Archive for June, 2011

Optimism Flowing As Markets Await Greek Vote

Tuesday, June 21st, 2011

U.S. stocks rose as investors overlooked weak U.S. housing data and bet Greek Prime Minister George Papandreou will win a confidence vote later Tuesday, a major step toward averting a sovereign debt default.  The gains extend a modest rise for stocks on Monday, when European leaders expressed confidence that Greece will concede on economic reforms in order to receive another tranche of aid. 

Investors are now turning their attention to the crucial vote of confidence Papendreou faces as the government tries to shore up support for its economic reforms. The vote, which is expected at 5 p.m. ET, comes just days after a mass protest over new government cutbacks shook Greece’s political establishment. Still, Greece is expected to get its next quarterly installment of bailout money as long as the country’s Parliament passes a contentious package of budget measures. European finance ministers also showed modest signs of progress toward a broader agreement for a bigger package of aid to Greece for coming years. International markets appeared relatively confident that Papandreou, who reshuffled his cabinet last week in an effort to win support for unpopular, additional austerity measures, would survive.

But strategists and economists warned that such an outcome for Papandreou isn’t guaranteed, leaving the potential for a substantial hit to international market sentiment should the government fall. If the government falls after Tuesday’s vote of confidence, presumably we reach the point where the crisis starts to get really heated. 

Massive protests have met Papandreou’s calls for an additional 28 billion euros ($40.2 billion) in austerity measures and an accelerated €50 billion privatization program, which are seen as a condition for approval of the release of additional aid for Greece. Papandreou’s decision to install Evangelos Venizelos as finance minister, replacing George Papaconstantinou, is likely to appease PASOK dissidents, securing the government’s survival. That would then pave the way for the approval of Papandreou’s proposed, additional austerity measures next week, they said, in turn clearing the way for euro-zone finance ministers to approve the release of Greece’s next tranche of aid under last year’s €110 billion bailout plan at a July 3 meeting. Moreover, the finance ministers are also expected to agree on a new package of additional aid to Greece that is seen as necessary to avoid default after a deepening economic slump and a failure to hit fiscal targets left Athens unlikely to meet its upcoming funding obligations.

In addition, privatization efforts would likely yield around €30 billion by 2014, they said. Even then, Greece would still likely need to impose haircuts on bondholders in the next one or two years in order to restore sound public finances.

Stocks added to gains after the National Association of Realtors said sales of existing single-family homes and condos fell 3.8% in May to a seasonally adjusted annual rate of 4.81 million, in line with economists’ forecasts for a drop to 4.8 million. Housing continues to be a prime problem in this country and will continue to be until salaries rise and unemployment rate drops.

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New Jersey Senate Passes Pension/Benefits Reform

Monday, June 20th, 2011

Gov. Chris Christie’s agenda moved closer of becoming law on Monday, when a bill requiring government workers to pay much more for benefits, while limiting their bargaining rights, passed two crucial tests. To a chorus of boos from angry union members in the visitors’ gallery, the State Senate passed the bill, and on Monday evening a key Assembly committee sent it to the full chamber, where a vote was expected later this week. Democrats control both houses, and though most of them oppose the bill, Republicans support it.

If enacted, the bill would give the Republican governor a signal victory, shifting $3 billion in costs over 10 years from state and local governments to their workers. It also provides striking evidence of how far the public employees’ unions have seen their power fall. Mr. Christie has made a habit of beating the unions, verbally and legislatively, on issues — like spending, arbitration, job security and benefits — that have sown deep divisions among Democrats. With state workers’ contracts set to expire on June 30, the governor appears to have a strong upper hand in the talks.

For months, Mr. Christie and the Senate president, Stephen M. Sweeney, have taken the lead in pushing a bill to increase what a typical government worker pays for health care and a pension by thousands of dollars a year. With fast-rising costs, budget deficits, and employees’ pension funds far short of what is needed, Assembly speaker, Sheila Y. Oliver said, “inaction is just not an option for us.” “It is no employee’s fault; it is no union’s fault,” Ms. Oliver said. “It is the fault of successive generations and decades of short-sighted thinking that got us to the place where we are today.”

