The Big Surprise in the Great Rotation Into U.S. Stocks

Now that the S&P 500 (SNPINDEX: ^GSPC  ) has reached record highs once more, investors are finally starting to recognize the advantages of U.S. stocks by increasing their investments into exchange-traded funds that own domestic equities. That's not surprising, given long predictions of what's become known as a "great rotation" into stocks.

But the surprising thing about the way the great rotation is taking shape is what investors are selling in order to put more money into U.S. stocks. Although expectations were that investors would take money out of the bond market, it's actually coming from some other sources that most people wouldn't have picked as candidates until very recently.

Where the sales are
The reason most investors expected bonds to be a big funding source for equity-fund inflows is that bond investments have posted huge losses lately. As interest rates rose from their rock-bottom levels, bond prices plunged, with some bond funds facing double-digit percentage losses in just a matter of a couple of months. Given how conservative bond investors typically are, those losses aren't something that many of them were prepared to see, and a mass flight from bond funds would leave some of those investors with little choice but to take money and put it into stocks.

Instead, though, other niches of the investment world are seeing an exodus from investors. A recent blog post at Barron's gave figures from ConvergEx that identified several surprising sources. First and foremost was gold, with the SPDR Gold Trust (NYSEMKT: GLD  ) seeing redemptions of $1.3 billion since the month began. In a classic example of selling only after big price declines, gold investors are apparently tired of holding onto ETF shares that have lost a third of their value from gold's highs over the past couple of years.

The other big loser that's getting sold to fund U.S. stock purchases is the emerging-market stock area, where investors have moved more than $200 million out of ETFs. Higher interest rates have lowered the risk tolerance of many investors, and emerging-market holdings were among the first to suffer, as many emerging markets have actually posted losses for the year compared to the S&P's very strong gains. All told, the iShares MSCI Emerging Markets ETF (NYSEMKT: EEM  ) has performed consistently with many other emerging-market investments, with the ETF having fallen 10% on the year.

The unwillingness to take big bets has also driven money out of leveraged and inverse funds. The big losses in many inverse stock ETFs makes outflows logical, but leveraged bullish ETFs have posted amazing returns. ProShares Ultra S&P (NYSEMKT: SSO  ) , for instance, has posted more than double the rise of the unleveraged S&P 500 so far this year. Nevertheless, short-term traders are apparently satisfied to cash in their profits and take less aggressive positions going forward.

Finally, income-oriented funds in the real-estate and preferred-stock areas have seen outflows. This actually is most consistent with the original great-rotation theory, as these types of investments often behave in line with the bond market. With losses having come from rising interest rates, investors who believe rates will keep going up are selling to avoid further declines down the road.

Will the Great Rotation continue?
As long as macroeconomic conditions keep pointing toward a healthier recovery, it's likely that the same trend toward U.S. stocks and away from these other investments is likely to continue. Bonds might well follow suit as well and eventually provide even more inflows to the stock market, and as long as stocks keep attracting capital, it's possible for the bull market in stocks to continue well into its fifth year.

Hot Value Stocks To Buy Right Now

Whether you buy them directly or through an ETF, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Mortgage Rates Spike to 2-Year Highs

Freddie Mac released its weekly update on national mortgage rates this morning, revealing numbers that show a sharp spike in rates nearly across the board, to levels not seen in two years.

Thirty-year fixed rate mortgages (FRM) jumped 22 basis points in the most recent week to hit 4.51%. Fifteen-year FRMs tacked on 14 basis points to reach 3.53%. In both cases, these numbers exceed the relatively high levels that caused investors concern two weeks ago.

Among variable-rate mortgages, 5/1 ARMs experienced the sharpest weekly rise of all four major mortgage classes tracked by Freddie Mac, rising 16 basis points to 3.26%. The closest thing to "good" news in the report was that one-year adjustable rate mortgages held steady at 2.66% for their third straight week.

Freddie Mac Vice President and Chief Economist Frank Nothaft  attributed the sharp hikes in rates to "June's strong employment," which "led to more market speculation that the Federal Reserve will reduce future bond purchases causing bond yields to rise and mortgage rates followed."

This speculation may, however, have been premature. As Nothaft noted: "the minutes of the June 18th and 19th Federal Reserve's monetary policy committee meeting, released July 10th, stated that many members indicated further improvement in the outlook for the labor market would be required before it would be appropriate to slow the pace of bond purchases."

link

HomeAway

My top stock for 2014 is the leading online marketplace for rental properties, explains growth stock specialist Michael Cintolo, editor of Cabot Market Letter.

