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

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.

It’s early in the data analysis for Internet Retailer’s forthcoming 2011 Top 500 Guide, but one trend is already evident—web-only merchants took business away from the rest of the market in 2010.

Combined revenue for the 87 merchants that have so far reported annual web sales increased 32.9% to $46.53 billion in 2010 from $35 billion in 2009. In comparison, total retail sales grew year over year about 3% to $2.4 trillion last year from $2.33 trillion in 2009, according to the National Retail Federation.

Fueled by Amazon.com, web-only retailers grew the most in 2010. Among the 55 web-only retailers who have reported their revenue so far, sales were up 37.8% in 2010 to $39.47 billion from $28.64 billion in 2009. Without Amazon, No. 1 in the Internet Retailer Top 500 Guide which grew sales year over year by 39.5% to $34.20 billion from $24.51 billion, the remaining 54 online-only merchants grew revenue 27.6% to $5.27 billion in 2010 from $4.13 billion in 2009.

The analysis of the 55 web-only retailers, 15 catalog companies, 14 chain retailers and three consumer brand manufacturers also reveals:

- Even with only a handful of companies reporting e-commerce sales thus far, consumer brand manufacturers continue to see the Internet as a vital sales channel. Top 500 manufacturers posted combined sales of $340.4 million in 2010 from $233.2 million in 2009, an increase of 46%.

- Store-based retailers continue to generate more business online. The combined web sales of chain retailers grew 13.8% to $4.30 billion last year from $3.78 billion in 2009.

- Catalogers posted the lowest growth rates among all Top 500 merchant types in 2010, growing web sales 3% year over year to $2.41 billion from $2.34 billion.

- Without Amazon, the remaining 87 merchants experienced annual growth of 17.5% from sales of $10.49 billion in 2009 to $12.33 billion in 2010.

Last week I provided a warning about ensuring your yet-to-be-issued earnings releases and other confidential documents are secure on your website. I provided an example from an unnamed company, and this week I want to point to a public example. It appears that companies are being targeted by media outlet web scrapers in advance of public announcements. Once discovered, these news outlets publish the information before companies issue their press releases. The latest example is Disney, where earnings information was covered by news media before the company issued its press release as detailed in this blog. You might argue this is unethical or an invasion of privacy, but IR professionals must ultimately bear the responsibility for ensuring an airtight process including website security. If the news media is doing this, I suspect traders and others are doing the same and will trade on your news in advance of the public announcement.

Originally published in IR Weekly

Through yesterday, 662 US companies had reported earnings since the reporting period began with Alcoa’s release on July 12th. From today through the end of earnings season (Wal-Mart’s report date on 8/17), 1,518 companies will report. Tomorrow and next Thursday will be the biggest earnings days, with 250 and 275 companies reporting, respectively. At the start of last week, the beat rate was 73%, and it has trickled slightly lower to its current level of 71.1%. This season’s beat rate is currently 9 percentage points higher than the average of 62% since 1998. Through yesterday, 78.8% of S&P 500 companies had beaten expectations. Interestingly, the high beat rate for the S&P 500 hasn’t translated into better stock performance. The average one-day change for all stocks on their report days has been +0.55% this season. For S&P 500 stocks, the average one-day change in reaction to earnings has been -0.34%.

Courtesy of Bespoke Investment Group

http://www.bespokeinvest.com/