)

The list comes from the best bottom-up picks of Lehman's 89 equity analysts. Lehman's website notes: "In its 56-year history, the 10 Uncommon Values Portfolio has significantly outperformed the S&P 500 Index."

Dow Jones that the firm says the portfolio has outperformed the S&P 500 73% of the time, and delivered a 14.3% average annual return vs the S&P's 8.2%.

There is actually an ~~ETF~~ Index for this: UVI

Here's how its been doing:
click for larger chart

Not too shabby

Trading Rule #1

Wednesday, June 29, 2005 | 06:15 AM

in Trading

The first rule of trading is simply this: When you make a mistake, when you buy or sell ANYTHING by accident, you immediately unwind the position.

Immediately.

There are no ifs or buts. There is no after the trade consideration. (There's no crying in baseball). Do not justify or attempt to rationalize the position. You reverse the trade the very second you discover it.

Why? Because you own something you never planned to. You did not do the due diligence, the research, the stop loss planning, the carful contemplation.

And, you no longer can. Now, you are an interested party, no longer objective. You have a vested interest, a stake in the outcome.

Here's a perfect example of what NOT TO DO:

Somebody's sure to notice this...
Tue Jun 28,10:42 AM ET
http://news.yahoo.com/s/nm/20050628/od_nm/taiwan_shares_dc

A Taiwan stock trader mistakenly bought T$7.9 billion ($251 million) worth of shares with a mis-stroke of her computer, meaning her company is looking at a paper loss of more than $12 million and she is looking for a new job.

The trader with Fubon Securities mis-keyed in a small order from Merrill Lynch Monday, creating confusion when many small firms inexplicably surged the 7 percent trading limit.

"Something like this is difficult to explain to superiors," a Fubon executive said Tuesday. Fubon said that the trader was unfamiliar with new computer systems and would be fired.

"There is a paper loss of more than T$400 million," said the executive.

"However, with a good outlook for stocks in the second half, there are no plans to sell the shares in the near term." (emphasis added)

These idiots are fucked.

Translating Greenspeak into Plain English

Wednesday, June 29, 2005 | 05:44 AM

in Economy

Since we have a very special Fed meeting coming up this week, I thought I would give y'all a treat. Its the Peneboscot Princess, all by her lonesome:

The ‘90s were a fast and furious era of huge technological leaps and sweeping political change. These developments yielded more sophisticated investments across countless international borders. And along the way, these developments also mandated capital, which came in three flavors: productive, prophylactic and the kind used for “medicinal purposes only”. But little distinction was made among these varieties. All we know is that we got a boat load of dough and a mandate to spread it all over, like so much manure.

And that we did. Whether to jam the Asian Tigers or re-invent carry trades or ameliorate fall-out from the demise of the Soviet Union or to foster the dot.com frenzy, to expedite the explosion in the use of derivatives or to paperover any difficulty du jour, the FED was there, pump in hand, ready to keep us marinating in a bottomless pool of monetary brine.

Of course, this central bank promiscuity resulted in global excess of every imaginable kind, not the least of which was the stock market bubble which came to an end in 2000. There is no need to delve into any of the gory details.

But we will point out that Mr. and Mrs. America, though suffering 3rd degree burns over most of the portfolio, did become convinced in the existence of a free-lunch program. Therein lies the rub. Keep it in mind as we digress.

And as fate would have it, along came the recession of 2001. Dang it anyhow. You remember this part, right?

They began to slash rates like crazy. Here’s a quote to jar your memory … “Greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment …”

See? They couldn’t then, just as they cannot now … admit that they had created a great, big mess and had not the wherewithal to either understand it or to even begin to remedy it. So the one-trick pony, the FOMC, under the guise of “heightened political risk” (Iraq), kept pushing on that string until they had FED funds at 1% by the summer of ’03.

So the grease was back in the system, this time with a vengeance. But the economy was not cooperating, no sir. Couldn’t get a pulse. But the stock market? Another story altogether. The S&P 500 (cash) traded at a low of 788.90 on March 12, 2003. The high was marked on March 7, 2005 at 1229.11. Not bad for government work.