Through the end of September of 2013, the online firm HomeAway (AWAY) has 773,000 total paid listings among its various sites (including the popular VRBO.com site).

Growth has been steady, thanks to the recurring yearly fees that property owners pay to have their places listed (renewal rates average 75% or so).

But the big catalyst is HomeAway's recent adoption of a pay-per-booking feature, which is likely to accelerate listings growth and attract an entirely new set of customers, especially deep-pocketed property managers that are eager for business.

Top China Companies For 2014

The stock has come alive on the pay-per-booking release, with the stock ripping higher after sitting out this year's bull market for eight months.

With five times as much traffic as its nearest competitor, HomeAway is clearly the leader, and the flood of new business it's sure to garner in the quarters ahead, should keep big investors interested. I think it's set up for an outstanding 2014.

Subscribe to Cabot Market Letter here...

For More 2014 Top Stock Picks

1 Glaring Reason to Sell a Stock

Following the onset of the Great Depression, our country was forced to re-evaluate the way the stock market operated. Realizing the need for an arm of the government to oversee our capital markets, the Securities and Exchange Commission was created in 1934. In its role, the federal body's goal is to ensure a competitive yet fair marketplace that's run in a smooth fashion. To help achieve this goal over the years, the SEC has launched myriad investigations into companies and their business and reporting practices.

These investigations are launched for all sorts of reasons, but one thing seems to have held true, at least in the fairly recent past: that SEC investigations, whether informal or formal, tend to have some seriously gravitational affects on stock prices in the near and potentially long term.  

Evidence of near-term underperformance
A study in 2005 by The Leonard N. Stern School of Business showed that a company's market share declined, on average, by 6.18% and 6.23%, respectively, following the announcement of an informal or formal investigation. It also displayed that the stocks typically underperformed the market for the following three months as uncertainty surrounding emerging information maintained its grasp. However, following those initial three months, the stocks tended to regress toward the mean, leading them to outperform the market. Data was compiled from more than 240 informal and formal investigations from 1998 to 2003.

The latest victim
For a while now, talk has surrounded LINN Energy's  (NASDAQ: LINE  ) hedging strategy and the way it was handled from an accounting point of view. While a select group warned of potential misrepresentation, others seemed to overlook this fact in favor of a distribution that ranked near the top of its industry. These hedging strategies and their representation are now directly under the SEC's microscope, with LINN's distribution payments and acquisition of Berry Petroleum hanging in the balance. As a result, the past two days have been especially hard on investors, with the stock down over 31%. 

Like LINN, many others have come under SEC investigation in the past, and their subsequent performance has been more than lackluster:

Better watch your book
Ebix  (NASDAQ: EBIX  ) , an insurance software company, has been under investigation since last November but had denied these allegations initially. Just 13 days ago, an acquisition deal was called off by an arm of Goldman Sachs after further investigations were announced by the U.S. Attorney for the Northern District of Georgia. The stock reacted to the announcement by dropping 44% and 13% in the two days following as investors sold off. This reaction is justified in the fact that the probe surrounds alleged accounting misconduct.

Improperly hunting for tax havens
While in the midst of reconciling tax-accounting issues, Weatherford International  (NYSE: WFT  ) came under SEC investigation for potentially selling goods to sanctioned Iran and Syria back in March 2012. The stock has yet to recover and has traded down 20.6% since March 16, 2012, while the S&P 500 is up 15% and rival Halliburton is up 23.9% over the same time frame.

Accounting issues have continued to plague Weatherford, along with potential improprieties surrounding Iraqi contracts, resulting in the delay of its latest annual report. All of this follows restatements of its 2010 and 2011 annual reports. Over the past three years, Weatherford has underperformed the S&P 500 and Halliburton by 52.2% and 56.9%, respectively. 

Once the veil is lifted
Molycorp  (NYSE: MCP  ) presents a fine example of what can transpire after the SEC's investigation is complete and shows little in the way of further enforcement. Just last week, the company's shares spiked 10.5% after the SEC completed its investigation into Molycorp's policy of changing its public disclosures and levied no burdensome actions or fines. Unfortunately, this most recent price spike has done little to rejuvenate the rare-earth miner's volatile stock, which stands at just 27% of its year ago price.

Foolish final note
While it may be a bit more difficult for average investors to unearth accounting malpractice within their portfolios, the SEC has a fairly good track record. Even though some investigations might not warrant as much awareness, those surrounding accounting issues can clearly affect a company's market value in a substantial way. Being able to sell shares before or immediately following an announcement might not always be possible (or legal), but investors should certainly consider whether a company deemed suitable for an investigation is worth any space at all in their investment accounts. 

