Have you ever met the crazy conspiracy theorist who is convinced that a well-executed and malevolent plot lurks behind most events? These were the people whose eyes bugged-out during Y2K, who are convinced that Apollo 11 never landed on the moon, that the World Trade Center was actually blown up by the United States to garner support for invading the Middle East, and the list goes on. The conspiracy thread has woven a thick yarn throughout the ages. It would be worthy of a good belly laugh if it weren’t for the sick feeling you get when you realize that some people actually believe that stuff.

There is one conspiracy however, worthy of your attention: Those on Wall Street don’t want you to know that their industry is a sham. For Wall Street, the hypnotic malaise they cast over the unknowing investor is nothing less than an $11 trillion dollar shell game. Their gambit makes the baccarat table at the Bellagio look like the neighborhood lemonade stand.

And like any good shell game, they keep the pea moving so you never really understand what just happened. Hideous mutual funds vanish into thin air leaving only winners so that fund companies can claim their funds are leaping tall indexes in a single bound. High fees slip out the back-end of your account while you lie in bed asleep at night, thinking they got your back. And how about that reporting? It’s so convoluted you would have to be a Nobel Laureate in economics to even know what you made—or lost—after fees and taxes in any given year. Did you know that it practically took an act of Congress to force 401(k) providers to tell employees in plain language how much they are paying in fees?

Speaking of Nobel Laureates, fortunately there are a few that have been paying attention: Harry M. Markowitz, Merton H. Miller, William F. Sharpe, and Nobel candidate Eugene Fama, not to mention other notable luminaries such Princeton professor and author Burton Malkiel, John Bogle the founder of Vanguard, and William Bernstein, the acerbic author and truth teller. If you haven’t yet familiarized yourselves with their findings, the time has come to do so. They’ve blown Wall Street’s cover in reams of research. Never mind that they conclusively demonstrate that low-cost indexing beats active management by a long shot, or that the buy, hold, and rebalance style of investing trumps the vein-popping practices of Jim Cramer and crew.

Worse yet, the good guys’ PR campaign is weak. While they stutter in the corner, Wall Street is rolling out eloquent waves of hypnotic media, which roll over us as in a tsunami of minute-long TV ads, billboard artistry, and heart-grabbing radio spots. Each makes you want to pull out your hanky, pick up the phone, and call your mom to say you love her.

Who cares about facts when Smith Barney speaks? Why not talk to Chuck? He sure seems like a nice guy. His name is Chuck. Have you ever met a mean Chuck? Or what about the TD Ameritrade guy, Sam Waterston. He played stalwart Jack McCoy on the NBC series “Law & Order.” He sure cracked the code there, so he’ll be the guy I can trust for my retirement, right?

Yes, Charles Schwab, TD Ameritrade, and others are excellent brokers. For a fair, low price you can have excellent trade execution and fulfillment, as well as receive tremendous customer service and online reporting. But watch your pocket if you go to these firms for investment advice. Chances are they will roll out the four-color glossy print, full-court press, and slip you right into some mutual funds from their supermarket that drip, drip, drip away your hard earned savings in high fees and underperformance.

Posted WITH permission of Mitch Tuchman

Not known to be sentimental, stock traders are usually associated with a certain sang-foid, or indifference to emotions. So why the tremendous interest from traders in a new class of programs that detect emotions and sentiment from the trillions of bits streaming the internet? Because they can help make better trading decisions, and Wall Street has a long history of using sentiment indicators as buy and sell signals, such as the CBOE Volatility Index or the NYSE new highs and lows. These new analytic tools claim to be more predictive, offering a glimpse into the future of a stock’s trading pattern like a high-tech crystal ball.

These tools sniff out trends and glean sentiment by examining online news, transcripts, regulatory filings, stock blogs and twitter posts, giving traders and portfolio managers access to a world of untapped data to make predictive decision. These software programs search internet sources and quantify sentiment and topics ranging from optimism to anger, management and product changes for thousands of US stocks. The subjectivity of this data is its value, and the determining of its meaning is the power of these new technologies.