The bill would impose new terms for health insurance on the unions, stripping them of the power to address the issue in collective bargaining — and that, labor leaders say, is a bigger threat than the increased payments. Mr. Christie insists that he is not trying to eliminate collective bargaining, but union leaders say the New Jersey bill would have a similar effect. Under current state law, in a contract impasse, a governor or mayor can go through a series of steps and impose terms on most employee groups on every issue except health care. In the Senate, the bill won the votes of all 16 Republicans, and 8 of the 23 Democrats present. After being jeered loudly, Mr. Sweeney sounding much like the governor said the problem was that for years, union leaders lied to their members, creating unrealistic expectations. Stephen M. Sweeney, the Senate president, a Democrat and a high official in the ironworkers union, presided over a vote, his putative union brethren — teachers and firefighters and transportation workers. Some pension provisions were undoubtedly piled too high. And union leaders wheedled special deals and remained silent as governors, Republican and Democrat, declined to pay into the pension system. Labor leaders and politicians, no less than arbitragers and Goldman Sachs partners, relied on magic bubbles to keep it all afloat. The line between illusion and lie grew indistinct.

Most public employees now contribute 1.5 percent of their salaries to health insurance, or $975 for a person earning $65,000. Under the bill, low-income government workers could pay as little as 3 percent of their insurance premiums for full family coverage, while high-paid employees could pay up to 35 percent. For the $65,000-a-year employee, that would mean about $3,600 at today’s rates, but the increase would phase in over four years. The bill would also increase what most employees contribute to their pensions, from 5.5 percent of salary to 6.5 percent right away, and in stages to 7.5 percent. In private sector, contributing 15-20% of one’s paycheck is the norm.

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Greek Debt Deal Delayed

Monday, June 20th, 2011

Stocks are up mixed after European leaders failed to agree on releasing more financial aid to Greece. In order to get the aid, Greece has to agree to more budget cuts, which has been causing unrest and political upheaval there. The Greek government faces a confidence vote on Tuesday. If Greece defaults on its debt, it could trigger losses for the banks that hold Greek bonds, and economists worry it could shake the European economy and roil financial markets.

The action follows the end of a six-week losing streak for U.S. stocks on Friday, spurred by hopes that euro-zone finance ministers would reach a new Greek debt accord sooner than expected. With those hopes seemingly dashed over the weekend and with no major U.S. economic data Monday, worries about the repercussions of Greece’s problems were once again in the fore. Last week was a rebound based on false hope, or as traders call it, “Dead Cat Bounce”. Their were predictions that European leaders could reach a new accord swiftly. More investors are likely to conclude that European banks are overexposed to Greece’s crisis, he said, which could keep traders cautious beyond Monday’s session.

European bourses were broadly lower as euro-zone officials warned that the next tranche of Greek aid, which would keep the country from defaulting next month, was dependent on the passage of the latest austerity package. Finance ministers of the Group of Seven industrialized countries held a conference call to discuss the crisis. The details of any agreement are still unclear.

Crude oil futures slid below $93 a barrel. Gold futures moved higher, to $1,545 an ounce. The U.S. dollar declined versus the euro but gained against the yen.

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Quadruple Witching Day Equals Volatility

Friday, June 17th, 2011

Stocks bounced back in early trading Friday after sliding to multimonth lows in the prior session. The S&P 500 is up 0.8%. Volume was tracking sharply higher across the board amid quadruple witching. In economic news, the Reuters/University of Michigan sentiment index fell to 71.8 in June, below the forecast for 73.5. But leading economic indicators jumped a much better-than-expected 0.8%. Economists expected a 0.4% increase. However, concerns about Greece’s debt situation kept gains in check. The gains made during a volatile trading session were also attributable to the technical fundamentals of quadruple witching.

Quadruple Witching is a day on which contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire.

The Dow’s gains on Thursday helped the index partially recoup losses incurred on Wednesday. Over the past couple of weeks, experts have opined that the S&P 500 might trade below its March low of 1,250. Yesterday, the index bounced back from an intraday low of 1,258.07, above its 200-day moving average of 1,257.88. The S&P 500 posted its third increase in four days. However, the Nasdaq could not join the party and dropped to its lowest close since March 16. The index has now fallen eight times over the past ten trading days.

Experts believe investors putting money into equities yesterday had taken up a defensive stance. They were also of the opinion that investors also chose to unwind their positions, ahead of the quadruple witching on Friday. The upcoming quadruple witching or the expiration of stock-index futures, single-stock futures, equity options and stock-index options for June, led to the change in investor sentiment. Economic reports also lifted the mood of investors as initial claims declined more than expected and home sales gained modestly.

