Funny Speech Topics: Stock Making Money

After 6 straight weeks of losses, it looks like the US stock market is ready for a winning week. The Dow rose 123 points. Oil stayed below $100. But the yield on the 10-year T-note rose above 300 basis points.

And here’s the latest from The Financial Times:

“S&P cuts Greece’s rating one step closer to default.”

Want to earn a nice yield on your money? Buy a Greek 10-year bond. It will pay you 17% interest. For a while.

But wait. You say you can’t trust the Greeks? You say they’re not good for the money?

“The Greek political landscape is ingrained with vested interests, endemic kleptocracy and bribery,” writes John Sfakianakis, chief economist of Banque Saudi Fransi.

Unemployment is around 20%. People dodge taxes. Government workers don’t show up for work. Households spend too much. And the government is going into debt so deeply and so rapidly it can’t possibly get out.

Hey… It’s just like the US! No, the US is worse, says Bill Gross. CNBC:

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 told CNBC Monday. 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,” Gross said in a live interview. “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.”

How do you like that? He didn’t even mention the fact that Americans can’t sell their houses to Germans or turn their country into a retirement home for sun-deprived Scandinavians.

But wait, if the US debt situation is as bad or worse than Greece’s, how come the yield on US 10-year notes isn’t 17% too?

Therein may lay an even bigger opportunity. What if Mr. Market were making a mistake?

Everybody knows that Greece always defaults on its debt. It’s been in default, one way or another, for about half of its life – ever since it gained independence in 1828.

But the USA? If you can’t trust the US to pay up, who can you trust?

So, investors may feel secure lending money to the US…even though the fundamentals are little different from those of Greece. They may think: “the US never defaults.”

And yet, if there’s one thing we can learn from financial history it is that nobody is immune from financial errors. Everyone gets greedy and stupid from time to time. And no paper currency lives forever.

Right now, you can earn 17% on Greek debt or 3% or US debt. We’ll make a prediction that you can take to the bank: that spread will narrow.

The inflation rate in America is a matter of debate. But even the US government’s own number crunchers put it at about 5% for the first quarter of this year. That makes the real return on US 10-year notes a MINUS 2%.

How long will investors content themselves with a negative return? Maybe for a while. But not forever. They usually want a real return of about 3%, with no threat of default. A safe return, in other words.

And when they realize that the inflation rate in the US is really 5%…and that the return on US debt is NOT safe…they’re going to want a higher interest yield.

Say 5%. Or 7%. Or 10%.

Then, all hell is going to break loose.

Bill Bonner

for The Daily Reckoning

The Likelihood of a US Default originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

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Will the stock market be giving Pandora Media Inc. a thumbs up?

The Oakland-based Internet radio pioneer, which asks users to give a thumbs up or down on its song recommendations, on Tuesday priced its initial public stock offering at $16 a share. That's double the $7 to $9 range the company had initially projected in April in a filing with the Securities and Exchange Commission.

It's also higher than the range Pandora gave just days ago when it raised its target to between $10 and $12. The stock will begin trading on the New York Stock Exchange on Wednesday.

Tom Petruno, The Times' markets columnist, said in a post on Money & Co. that Pandora is simply tuning in to a chorus of investors clamoring to get a piece of hot Internet IPOs.

With companies such as Demand Media Inc., LinkedIn Corp., Yandex and now Pandora paving the way, many investors are frothing over what could be the main events over the next year when Zynga Inc., Groupon Inc., Facebook Inc. and Twitter Inc. are expected to go public.

But the lofty stock valuations are causing some analysts to see the scenario as a subdued remix of the dot-com bubble in the late 1990s, when companies with little revenue and even smaller chances of making a profit went public.

This time around, however, many of the companies have years of operations under their belts and show strong revenue growth. Some, including Zynga, are even said to be profitable.

Pandora, however, whose IPO pricing gives the company a $2.4-billion valuation, is still in the red. As is Groupon, which lost $389.6 million in 2010.

That hasn't deterred investors from piling in and driving up IPO prices. For Pandora, the question now is how high investors will push the stock in its trading debut.

"It's a great company that's probably worth $1.2 billion," not $2.4 billion, said Anupam Palit, an analyst with GreenCrest Capital Management in New York. "There's so much investor demand now for hot tech IPOs that the price has gotten a little rich for my taste."

-- Alex Pham

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