Here are a few examples of high-tech crystal balls that give traders and PMs insights and trading signals from the information flood we face every day:

MarketPsych – monitors tens of thousands of newspaper articles, blogs, corporate communications and presentations, and Tweets. The software then analyzes the changes in over 400 types of sentiment on over 6000 U.S. stocks. MarketPsych sells this data along with its overlay on top of macroeconomic and firm-level information to hedge funds that create quantitative strategies accordingly.

RavenPack – A partnership with Dow Jones providing real-time analytics of Dow Jones’ library of news. By scoring the importance of the news and sentiment on professional newswires, blogs, and hundreds of financial sites, RavenPack enables algorithmic and quantitative funds to exploiting profitable
opportunities.

Recorded Future – A quant, proprietary linguistic and statistical algorithm to extract time-related information from general news sources, trade journals, blogs, and social media. Uses web content to predict the future by plumbing the depths of the web to help investors handicap the probability of future events with the world’s first temporal analytics engine.

What does this mean for investor relations professionals and corporate executives: choose your words VERY carefully. These programs rely on word parsing – technology that separates the word from its context. Consider all written and spoken words as targets for sentiment analytics. Wall Street is hanging on your every word.

This is alarming: PIMCO Dumps U.S. Treasuries…. Many of us know of Bill Gross and his performance in the bond market.  To make matters worse one of the Yahoo business headlines yesterday  also struck me as a near term market top, and typically a key reverse indicator. 2 years after market low, the little guy is back ….As the bull market turns 2, investors flood back into stocks, more confident but still wary. See both articles below and the commentary on the Pimco decision.

http://www.investors.com/NewsAndAnalysis/Article/565477/201103091844/Pimco-Dumps-US-Treasuries.htm

http://finance.yahoo.com/news/2-years-after-market-low-the-apf-2492075628.html?x=0

The PIMCO call

The commentary today is about the bond fund manager PIMCO and the US Treasury holdings in their flagship $236bn Total Return Fund, the largest bond fund on the planet.  An article today on Zero Hedge discussed how as of 2/28/11, the Total Return Fund had reduced its holdings of US Treasuries down to 0%! (link here)  This is a very big deal and the only time to my knowledge the fund has ever moved total US Treasury holdings to 0%.

To give this call some perspective, the PIMCO Total Return Fund is managed vs. the BarCap Aggregrate Total Return Index (this is the former LBAGG or Lehman Brothers Aggregrate).  The BarCap Agg index has a total allocation to US Government securities of around 40% (link here).  This means that PIMCO is underweight its bogey in US Treasuries by about 40 % which in the bond market is a MASSIVE underweight.  PIMCO has also reduced duration in the fund to 3.89 years which is the lowest since December 2008 at the height of the liquidity crisis.

Why is this significant?

Having worked at PIMCO for 4.5 years, I can tell you that this kind of a major allocation decision was not reached overnight nor was it reached without considerable debate by every senior member of the firm.  In other words, the decision to lower total US Treasuries to 0% was discussed by senior portfolio managers, senior account managers and many prominent outside consultants for days and perhaps even weeks before it was finally implemented.  They never do anything over there without vigorous debate and discussion.  For example, Alan Greenspan is a paid consultant to the firm and often participates in their quarterly Secular Outlook meetings.  I don’t know if Mr. Greenspan participated in the debate about this decision but I wouldn’t be surprised if he or others of his stature did.

By this move PIMCO is clearly indicating, almost by putting their reputation on the line because imagine the under performance they face if they are wrong, that bond yields in the US will be rising soon, US Treasury prices falling and liquidity drying up to some degree.

Does this move make sense?