While the job markets have been reflecting a slowdown in the economic recovery, for once data from the Labor Department suggested otherwise. According to the report: “In the week ending June 11, the advance figure for seasonally adjusted initial claims was 414,000, a decrease of 16,000 from the previous week’s revised figure of 430,000. The 4-week moving average was 424,750, unchanged from the previous week’s revised average of 424,750. The advance seasonally adjusted insured unemployment rate was 2.9 percent for the week ending June 4, unchanged from the prior week’s unrevised rate of 2.9 percent”. This data came in better than expected as the consensus for the current period expected the initial claims to decline to 424, 000.

Housing data also chipped in to drive the markets higher as data on new residential construction statistics supported bullish sentiments. The U.S. Census Bureau and the Department of Housing and Urban Development reported: “Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 612,000. This is 8.7 percent (±1.5%) above the revised April rate of 563,000 and is 5.2 percent (±2.4%) above the May 2010 estimate of 582,000”. It further reported: “Privately-owned housing starts in May were at a seasonally adjusted annual rate of 560,000. This is 3.5 percent (±12.4%)* above the revised April estimate of 541,000, but is 3.4 percent (±8.7%)* below the May 2010 rate of 580,000,” and, “Privately-owned housing completions in May were at a seasonally adjusted annual rate of 544,000. This is 0.4 percent (±14.6%)* above the revised April estimate of 542,000, but is 22.5 percent (±9.2%) below the May 2010 rate of 702,000”.

However, according to Philadelphia Federal Reserve Bank’s business outlook survey, factory activity in the U.S. Mid-Atlantic region weakened in June. The report stated: “The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 3.9 in May to ‐7.7, its first negative reading since last September. The demand for manufactured goods, as measured by the current new orders index, showed a similar decline: The index fell 13 points and recorded its first negative reading since last October.”

Concerns about Greece’s debt problem continued to dampen investor sentiment. After a day of violent protests in Greece that hampered the markets yesterday, Prime Minister George Papandreou said he will reshuffle his government and seek a confidence vote.

On the sectoral front, the Financial Select Sector SPDR (XLF) was up 0.5%. Gainers for the sector include Bank of America Corporation (NYSE:BAC), The Goldman Sachs Group, Inc. (NYSE:GS), Wells Fargo & Company (NYSE:WFC), U.S. Bancorp (NYSE:USB) and American International Group, Inc. (NYSE:AIG) and they rose 1.0%, 0.9%, 0.9%, 0.9%, and 0.5%, respectively.

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Sectors, Commodities, & Currencies

Thursday, June 16th, 2011

Markets gave warning of a pullback when commodities such as silver took the largest percentage losses in a 1 day period ever recorded. Margin requirements were raised by the OME. Since then markets have been just the same. You have the Greek tragedy, Japan nuclear meltdown, Iceland volcano eruption, US debt ceiling, and the Arab spring. Nothing seems to bright. Let’s look back what was gained and lost since the May 2nd high.

Silver has taken the largest hit hitting a high of almost $50. It currently trades at $35.49  down 30% – Hedge funds got of this play way in advance…first sign of market correction

Japan’s earthquake has disrupted the economy so bad that it knocked the country back into a recession. Markets tend to read into a slow down 6 months in advance. Japan, is the #3 largest economy in the world. If they slow down, then you bet the US will feel it.

US Crude oil has taken a huge bite of profits too. Having Oil prices at $115 with a weak economy and having the producers taking the brunt off the added expense hurts corporate profits in a big way. Headlines constantly read high oil prices will hurt the economy. It was inevitable prices will come back to earth. They have since fallen from May 2 $115.27 to $94.94 down 17%

US dollarhas gained after commodities fall. The Euro takes a beating. The Euro has fallen from 1.489 to 1.414 down 5% in 7 weeks. Currencies aren’t normaly this volatile.

S&P 500has fallen down to break all technical support. Charts look badly damaged. It’s currently atop the 200 MA.  It was first noted on May 17th here. It has since fallen from 1361 to 1259 down 7.5% which translates stocks are down +20%.