Literally. But who was in the driver’s seat? Hedge funds were the first on the food chain to get the fertilizer from the banks/brokers that the FED was intent on doling out. And are the perfect pick when a reflation is needed. So it’s no wonder that trade has became insufferably one-way and maddeningly mechanical for so long as they set about the business of stock market bubble #2. Meanwhile, though some of the Moms and Pops who had visions of recouping, surely did get back into the swing of investing in stocks, the incredibly low rate scene was busy spawning yet another bubble, the one in housing, of course. The stories of the blistering pace of new and existing home sales, median price explosion and the relaxation of lending standards to the point of absurdity are legendary by now but alas, mesmerized anew by the latest get-rich-quick frenzy, all caution has been thrown to the wind.

Now we get to the conundrum part. Where to start, eh?

You can only slam and jam the S&P 500 so much until you get bored, right? So branching out into commodities speculation proved to be a noteworthy diversion for some of the more agile, highly-levered players. Example: On May 27, 2004, prompt Gasoline hit a then-record of $1.47. Example: Copper ticked at .90 on 11/24/03. By August of ’04 it was up around 1.22. Meanwhile, the S&P 500 made the “August ’04 low” on the thirteenth, demonstrating what we knew all along, that the loosey-goosey do-re-mi was being transferred from one asset class to another as the fast players were about the business of squeezing every last bit of opportunity from each venue they descended upon. In droves. Other commodities were likewise in the throes of extremes, one way or another, as they ran around ringin’ the register. Which is their raison d’etre, so more power to these guys. Okay, the commodities gig was the latest craze back then and of course, China, with 9.6% growth was indicted in the mix, make no mistake about it. The great soybean caper of ’04 comes to mind. Anyhow, they reflated us with all those rate cuts which they claimed were done to stave off run-of-the-mill deflation. But what they really meant to say was “we are soiling ourselves thinking about the possibility of debt deflation”. Indeed, things were getting a bit steamy in the speculative world. How steamy was it getting? A big, fat reminder of just how steamy those prices were, comin’ at you right now: ‘Twas during this period of heating commodities that the BLS lost the recipe
for the PPI. Remember that caper? Yee-ha. They couldn’t let us see what we already knew. Alas, it was time to get us to simmer down. Here’s a verbatim example, spoken by Greenspan on June 8, 2004:
…. “Lastly, let me emphasize that recent financial indicators, including rapid growth of the money supply, underscore that the FOMC has provided ample liquidity to the financial system that will become increasingly unnecessary over time. The Committee is of the view, as you know, that monetary policy accommodation can be removed at a pace that is likely to be measured. That conclusion is based on our current best judgment of how economic and financial forces will evolve in the months and quarters ahead. Should that judgment prove misplaced, however, the FOMC is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth.”
See? Vintage Greenspan. Couldn’t admit they had “reflated” us to the point where more bubbles were popping up all over the place. So what he did was to imply that the reflation gambit had worked so well that it is now time to start to reverse course. You gotta’ love the eternal charade, right?

So they were now about the business of jacking rates in order, they claimed, to get us back to “neutral”. The current round began in June of ’04. And all along this course, while the “I” word pops up in regular commentary as well as in those FOMC communiqués, the long-term outlook is always in one shape or another, benign. And on top of this deliberately misleading banter, the FED themselves has contributed even further to the origin of the conundrum by being relentlessly and painstakingly transparent, to the point where, 100% of the mystery having been removed, the Street has no fear of either inflation or a sudden FED move and as the result, feels foot-loose and fancy free to go further out the curve.

And the sheer magnitude of the staggeringly-leveraged fast players who have turned US government bond trading into what one veteran has termed “contact sport” (on days when they are not otherwise “wilding” in that market), has exacerbated the conundrum to the highest degree. Leave us not forget, too, the added joy of front-running by this set of players, of the “real money” accounts who are sporadically forced in to do various types of hedging. So one can see the beginnings of just how the long end of the curve began un-cooperating with the FED’s rate increases.