While it’s impossible to know the future, in my opinion this is something that should NOT be ignored.  The S&P has rallied about 25% on pure QE2 since late-August 2010 which is not organic or sustainable.  Commodity prices have surged and it is becoming well-documented that many companies are having a hard time passing along price increases without facing demand destruction: this leads to margin compression.  If rates do rise as PIMCO suggests, add into the mix a cost of capital that could go up by at least the move in Treasuries which Gross argues should be at least 150bps to compensate Treasury investors for their risk.  Which means that cost of capital could go up by at least 150bps while input costs are rising, margins are compressing and liquidity drying up.  This is a sure recipe for a sell-off so yes, I think this move by PIMCO makes sense.

Another thing to consider is that because of their sheer size in the fixed income market, PIMCO is a market mover no matter what they do.  So simply not being in the US Treasury market means a huge buyer is missing and rates will rise simply due to this supply/demand imbalance so to some extent, PIMCO can make interest rates go up all by themselves by simply not buying.  Very few organizations on the planet can exert this kind of pressure on rates outside of central banks.

How should equity investors play this?

If this call is correct, and of course there is no way to know if the people at PIMCO will ultimately be right, BUT, if this call is correct, I think the way to play this news is as follows:

1.    Sell positions that have done well since Aug 2010 when Bernanke first announced QE2 at Jackson Hole.
2.    Move into an overweight position in large, liquid names.
3.    Buy defensives like utilities and telecoms as dividend plays should outperform growth plays.
4.    Raise cash with the idea of being a liquidity provider at some point in the future after the market has moved lower.
a.    To this end, create a “wish list” of stocks that you like but think are too expensive.  They are likely to get cheaper soon.
5.    Liquid Brazilian names to consider include Petrobras, Itau, AmBev, Copel, and Vivo.

CNNMoney

Steve Jobs’ appearance at the iPad 2 announcement was not the only big surprise at today’s event. To investors in ZAGG, a Salt Lake City company that makes invisibleSHIELD and other covers and skins for mobile devices, the news of a snappy new cover Apple plans to sell with its new tablet was a huge shock too. And not in a good way.

Shares of ZAGG plunged more than 20% as traders apparently decided to shoot ZAGG first and ask questions later. The knee-jerk response is that Apple’s new cover will make ZAGG products obsolete.

But that’s silly. Sure, the new cover sounds snazzy. CNNMoney video producer Mason Cohn, who attended today’s unveiling, described the SmartCover as “more advanced” than the original iPad case.

He noted it was a “thinner, more flexible, user-friendly case than original more cumbersome case.” It attaches with magnets (nice!) and comes in 10 colors. Polyurethane version costs $39. If you’re like Judas Priest and are hell bent for the leather cover, the price tag is $69.

But Smart Cover won’t make invisibleSHIELD or other ZAGG products, such as the ZAGGmate, an aluminum iPad case with a Bluetooth keyboard option, obsolete.

Richard Fetyko, an analyst with Merriman Capital in New York who covers ZAGG, said he thought the drop in ZAGG’s stock price was an overreaction. He said investors may not understand that some iPad owners may want to buy the invisibleSHIELD, which is a clear skin as opposed to an actual cover, or ZAGGmate in addition to any Apple products.

“Some consumers may prefer both. Apple’s cover is not a substitute for ZAGG products,” he said.

Another analyst who follows ZAGG and asked not to be named pointed out that it’s not as if the company sells any of its products directly through Apple stores to begin with. ZAGG has thrived despite an official blessing from Apple.

A spokesperson for ZAGG also said ZAGG’s latest invisibleSHIELD is finger-print-proof and smudge-proof, a big selling point for any tablet user, let alone iPad owners.

“The recent announcement from apple does not negate the need for invisibleSHIELD,” the spokesperson said.

Finally, even though many think the tablet market begins and ends with Apple, it’s a huge, growing business.

“Estimates are for the tablet market to grow at 80% rate over next four years and for there to be 200 million units sold by 2014,” the ZAGG spokesperson said.

ZAGG, of course, has been wise to make products specifically targeted at Apple aficionados. But not everyone is a believer in iEverything.

So it seems reasonable to expect ZAGG’s stock to bounce back once investors realize Apple didn’t put the company out of business.