Financial Sector has taken the biggest beating. The Financial ETF (XLF) has lost 14.65% The Greece tragedy isn’t helping either. It’s said that the US banks are exposed to $41 billion worth Greek debt. It’s unclear what banks are clearly holding, with thexception of Bank Of America which holds $461 billion of Greek issues. I would believe most of the banks sold Greek credit default swaps to European Banks. Explains why capital requirements still remain high. 

Let’s face it…markets are in a Correction. We’ve gone overextended from the commodity play that we need a breather now. As I have indicated several times during May and will continue to stress during the summer, stay at cash. Of course we’ll have a few bounces, which some will be 100 points plus, but it is not indicative to a market turn around. We need at least 2-4 months to recoup the damage. We’ll recover, but it won’t be an easy summer, and no we won’t head into a double-dip recession.

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Morning Markets Fall After Wednesday’s US Data

Wednesday, June 15th, 2011

U.S. stock markets fell harder Wednesday after economic reports had a regional manufacturing index declining sharply in June and consumer prices gaining 0.2% in May. The Dow Jones Industrial Average fell 105 points to 11,913. Standard & Poor’s 500 were down 11.7 points to 1,272.8.

On the economic front, the consumer price index rose 0.2 percent in May, down from April’s 0.4 recent increase, according to the Labor Department. Food costs rose 0.4 percent, while energy costs fell 1 percent, the first drop in almost a year.

Meanwhile, a gauge of manufacturing in New York State showed the sector unexpectedly contracted in June, falling to minus 7.79 for the first time since November 2010 from positive 11.88 in the month before, in another sign the economic slowdown could become more protracted, according to the New York Federal Reserve. Economists polled by Reuters had expected a gain to 12.50.

In other economic news, the Mortgage Bankers Association said refinancing requests pushed home loan applications to their highest level in three months. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, surged 13 percent in the week ended June 10, the biggest percent gain since March. The MBA’s seasonally adjusted index of refinancing applications jumped 16.5 percent, while the gauge of loan requests for home purchases climbed 4.5 percent. Mortgage rates have declined for eight of the past nine weeks. Coming off of the Memorial Day holiday, refinance application volume increased significantly, as borrowers jumped to lock in the lowest mortgage rates since last November.

Pandora (NYSE:P) opened this morning at $20.50 up 28.13% from $16 and still rising.

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Pandora IPO Prices At $16 Set For 6-15-11

Tuesday, June 14th, 2011

In a HOTT internet 2.0 IPO markets, Pandora (NYSE:P) for the third time increases it’s final IPO price set at $16.00 with a valuation $2.56 Billion. The company sold 14.7 million initial public offering shares at a level that topped a boosted price range of $10 to $12. The company last week increased the number of shares sold by one million and the price range by $3 in the face of strong investor demand. At $16 a share, the offering ended up raising $235 million, almost double the amount originally aimed for earlier this month. Pandora sold $96 million of stock, while shareholders, namely Hearst Corp., sold the rest. Pandora commands a market capitalization of $2.56 billion for a business that hasn’t made money and has no prospects of earnings at least through January. Pandora’s revenue has grown fast, but the company isn’t profitable on a net or operating basis. So far, the company hasn’t been able to generate enough revenue from advertising to offset its royalty expenses, and it warns that it expects to continue generating operating losses at least through fiscal 2012, which ends in January.

Among Pandora’s venture capital shareholders, Crosslink Capital will own 21.9% after the offering, currently worth $560 million; Walden Venture Capital, 17.8% worth $455 million; Greylock Partners, 13.4% worth $343 million; Labrador Ventures, 8.1% worth $206 million; and GGV Capital, 4.9% worth $126 million. Other investors have included DBL Investors, Elevation Partners, King Street Capital and Selby Ventures, according to VentureWire records. The company has raised more than $50 million in venture capital. The stock is scheduled to begin trading Wednesday under the symbol P on the New York Stock Exchange.

If prior internet stocks shows any signs of previous success such as last month’s, Russian search engine Yandex N.V. (NASDAQ:YNDX) priced above range and rose 55% on its first day of trading, while online professional networking site LinkedIn Corp. (NYSE:LNKD) doubled on its debut, we’re set another successful ride. At the open trade between 9:30-11:30 AM EST. I anticipate this stock to open at $25 to retail investors and hit $35-$45 range, resulting a 56% gain (from$16-Initial investors i.e. big money & funds), 40-60% gain scalp for retail investors.