We also have to bring in the vendor-financing aspect of the conundrum. We’ll make this quick as it is really old hat. All the excess dough and free and easy credit have made us even more gluttonous than usual. And it’s a good thing, too. Who else is gonna’ buy those one billion white dress shirts that the world was said to have in inventories, owing to the excess capacity that was fueled by the monetary largesse of the ‘90s global expansion, eh? Okay. So we keep buying and blowing up our trade deficit. They get dollars which they then lend back to us so that this scam can keep going. You might know this trick as “foreign central bank participation in US Treasury auctions”. Indeed, between the central banks, those “offshore hedge funds” and the govvie dealers, it’s no wonder we aren’t inverted already …. FED rate hike this.

So as you can see, John Q. is not too prominent in the picture is he? Why not? He’s busy flipping Miami condos, that’s why. Indeed, the same free and easy credit which has the leveraged set gone ga-ga looking for new and innovative niches in which to coin profit (latest I guess are the CDOs), has John Q. now believing he is a real estate tycoon as he has just gotten a spot at the table where they’re serving today’s free lunch.

A colleague referred me to the current issue of TIME. Here’s a cut and paste to help make the easy-money/hog wild consumer point: “In 2004, U.S. homeowners took an estimated $139 billion out of the walls and floorboards through refinancings, compared with $26 billion in 2000, according to Freddie Mac. They put about 35% of that money into home improvements, spent 16% on consumer purchases, and used 26% to pay off debt (including credit cards for other consumer purchases), according to the Federal Reserve Board.”

And the banks/mortgage lenders are just as complicit in this disaster-in waiting. And why not? The more the curve disobeys, the more margin compression they feel, the zanier they get. Interest-only, no money down, no doc, no credit-check, no ability to sign your name? No problem. Just put your “X” on the dotted line. And here’s the keys. And as time goes on and this bubble gets even more outrageous, no need to even move in. Just flip it. It’s never gonna’ end. Right.

And Mr. Greenspan himself is complicit in fostering this egregious notion in that last evening, when asked if he thought there would be any change soon in the falling-yields saga, said “I would think not.”

And he continued:
"The pronounced decline in U.S. Treasury long-term interest rates over the past year, despite a 200-basis-point increase in our federal funds rate, is clearly without precedent … The yield on 10-year Treasury notes currently is at about 4 percent, 80 basis points less than its level of a year ago.''
No stuff, Sherlock.

Keep right on “conceiving of hypotheses that are mutually contradictory”. This writer agrees with you. The aberrational path which took us to this juncture with the curve in its current shape, does not necessarily signal that players are convinced we are headed for recession. How we got here is from deceptive jawboning, an ongoing strip-tease which comes to us in the form of FOMC communiqués, a continuous stream of easy money/gimmicks which keeps the US consumer at the trough and the foreign central banks committed to our debt market and the quantum expansion of the hedge fund industry which, well-oiled by the money machine, is perpetually in the business of figuring out how to wring even more out of the system by some very creative/exotic investment strategies. (Those guys control better than a $ trillion at last count.) It all adds up, doesn’t it?

Thus, we can comfortably say that we have been brought to the height of it beginning with a fib that got bigger and bigger. The housing bubble is the latest and possibly most dangerous result. (Also from the TIME article: “At the stock market's peak, 1% of investors controlled about 33.5% of stock wealth; the top 1% of home-equity holders have only 13% of housing wealth. In other words, a broad drop in home values, should it happen, would affect a far larger cross section of Americans than did the NASDAQ bust.”)

Conundrum this.

Next case.

Time Warner continues its old ways

Tuesday, June 28, 2005 | 05:00 PM

in Film | Finance

As long as today is beat up on the content industry day, let's not forget the film studios: Can anyone be surprised that Time Warner is accused of playing games with the Director of the enormously successful LotR trilogy?