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

June Job Growth Clocks In at 188,000, Beating Estimate

Job growth is up for June, according to an ADP National Employment report (link opens as PDF) released today. Nonfarm private employment increased by a seasonally adjusted 188,000 jobs for June, beating analysts' 165,000 consensus estimate and boosting numbers above May's revised 134,000.

Human capital management company ADP partners with Moody's Analytics to produce this monthly report based on ADP payroll data representing 416,000 U.S. clients employing nearly 24 million workers in the United States.

Source: Author, data from ADP 

In terms of employment gains, smaller seems to be better. Small businesses (one to 49 workers) added 84,000 jobs in June, while medium (50 to 499 workers) and large (500-plus workers) businesses added on 55,000 and 49,000 jobs, respectively.

While the services sector made its largest improvements since February (+161,000), manufacturing's 27,000-job gain is a welcome change from last month's 6,000-job drop.

In the report, Moody's Analytics Chief Economist Mark Zandi commented on the public sector's role in private sector employment:

The job market continues to gracefully navigate through the strongly blowing fiscal headwinds. Health Care Reform does not appear to be significantly hampering job growth, at least not so far. Job gains are broad based across industries and businesses of all sizes.

Efficiency and Productivity in a Real-Time World

We talk with author and media theorist Douglas Rushkoff, who has published 10 books on media, culture, and technology. He joins us to discuss his most recent work, Present Shock, about living in today's immediate, always-on world.

What happens when there's nowhere left for the market to expand? In this video segment, Douglas suggests that our views on productivity and employment themselves need to evolve as human attention becomes the new commodity. The full version of the interview can be found here.

A full transcript follows the video.

The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Brendan Byrnes: Right. Another thing I want to talk about is productivity, efficiency. Do you think workers today are more efficient, more productive, with this "live in the now" era, or do they get distracted too easily?

I think everyone's familiar with surfing Facebook  (NASDAQ: FB  ) on work. Is this a good thing or a bad thing when you're talking about efficiency and productivity?

Douglas Rushkoff: In some sense, if we're going to maintain the old models, the old ways of doing business, our efficiency has become a problem. We're more efficient now, really, than we were before, to the point where ... most people are unnecessary to the jobs they have anyway, so the fact that they're checking eBay  (NASDAQ: EBAY  ) or checking Twitter or doing something else doesn't really affect their productivity so much, because there are not that many productive assets left -- human productive assets in businesses.

The real challenge now is how we look at our productivity, how we look at employment, really, in a landscape where everything's happening now, where everything's happening all the time.

Byrnes: How has this evolved over time? I assume the Internet was a big catalyst in the whole "living now" thing that you talk about in Present Shock.

Rushkoff: Yeah, although when the Internet first came up in the late '80s, early '90s, we looked at it as a technology that was going to make time. It was going to make us not just more efficient, but allow us to do things -- work from home in your underwear, on your own schedule -- and what we ended up doing was really, we used the Internet as kind of a last gasp for this, for the Nasdaq stock exchange.

The Internet became the dot-com boom, and then human attention, human time, became the new commodity. We ended up strapping the devices to ourselves and having them tweet us and ping us every time someone is going to send us an update or do a little thing.

We've ended up in this state of perpetual emergency responsiveness, which is not an appropriate state for a human or a business. It's because our markets needed new territories to grow. Colonial conquests were over. There were no new territories. There's nothing left to extract, so we try to extract it from ourselves instead.

Could "PepsiStream" Actually Work?

When analysts at Barclays slapped a $100 price target on shares of SodaStream (NASDAQ: SODA  ) Monday, something tells me they didn't expect the stock to take just four days to reach it.

Sure enough, shares of SodaStream briefly jumped more than 40% during premarket trading today after rumors surfaced saying industry giant PepsiCo (NYSE: PEP  ) was in talks to acquire the comparatively tiny at-home carbonation specialist.

Unfortunately for excited SodaStream investors, Pepsi CEO Indra Nooyi wasted no time telling CNBC the rumor was "totally and completely untrue." Even so, SodaStream is still up 63% so far this year, and more than 5% today as of this writing:

Source: Google Finance.

Of course, that raises the question: Could "PepsiStream" actually make sense?

On one hand...
I agree with fellow Fool Rick Munarriz, who quickly chimed in this morning to say in no uncertain terms that this particular buyout would make little sense.