See details and analysis of Pandora here

Disclaimer: I currently do not own this stock, but intend to trade it throughout the day

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China’s Inflation & US Data Lift Markets

Tuesday, June 14th, 2011

China’s Data

Chinese consumer inflation accelerated to a three-year high in May, in line with expectations and bolstering the case for tighter credit conditions to help contain prices, while other data helped round out a picture of relatively upbeat economic activity. The consumer price index rose 5.5% in May from a year earlier, compared to April’s 5.3% gain, the fastest rise since a 6.3% gain in July 2008, according to data released Tuesday by the National Bureau of Statistics in Beijing. A Dow Jones Newswires survey had tipped a 5.5% rise in the consumer price index, while a Reuters poll had projected a 5.4% rise. China on Tuesday lifted the proportion of funds banks must set aside as reserves by a half-point effective from June 20, marking the sixth such increase so far this year. The move reinforces its efforts to contain inflation, which is running at a nearly three-year high. The May producer price index rose 6.8%, flat from April and above the 6.5% consensus in the Dow Jones survey. Analysts at IHS Global Insight said it was “worrying” that the PPI reading hadn’t cooled, as many market observers were expecting.

Analysts believe there will be a soft landing event, and the enlarging gap between bearish perceptions and a much more stable reality could create another money-making opportunity at some point in the second half of 2011. It should be noted in particular that non-food inflation accelerated markedly in May to contribute to higher headline inflation, indicating increasing risk of inflation becoming more generalized.

The move by the The People’s Bank of China will bring the reserve requirement ratio to 21.5% for large banks and 19.5% for smaller ones. The move was unveiled after markets in China closed. The trend signals a greater resolve within China’s central bank to inflation, he said, estimating it will drain about 370 billion yuan ($57.1 billion) from the banking system.

Fixed-asset investment accelerated to 25.8% in the January-May period from a year earlier, picking up from the 25.4% rise in the January-April period, and beating analyst expectations of a 25.3% rise in the to Dow Jones survey.

Meanwhile, industrial production rose 13.3% from the year-ago period, just above the separate Dow Jones and Reuters forecasts of 13.2%, but easing slightly from 13.4% in April.

Retail sales for the month were 16.9% above May 2010’s level, compared to 17.1% growth in April, and March’s 17.4% on-year rise. Analysts said the weaker retail sales growth was attributable to easing auto sales, which fell 3.9% in May from a year earlier, according to monthly figures released by the China Association of Automobile Manufacturers.

US Data

U.S. wholesale prices rose 0.2% in May, the slowest pace in 10 months, as the cost of food fell and the increase in energy prices tapered off, the Labor Department reported Tuesday. The more closely followed core producer index also rose 0.2% in May. Analyst’s had predicted increases of 0.1% for overall producer prices and 0.2% for the core rate. Food costs dropped 1.4% last month, owing mainly to lower vegetable prices, to mark the biggest one-month decline in almost a year. Energy prices, meanwhile, rose 1.5% in May, the slowest rate since September. The price index for intermediate goods rose 0.9% and crude prices dropped 4.0%.

Retail sales, which provide a snapshot of consumption, fell for the first time in 11 months, although the decline was less than expected. Total retail sales slipped 0.2 percent, according to the Commerce Department. Economists had forecast retail sales falling 0.4 percent, according to Reuters.

Futures on the Dow Jones Industrial Average rose 95 points to 11,980 and Standard & Poor’s 500 index futures were up 13.60 points at 1,279.8. In the context of good growth data in China and an oversold market condition in the US, a short-term bounce makes sense. I think from here on in it will be a sideways moving market for the rest of the year with a few market uptrends in the second of 2011. There are too many economic and political uncertainties — including high weekly jobless claims, high oil prices, an unstable housing market and disagreement over U.S. debt.

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Pandora (NYSE:P) Debuts June 15th

Monday, June 13th, 2011

Pandora Media Inc. increased the size and price range of its proposed initial public offering on Friday, upping the total potential take of the deal by 43% ahead of the streaming media company’s public debut, which is expected to take place June 15th. Pandora said it now plans to sell about 14.68 million shares at a proposed price range of $10-$12 per share. The company had previously offered to sell 13.68 million shares at a price range of $7-$9 per share. The total value of the deal could reach about $176 million at the high end of its price range. The pricing of the stock puts Pandora’s valuation suggesting a total value of $1.94 billion at high end. The company, which has yet to turn a profit, first filed to go public in February. At the time, Pandora expected to raise $100 million. The steady increases are a sign that the IPO’s underwriters — Citigroup, Morgan Stanley, and JP Morgan Chase are the leaders, anticipate heavy demand for the company’s shares. The company expects to trade under the ticker symbol “P” on the New York Stock Exchange.