Peter Jackson, one of the film industry's most powerful and popular directors, is suing New Line Cinema, the subsidiary of Time Warner that financed and distributed his Oscar-winning "Lord of the Rings" film trilogy.

In his lawsuit, Mr. Jackson claimed that New Line committed fraud in its handling of the revenues generated by 2001's "The Fellowship of the Ring," and as a result, he was underpaid by millions.

The suit does not specify a damage award. But in an interview last week, his lawyers said that, after New Line applied its contract interpretation from "Fellowship" to the other two movies, Mr. Jackson was underpaid by as much as $100 million for the trilogy.

Lawsuits in Hollywood are as common as hobbits in Middle Earth. What makes Mr. Jackson's suit draw such widespread interest here, other than his clout in the industry and the amount at stake, is one specific allegation about New Line's behavior. The suit charges that the company used pre-emptive bidding (meaning a process closed to external parties) rather than open bidding for subsidiary rights to such things as "Lord of the Rings" books, DVD's and merchandise. Therefore, New Line received far less than market value for these rights, the suit says.

Graphic courtesy NYT

The "Rings" trilogy cost $281 million to make. Worldwide, it has grossed over $4 billion: exhibition, home video, soundtracks, merchandise and television. TWX' New Line netted more than $1 billion.

According to the NYT, escalators in Mr. Jackson's contract (he was director, co-writer and co-producer of the trilogy) gave him about 20 percent of the gross after tax revenue realized by New Line.

Source:
The Lawsuit of the Rings
By ROSS JOHNSON
Published: June 27, 2005
http://www.nytimes.com/2005/06/27/business/media/27movie.html

iAudio X5

Tuesday, June 28, 2005 | 04:15 PM

in Film | Music | Web/Tech

Let's round out Tuneful Tuesday with the latest in our series of way cool portable gadgets: Cowon's iAudio X5

A full review is here

via NYT, Engadget

Indy Radio

Tuesday, June 28, 2005 | 03:17 PM

in Music

Here's another way in which the labels and radio stations are ultimately threatened:

Indy Radio is a "music discovery tool."

The goal, according to their FAQ, is to give indy musicians a great new way to promote their music, and to create a whole new way for people to discover music that they'll love.

Indy uses a collaborative filter, identifying fans with similar taste to yours to recommend music they like. It's basically the way people have always recommended music to their friends, the only difference is that Indy draws on the recommendations and taste of a whole lot more people. Indy uses the COllaborative Filtering Engine, although we are working on our own collaborative filtering engine to dramatically improve the scalability of Indy and related software we are working on right now.

Piracy versus Disintermediation

Tuesday, June 28, 2005 | 01:17 PM

in Finance | Music

Whenever we discuss issues such as music sales, P2P, piracy and/or counterfeiting, be aware of the differing items we are discussing. There are 2 key threats to the music business: one challenging the present, one challenging the future: The present threat is simply counterfeiting. Running off bootleg copies of CDs and then selling them is what the International Federation of the Phonographic Industry (IFPI) terms “piracy.”

The Future threat, on the other hand, is “Disintermediation.”

There’s a world of difference between the two.

What the recording industry’s present business model must contend with is not P2P, but plain old counterfeiting. A recent report from the IFPI noted that counterfeiting accounts for one of every three CDs sold. That problem impacts the classic model of manufacturing and shipping Polycarbonate discs to consumers.

But that has nothing to do with P2P.

I have long held that the real reason the labels fear of P2P networks has little to do with copyright infringement. It’s all about Disintermediation: Removing the middleman, taking out the no-value-added player from between the artists and their music fans.

Assuming they continue down their present digital path, in the not-too-distant-future, the labels (and their A&R departments) will have little if anything to do with how music is created, promoted distributed or sold. They will exist only as a shadow of their former selves, collecting an ever-diminishing stream of royalty payments.

What future models get developed to replace the major labels with something else is a challenging and fascinating subject. I suspect that ‘thing” will likely be P2P.

We see that Independent artists have already figured this out.

It would make sense for the industry to recognize this, and act preemptively to become that P2P player (but I suspect they lack the savvy to cannibalize themselves).