After all, he noted, acquiring SodaStream would not only anger bottlers who depend on Pepsi's existing business model, but also would largely make Pepsi's core business obsolete by cannibalizing its own canned and bottled sales.

What's more, if Pepsi were to simply buy SodaStream with the intention of shuttering its doors to eliminate an up-and-coming competitor, you can be fairly sure the brand would suffer greatly from resulting consumer backlash. Remember, while SodaStream still only commands a less than 2% share of the 130 million households in the United States, the tiny company has made it abundantly clear it wants to make life better for consumers over the long run.

On the other hand...
Even so, nobody can ignore the fact that SodaStream is growing like a weed. Remember, I mentioned a few weeks ago that the company hopes to increase annual sales by more than 80% to $1 billion by 2016, all while en route to its long-term goal of achieving 10% market penetration here in the U.S. If that sounds a little ambitious, however, take a look at Sweden, where an impressive 25% of all consumers use SodaStream's carbonation systems.

In the meantime, Pepsi was only able to increase its own net revenue last quarter by a meager 1% year over year, instead preferring to place greater emphasis on still-low 4.4% "organic revenue growth," which doesn't take into account the cost of structural changes or the negative effects of foreign exchange translation. Fellow industry giant Coca-Cola (NYSE: KO  ) fared even worse, posting a net revenue decline of 1% last quarter. Like Pepsi, Coke also wanted to emphasize its organic net revenue, which did grow 2% when you take currency and structural changes out of the mix.

The bottom line is that, while these beverage titans remain massively profitable, it's impossible for either of them to match SodaStream's growth. For now, though, Coke and Pepsi are happy to do their best to maintain their current markets.

Between a rock and a hard place
However, while some people may believe SodaStream is a fad, the company is also happy to continue chipping away at the markets Coke and Pepsi have dominated for so many decades.

In the end, though "PepsiStream" certainly doesn't make sense now, SodaStream has set itself up nicely to put the hurt on its larger competitors as consumers increasingly accept its at-home carbonation machines as a viable alternative.

It certainly won't happen overnight, but if the trend continues over the next few decades, we may just see the folks at Coke and Pepsi ultimately forced to abandon their current business model in favor of SodaStream's more efficient, environmentally friendly ways.

Top 10 Bank Companies To Invest In 2014

The only difference, however, is that SodaStream could just grow too large to acquire by then.

A deeper dive into the 'Stream
SodaStream's carbonation technology sounds simple, but this razor-and-blade company offers an intriguing opportunity for growth that could very well disrupt the soda industry. The Motley Fool's premium report on SodaStream explains the opportunities as well as the risks in the company. The report comes with a year's worth of updates, so just click here to get started.

Quindell Portfolio Announces "Major UK Contract Win"

LONDON -- The shares of Quindell Portfolio (LSE: QPP  ) have risen 1.3% as of 9:20 a.m. EDT after the company announced a "major U.K. contract win." The AIM-quoted firm said it had agreed a five-year deal to supply its ICE Challenger administration software to a top-10 U.K. motor insurer.

Quindell said the contract followed a competitive tender and included "extensive evaluation and proof of concept." The company also claimed the initial license would cost the unnamed customer £3.5 million, with "multi-million pound" service revenues expected thereafter.

Robert Thomas, chief executive of Quindell's software and consultancy solutions division, said: "This contract for all of our technology components with such a large U.K. insurer validates our strategy. We are delighted to have the insurer as a customer and look forward to a successful implementation, providing them with the platform for the successful development of their business."

This morning's contract announcement is the fifth issued by Quindell since the start of April, and it comes less than a month after the company published its 2012 results and refuted accounting allegations made by "active shorters." Those results showed acquisitions helping underlying profit surge 680% to £49 million, while the allegations concerned the size and structure of the group's debtor ledger.

The market's mixed feelings toward Quindell currently leave the shares trading at less than seven times trailing earnings. Of course, whether that lowly multiple, today's contract win, and the wider prospects of the insurance sector all combine to make Quindell a buy is something only you can decide. For what it's worth, Quindell's directors spent £110,000 buying extra shares last week.

However, if you already hold Quindell shares and are looking for buying opportunities that carry a little more certainty, this exclusive wealth report reviews five particularly attractive possibilities. Indeed, all five opportunities offer a rich mix of robust prospects, illustrious histories, and dependable debtor ledgers, and they've just been declared by the Fool as "5 Shares You Can Retire On"! Just click here for your report -- it's free.