About Pandora

Pandora Radio is an internet radio service, recommendation service, and the custodian of the Music Genome Project. Users enter a song or artist that they enjoy, and the service responds by playing selections that are musically similar. Users provide feedback on approval or disapproval of individual songs, which Pandora takes into account for future selections. While listening, users are offered the ability to buy the songs or albums at various online retailers. As part of the Music Genome Project, over 400 different musical attributes are considered when selecting the next song. These 400 attributes are combined into larger groups called focus traits. There are 2,000 focus traits. Examples of these are rhythm syncopation, key tonality, vocal harmonies, and displayed instrumental proficiency.

The Music Genome Project is what powers Pandora’s personalization, as it is a detailed, hand-built musical taxonomy. Using this musicological “DNA” and constant listener feedback Pandora crafts personalized stations from the more than 800,000 songs that have been analyzed since the project began in January 2000. More than 75 million people throughout the United States listen to personalized radio stations for free on Pandora through their PCs, mobile phones and devices such as the iPad, and connected in-house devices ranging from TVs to set-top boxes to Blu-Ray players. Mobile technology has been a significant factor in the growth and popularity of Pandora, starting with the introduction of the Apple app store for the iPhone in the Summer of 2008. Pandora instantly became one of the most top downloaded apps and today, according to Nielsen, is one of the top five most popular apps across all smart-phone platforms. Pandora is mostly free and, thanks to connectivity, available everywhere consumers are – at the office, at home, in the car and all points in between.

In 2009 the Company announced that Pandora would be incorporated into the dashboard in Ford cars via SYNC technology; GM has already followed in announcing plans to integrate Pandora into its vehicles’ OnStar system. Since more than 50% of radio listening happens in the car, this was a crucial arena for Pandora.

The Oakland, Calif., company’s business is growing fast, averaging a new user every second. As of last April, Pandora had 90 million registered members, up from 80 million in February. Those members racked up 3.8 billion hours of listening to Pandora’s song stream last year. Founded in 2000 as the Music Genome Project, Pandora uses algorithms and user feedback to generate music recommendations for its listeners. The company claims a 50% share of all Internet radio listening time among the top 20 stations and networks in the United States, according to a November 2010 report by audience measurement firm Ando Media. Pandora offers listeners two options: A free, advertising-supported stream or a “premium” plan priced at $36 per year, which offers higher audio quality and no ads. Most of its revenue base comes from advertising. Revenue surged 150% to reach $137.7 million in the fiscal year ended Jan. 31, 2011. Net losses fell to $1.76 million from $16.7 million the previous year. Due to copyright and licensing rulings, Pandora is only available in the United States, but Pandora has said that it has plans to extend its service to a global market.

Financials

Revenue for the 9 months ended October 31, 2010 was $90.12 million. That’s an increase over 30.1 million over the same months in 2009. Net income in the first 9 months of 2010 was…a loss of $328,000. Pandora lost $18 million during the same months in 2009. During the first nine months of 2010, Pandora ad revenue reached $78 million. That’s up from $29 million during the same period in 2009. That’s huge growth. Subscription revenue was $12.3 million during the first 9 months of 2010. It was $4 million during the first 9 months of 2009. That’s huge growth.

Increasing Expense & Risk – “Royalties”

Pandora paid out 49% of its revenue to license the music it sends to listeners via its customized, online radio channels. Even more important, the key royalty rates that the still-unprofitable company pays to artists and music publishers are set to rise significantly during the next four years. Pandora agreed to give up the greater of 25% percent of its annual revenue, or another aggregate amount based on a royalty rate charged each time Pandora plays a copyrighted song. Pandora is consistently paying about half its revenue in license fees, or nearly double the 25% figure that was part of the agreement, provides a pretty clear indication of which party got a better deal. What’s worse for Pandora (and, soon, for its public shareholders) is that the rate for its license, known as a “pure-play license,” is calculated based on a sliding scale that jumps substantially over time.