As of now, Snocap may be a slim but legitimate hope for this to happen.

When thinking about the future of P2P, the key takeaway from the MGM vs Grokster case is whether the technology creator manifests any malicious intent, as seen via their marketing or advertising. That suggests that entities like Google Video are safe, so long as they do not market it as an infringing tool (not that Google does any marketing).

So as an exercise, let’s toss around ideas for a new P2P service, one that is both financially viable and compliant in the post-Grokster legal era. Since the major labels have shown little interest in working the P2P outlet, we may leave them out of the discussion (for now).

Let’s call this “Indy P2P.”

The new P2P should be ideally situated for swapping MP3s, videos, pictures – it’s a distribution methodology that is designed to cast the widest possible net, yet filter out major label/film studio product.

Its attractiveness to users would be the fact that it is spyware-free, RIAA judgment proof, and completely legal. It should be a substitute for the now defunct terrestrial radio, a place where users can find new music via the software’s colloborative filtering (like iRate Radio).

At the same time, it should be a place where independent labels can seed their new artists MP3s, distribute video excerpts of live shows, and otherwise promote their roster of talent.

This can be accomplished by digitally watermarking specific files, via a whitelist (for the participating Indy’s) and by blacklisting all the major label files.

Anything watermarked is a specific file that has been submitted to Indy P2P for this watermark. An independent label can embed the watermark into all of their roster’s content. Or, if they desire, then can turn over an entire whitelist of artists, songs, and video clips, and that white list is added to the kosher P2P list.

Lastly, to ensure compliance in the post Grokster era, the major labels are requested to provide to Indy P2P, a list of artists and songs they which to be non-searchable via this search tool and exchange tool.

When a user requests a particular file, Indy P2P goes thru 3 steps: If it sees the digital watermark, the files are permissioned as “swappable.” So too, if the the watermark isn’t there, but the title is on the Whitelist. If neither a watermarked nor a whitelist exists, Indy P2P flags the files as possibly infringing, and then checks it against the blacklist. If it appears on that list, it is not “swappable.”

Note that this system forces the major labels to cooperatively opt-out of the P2P system. After all, the labels have all of this data readily available in their own possession and databases. The idea is to share the burden of enforcement cooperatively between the new media and the old, the dinosaurs and the mammals. (Plus, I like the irony of having the labels help tie the noose themselves. Its a nice poetic touch).

The difficult question will be what happens when a major label wants to use Indy P2P to test out a new act (we’ve already seen where U2 and Eminem may have used P2P to create buzz for their new releases)

Will accepting such files create a technological problem for the blacklist? In terms of the business model, would the firm want to take an all or nothing approach? It will likely be a function of how successful this model is, and whether the firm has the marketing muscle to accept or reject major label fare.

That’s my ‘open source’ strategy (free to whoever wants to improve upon it) for the Disintermediation of the major labels: Legitimate independent P2P.

Now, all that’s necessary is some smart technologists (Shawn?) and a source of innovative tech funding (Mark?) to create it.

Personally, I cannot wait!

File-sharing case worries Indie artists

Tuesday, June 28, 2005 | 12:45 PM

in Finance | Music

Want to have a better idea of what the MGM v. Grokster case is really about? Have a look at this:

"Recording industry executive Andy Gershon sees opportunity in the online file-sharing networks that most of his rivals decry as havens for music pirates. As president of V2 Records, home to such established acts as The White Stripes and Moby, Gershon mines such Internet distribution channels for new fans and revenues.

"The cat is so far out of the bag and so far gone that it's pointless to keep fighting it," Gershon said. "I might as well make as many people fans of our music, whether they illegally download it or not."

A number of mostly independent recording artists and labels have experimented with and embraced the freewheeling digital distribution that the Internet affords. And many worry that a victory by major recording companies in a landmark file-sharing case now before the U.S. Supreme Court could short-circuit the very technologies that they believe are making a more level playing field of the music business."

I'll have more on this subject shortly.

Source:
File-sharing case worries Indie artists
Alex Veiga
Associated Press, 3/25/2005 8:44 AM (USA Today)
http://www.usatoday.com/tech/news/techpolicy/2005-03-25-indie-file-sharing_x.htm?csp=34

One in three music discs is illegal

Tuesday, June 28, 2005 | 11:58 AM

in Music

While everyone is focusing on the Grokster decision, this IFPI report slipped by practically unnoticed -- one in three music discs is illegal.

Recall that we had mentioned nearly identical IFPI statistics last year.

Here's the overview of the report:

One in three music discs sold worldwide is an illegal copy, creating a US$4.6 billion music pirate market that destroys jobs, kills investment and funds organized crime.

A total of 1.2 billion pirate music discs were sold in 2004 - 34% of all discs sold worldwide. But growth in disc piracy has slowed to its lowest level in five years, partly thanks to stepped up enforcement efforts in countries including Mexico, Brazil, Hong Kong, Paraguay and Spain.

Industry and government enforcement efforts are also reaping results. The past year saw record levels of pirate production taken out of action, while seizures of commercial CD burning equipment in 2004 were twice the levels of 2003.

Sales of pirate music exceed the legitimate market in a record 31 countries in 2004 - including, for the first time, Chile, Czech Republic, Greece, India and Turkey.
>

Global counterfeiting rates, by Country (IFPI's Top 10 Priority List) :

Brazil (52% piracy rate): Counterfeit sales outnumber legitimate sales.

China (85% piracy rate): The world's largest counterfeit pirate market, worth US$411 million, has seen a slight fall in the piracy level. Despite that, a lack of political will and absence of clear coordination between government agencies means there has been little substantial progress.

India (56% piracy rate) is one of IFPI's priority countries for the first time due to the sharp rise in CD-R piracy and the availability of mp3 files online. Corruption and very slow court processes hamper prosecution.

Indonesia (80% piracy rate) has 15 optical disc plants, with pirate product exported into markets including Australia. Government action on plants has been weak.

Mexico (60% piracy rate), until recently among the world's top 10 music markets, has been devastated by counterfeiting.

Pakistan (59% piracy rate) is one of the world's biggest exporters of counterfeit pirate discs. There has been some enforcement at the customs level, and a recent series of raids on plants producing counterfeit discs.

Paraguay (99% piracy rate): The country is a major transit point for blank discs which fuel pirate markets, mainly in Brazil and Argentina.

Russia (66% piracy rate) is the world's second largest counterfeit pirate market, with capacity far exceeding local demand. IFPI forensics has identified Russian-made pirate disc exports in over 27 countries.

Spain (24% piracy rate) was one of the world's top legitimate markets, which has shrunk by a third in the past five years. CD-R street piracy is rampant. The government has stepped up enforcement in 2004 and proposed a comprehensive programme of anti-piracy actions.

Ukraine (68% piracy rate): Three years after trade sanctions were imposed by the US government, and despite encouraging signs from the new Yushenko administration, the country maintains a high level of counterfeit.

Sources:
2005 Commercial Piracy Report
Key Figures Summary
IFPI, London and Madrid, June 23, 2005
http://www.ifpi.org/site-content/press/20050623a.html

One in three music discs is illegal
IFPI, London and Madrid, June 23, 2005
http://www.ifpi.org/site-content/press/20050623.html

Liability for Heinous Behavior

Tuesday, June 28, 2005 | 09:29 AM

in Music

Lefsetz observes that "Conventional wisdom is the content companies won, P2P lost. The Grokster decision was heralded as a great day in the fight against file-trading and the establishment of legitimate online services.

The only problem is this is not what Justice Souter's opinion said.

Justice Souter questioned whether file-trading was even hurting the labels. He restated the essence of Sony Betamax. The judgment didn't turn on broad intellectual property issues, rather the decision took the form of castigation and liability for heinous behavior."