For 2011, Pandora pays a per-performance rate of $0.00102 for songs played on its non-subscription service. That service, by the way, generated 86% of the company’s revenue for the nine months ended Oct. 31, 2010, according the company’s initial S-1 regulatory filing. By 2015, the rate goes up by more than a third, or 37%, to $0.00140 per performance. For music played on Pandora’s subscription service, which generated the other 14% of revenue during those same nine months, the company is paying a per-performance rate of $0.0017 in 2011. By 2015, that rate jumps a whopping 47%, to $0.0025. And, as Pandora itself says in its S-1 document, the company gets no volume discount on royalty fees. In other words, the more it plays, the more it pays. And those are not all the royalty fees that Pandora has to pay. It also has an agreement with the music publishing organization BMI that causes it to fork over another 1.75% of its “gross revenue,” and another with a similar group, known as SESAC, that pays out 0.38% of gross revenue.

Pandora detailed in its S-1, the company paid 48% of its revenue to acquire content. It clearly states that the company is at a disadvantage to its non-Internet rivals because “unlike traditional radio broadcasters, they must pay performance rights royalties for the digital audio transmission of sound recordings …”  The company’s S-1 filing also says this: “As a result of these (several) factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2012.” When the company expects to be profitable, the prospectus doesn’t say. How it will pull that off while its biggest expense is rising by at least a third during the next four years is also a mystery. They will need the extra cash to continue the huge run-up in top line revenue growth that they are getting basically from advertising revenue.

Competition

Pandora’s increased IPO price also comes as competition is growing for how people listen to music. Earlier this week, Apple unveiled a digital-music service that will allow users to remotely access their songs. Meanwhile, Amazon.com Inc. (AMZN) and Google Inc. (GOOG) also offer similar products. Pandora admits in its filing that the three companies and Facebook pose a significant threat if they were to develop a competing Internet radio platform, because they likely would have advantages in resources, technology and services. For now, though, Pandora has a strong head start. According to a September 2010 report by Nielsen, a media measurement firm, the Pandora app is a top-five-most-used app across all four major smartphone platforms in the U.S.; in January, the Pandora app was the No. 2 all-time downloaded free iPhone app and the No. 1 all-time downloaded free iPad app, according to Apple.

Beneficiaries

Employees and investors who stuck with Pandora will be the biggest beneficiaries of the IPO. That’s because 8.68 million of the 14.68 million shares that Pandora now expects to sell in its offering are being sold by existing shareholders, which means most of the money raised in the offering will go into private hands, rather than onto the company’s balance sheet.

Here’s the full ownership table:

Pandora Shareholders

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Pimco’s Gross Says US Debt Is Worse Than Greece

Monday, June 13th, 2011

US has over +$100 billion in shortfall budgets. In unfunded liabilities such as Social Security, pension funds, medicare & medicaid costs amount to close to $50 trillion dollars if you add in states unfunded liabilities. When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco’s Bill Gross said.

Much of the public focus is on the nation’s public debt, which is $14.3 trillion. But that doesn’t include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures. The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show. Taken together, Gross puts the total at “nearly $100 trillion,” that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won’t find a solution overnight. To think that we can reduce that within the space of a year or two is not a realistic assumption.

That’s much more than Greece, that’s much more than almost any other developed country. We’ve got a problem and we have to get after it quickly he goes onto say. Gross spoke following a report that US banks were likely to scale back on their use of Treasurys as collateral against derivatives and other transactions. Bank heads say that move is likely to happen in August as Congress dithers over whether to raise the nation’s debt ceiling, according to a report in the Financial Times. The move reflects increasing concern from the financial community over whether the US is capable of a political solution to its burgeoning debt and deficit problems.

We’ve always wondered who will buy Treasurys” after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, Gross said. “It’s certainly not Pimco and it’s probably not the bond funds of the world.”

Gross confirmed a report Friday that Pimco has marginally increased its Treasurys allotment—from 4 percent to 5 percent—but still has little interest in US debt and its low yields that are in place despite an ugly national balance sheet. “Why wouldn’t an investor buy Canada with a better balance sheet or Australia with a better balance sheet with interest rates at 1 or 2 or 3 percent higher?” he said. “It simply doesn’t make any sense.” Should the debt problem in Greece explode into a full-blown crisis—an International Monetary Fund bailout has prevented a full-scale meltdown so far—Gross predicted that German debt, not that of the US, would be the safe-haven of choice for global investors.

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