Below please find from Souter's decision the actual behavior of Grokster and Streamcast:

____________________________________________

Continue reading "Liability for Heinous Behavior"

The Napster Grokster Cooption Business Model

Tuesday, June 28, 2005 | 07:35 AM

in Music

Back in 2003, we lamented the industry's missed opportunity to Coopt Napster into a viable industry business model. The Grokster decision represents another chance at our proposed cooption.

Wanna know how smart the recording industry is? Don't answer, just watch how they respond to the MGM v Grokster.

If industry insiders had any savvy, they would revisit our past Napster Cooption Business Model. Use the technology as a promotional tool. Turn it into a modern, on-demand, web-based radio. Put out low-fi mp3s (96k or so) as way to expose new artists, promote special releases, rarities, etc. whet people's appetites for more content which history teaches us they are willing to pay for.

Jiu Jitsu the concept of piracy into a terrific tool for the industry to track, more precisely than anything else before, what artists and songs are attracting which listeners, and where. Custom tailor tours around it, marketing and advertising campaigns, etc.

Create the holy grail of algorithms: Use it to roll out new music, artists and content via our clever algorithm that can tell, based upon what you have already downloaded, what you may like, will like and will definitely fall in love with.

Turn the recording industry from an asteroid doomed dinosaur to a warm blooded furry mammal. Coopt the technology. Embrace people's love of digital music. Be smarter business people.

<sigh> Or not . . .

Surprising WSJ Poll on Grokster Decision

Tuesday, June 28, 2005 | 06:36 AM

in Film | Intellectual Property | Music

This is rather surprising: The WSJ Poll on Grokster Supreme Court Decision:

Click for larger graphic

A substantial majority thinks the Supremes were wrong in holding Grokster responsible for the infringment of their users . . .

Bloomberg TV (6:10 AM, 6/28/05)

Monday, June 27, 2005 | 09:49 PM

in Media

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If you are in front of a screen at 6:10 am tomorrow (Tuesday), I'll be on Bloomberg TV (US) for a quick Fed/Oil/Markets discussion . . .

UPDATE June 28, 2005 6:40am
A shrewd observer passes the following along:

Having gotten slapped around on Thursday when the tides turned suddenly, the Punditsyare now crying “Crude” all over the place; the S&P 500 has given back its narrow gain on the year and now stands year-to-date, -1.68%. Just like that.

Question: Crude printed $59.70 on April 4 (July basis; printed $60 August basis the same day). The Transports, having made the high for the year on March 8, were still a lofty 3717 when Crude made the high tick back in April.

So why is $60 Crude bad for Transports now? Why were we able to overlook these prices just a couple of months back? Is there that much more of a negative economic impact with Crude at $60 than say, Crude at $59.50 or $57.25? Absolutely not.

Supreme Court versus Innovation

Monday, June 27, 2005 | 05:30 PM

in Film | Intellectual Property | Music | Technology | Web/Tech

While the entertainment industry is cheering the Grokster decision, I am concerned about the issue of vicarious liability and the thwarting of legitimate innovation. I suspect ultimately the decision will be terrific for Trial Lawyers, but not so great for everyone else.

Example: What does the Grokster decision means for Google? The comapany just rolled out Google Video, a search tool that lets you find video on the Web. Let's say you use that to find copyrighted material on line and then I download what you find, is Google now viacariously liable under this decision?

Even worse, is there now no bright line standard, as their was in the Beta-Max case. Now, we should expect a ton more litigation, all on a very piecemeal basis. I'll bet SCOTUS will be forced to revisit this decision after a decade or so.

How will the Grokster case stop the 100 to 200 million PCs that have grokster installed from file swapping? Its decentralized and the company cannot control it. (hint: it won't)

The bigger concern is now litigation risk: While file swapping will continue unabated, legitimate innovations and (previously) legal applications may not get venture funded. That's not good for innovative companies like Apple and TiVo.

I wish the Supremes woulda stuck with their BetaMax decision . . .

Stop Blaming Oil!

Monday, June 27, 2005 | 03:05 PM

in Commodities | Investing | Markets | Psychology/Sentiment

Better late than never: The market’s overbought condition finally reached the point last week where the buyers became exhausted, leaving the sellers to dominate trading. While a lot of commentators foisted blame on Oil, as well as Interest Rates or even Iraq, we find those rationales singularly unsatisfying: Oil has been flirting with $60 for weeks, Interest rates have been going up for a year, while Iraq has been messy for even longer. Pat explanations for the markets’ daily gyrations rarely ring true to us.

As we noted last week, Mutual funds were running with bearishly low levels of cash on hand. That’s often the fuel of sustained moves higher, and when they run out of gas, so too the market. But as we also noted, hedge fund cash is (anecdotally) at relatively high levels, buttressing our expectations that the consolidation lower remains well contained.

The issue for resolving this retracement may have more to do with time than price. After the fast move off of the April lows, the indices quickly got overbought, but never backfilled. All the while, Bullish sentiment quickly rebounded; With the benefit of hindsight, we can see sentiment went too far too fast. That combination of Bullish complacency and a technically extended market condition is what led to the selling - not Oil, Rates or Iraq.

Indeed, since October 2002, Oil has doubled, and with it the Nasdaq. The inverse correlation many seem so found of blaming the Market’s woes upon seems to come and go with such irregularity that we hardly find it instructive to quote Oil as the basis for the selling.

“Imagine,” we were recently asked “where the Nasdaq would be if Oil were still at $25 a barrel.” Our answer is “probably a lot lower.” Why? Many of the same factors that have driven Oil higher have also been driving the Nasdaq upwards: Massive government stimulation, ultra-low interest rates, and increasing Globalization.

At the present juncture, we expect not so much more downside price-wise as we do a period of consolidation, as mutual funds refill their coffers with fresh ammo. Before the sell off began, Nasdaq was way above its 50 day ma; now, its only 25 points off.

We wouldn’t be surprised to see the next equity bottom formed as Oil moves towards $65. Such a peak could correspond with a low in equities, and fit in nicely with our Bear Trap theme. Watch that price, as well as the tech index’ support between its breakout point and its moving average (2000-18) for a good risk/reward entry long point.

Chart of the Week: % of NASDAQ Issues on MACD Buys

Monday, June 27, 2005 | 03:03 PM

in Markets

We see the number of Nasdaq issues on a MACD Buy signal have been falling:
>

% of NASDAQ Issues on MACD Buys

Source: Redwood Technimentals

The percentage of NASDAQ issues on MACD buy signal dropped below 50 % (orange circle) - Technimentals Kevin Lane notes that “given the other deteriorating internals we would suggest that further corrective activity is ahead of us.”

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Quote of the Day:

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Grokster Decision is meaningless to filesharers

Monday, June 27, 2005 | 11:12 AM

in Film | Music

While people may disagree about the appropriate response to filesharing, its pretty clear to most that if Hollywood embraced and extended P2P, they would have a fantastic distribution and promotion machine at their disposal.

I guess all those file sharers, once they read Souter's decision for the majority, will be so compelled by its legal force and arguments that they will immediately stop swapping.

This decision is meaningless when it comes to P2P behavior, but could have significant ramifications for tech and content companies. A bad decision for yechnology and consumers, a good decision for studios and labels . . .

NOTE: This now sends this case back to the lower courts for trial

Update: June 27, 2005 1:37pm

What does the Grokster decision mean for Google? They just rolled out Google Video, a search tool that lets you find video on the Web; If you then download what you find, is Google now viacariously liable?
s>

Scrolling News Resources:

MGM v. Grokster (EFF)

Notes on RIAA and MPAA Press Conference

Pro-Grokster press conference

WSJ Grokster Roundtable

C/NET File Swap round up

Copyfight

Freedom-to-tinker

FTC Staff Workshop Report: Peer-to-Peer File-Sharing Technology [PDF]

Entertainment Industry Wins High Court Piracy Fight

Supreme Court Unanimously Sides With Entertainment Industry In Gokster Case

Court: File-sharing services may be sued

Studios Win Big in Grokster Cas