Headline readers buying stocks...

Headline readers buying stocks... Mr. Market buying bonds... $1 of income: Bonds vs. WDDGs... 'Subprime goes to college'... For-profit education fraud... Wuhan 'diversifying'...

 For the life of me, I (Dan Ferris) often can't fathom how people believe the headlines they read are true. And worse, believing they're true, then going into the stock market and committing new capital based on what they say.

Working off yesterday's news that Federal Reserve Chairman Ben Bernanke made opaque reference to being willing to renew his quantitative easing (QE) efforts (read: print more money)... the Financial Times website this morning proclaimed: "Stocks stable on more hopes for Fed QE."

People hear a few comments that indicate the Federal Reserve might print more money than they previously thought it would print... and decide to go buy stocks? It's as though American corporations suddenly have more value because the Federal Reserve might print up more dollars with which to buy their wares... and their shares. But when the Fed prints more money, it doesn't increase your capacity for Coca-Cola or McDonald's cheeseburgers, does it? No. So why bid their shares up?

Remember... the Fed kept rates low, inflating the stock market bubble of the late 1990s. Then, the stock market tanked in 2000-2002, so the Fed lowered rates again... bringing about the housing bubble. That resulted in the biggest economic/financial disaster since the Great Depression. Now, rates are lower than ever... And both stocks and bonds have enjoyed a huge rally.

 In Chapter 8 of his landmark investing book, The Intelligent Investor, Ben Graham described "Mr. Market." Graham, the father of value investing, said that when you venture into the stock market, you should imagine you're business partners with a manic depressive. The poor fellow, Mr. Market, comes into work every day and, based on his mood, offers to buy out your stake or sell his. When he's depressed, he'll sell you his half of the business at a rock-bottom price. When he's riding high, no price is too great for your share of the business.

 Were Graham alive today, he'd certainly note Mr. Market's latest obsession – bonds. According to market researchers at the Investment Company Institute, investors took $2.57 billion out of equity mutual funds during the week ended March 14... and put $9.1 billion into bond mutual funds. Clearly, Mr. Market hates stocks and loves bonds.

Like most popular investments, bonds are a lousy place to put new money right now... especially the higher-quality issues. The benchmark 10-year Treasury bond yields just 3.3% these days. Once you account for taxes and 3% inflation, your real rate of return is negative. Your investment is losing value. Inflation will do a number on triple-A corporate bonds, too. Credit-ratings agency Moody's forecasts the yield on triple-A corporate bonds in March will be 3.92%. (It's a forecast because March isn't over yet.) That's about 60 basis points (0.6 percentage points) over Treasurys. Moody's predicts this'll sink to 3.78% in April.

 It's perverse. Investors are fleeing stocks, which are trading around 15.5 times earnings, just below their long-term price-to-earnings ratio (16.4x). And they're buying bonds, which are yielding less than 4%... (In some cases, they're buying bonds yielding less than 1%.)

The stock market's earnings yield is about 6.5%. And that'll grow over the long term because the economy will grow... and corporate profits along with it.

But bond yields won't grow. Their interest payments – the so-called "coupons" – are set in stone... That's why they're called "fixed-income investments." And investors today seem to think receiving less than 1% is just fine. This is only rational if deflation is guaranteed, corporate earnings shrink over the next 10 years, and bond yields fall (causing bond prices to rise) or remain flat.

But a huge printing press supports our economy. It'll never be switched off. The more dollars we print, the more dollars we'll have to surrender to buy the goods we need. As long as that continues, we won't have deflation for any significant period of time.

The dollar has lost 95% of its value since the Federal Reserve started printing money in 1913. I promise you, that decline in value will not stop. It can't.

 I've heard it said that $1 of income is $1 of income, and the source doesn't matter. But I don't see it that way...

Consider that $1 of bond income this year will buy you $1 worth of stuff this year. But next year, after 3% inflation, that same $1 will only buy you $0.97 worth of stuff.

That'll keep happening every year you own that bond. After 10 years, your $1 of income will buy you about $0.74 worth of stuff. The bond market is supposed to be the smart money. But that doesn't seem very smart to me.

 Now consider $1 of dividend income from a World Dominating Dividend Grower (WDDG) stock. WDDG stocks are the shares of the best businesses in the world. And these companies raise their dividends every year like clockwork for decades on end. The WDDG stocks recommended in my 12% Letter newsletter raised dividends at an average rate of about 11.5% over the past year. Last year, they paid you $1 of income... This year, they paid you $1.115 of income. After 3% inflation, that's worth about $1.08. After 10 years of 11.5% dividend growth and 3% inflation, the value of the WDDG income will more than double.

So you can wind up with $1 that's worth $0.74 after 10 years, or you can wind up with an income stream that's worth $2 in today's money.

If you've got 10 years or more, World Dominating Dividend Grower stocks are hard to beat. If you're buying bonds and leaving your money in them for long periods of time, you're eventually going to realize you've been getting hosed down with gasoline and lit on fire. To discover the WDDG stocks that raised their dividends by an average of 11.5% over the past year, click here to get access to The 12% Letter.

 I recently gave an interview with The Daily Crux – Stansberry & Associates' financial news and opinion aggregator service – as part of its World's Greatest Investment Ideas series. The goal of these interviews is to simply explain the timeless "big" ideas responsible for the success of many of the world's best investors.

In the interview, I discuss an idea that's near to my heart... Maybe more than any other, it's responsible for leading me to the World Dominating Dividend Growers I write about so often. If I could teach our subscribers just one thing, this idea would be it. I hope you'll take a few moments to read it. Crux trial subscribers received that interview in a Sunday e-mail. If you don't subscribe to The Daily Crux, you can read the interview after you sign up for FREE by clicking here.

 Master short seller Jim Chanos, who founded the hedge fund Kynikos Associates, has been bearish on for-profit educators for years... We have long shared his skepticism and first quoted him on the subject in 2008...

Among Chanos' criticisms, he noted at the time, "Outcomes at these for-profit educators are not much better than the average community college, which is free."

And Chanos said the sector is "rife with potential" problems... The foremost being a decrease in federal funding for tuition. For-profit colleges receive 85%-90% of their income from federal aid... For fiscal year 2011, Apollo Group, one of the largest for-profit educators and a good industry bellwether, generated 91% of net revenue from government money.

 About a year later, in May 2010, hedge-fund manager Steve Eisman (then with FrontPoint Partners) took Chanos' theory of high prices and low value a step further... He labeled for-profit educators outright frauds.

At the Ira Sohn Investment Conference in New York two years ago, Eisman gave a speech titled "Subprime Goes to College." As the title implies, Eisman likened the for-profit educators lending standards to the questionable subprime mortgages that sparked the mortgage crisis. We wrote...

 Since these short sellers shone a light on the industry, for-profit educators have been slammed with lawsuits, including accusations of securities fraud, lying about stock-option grants, and deceptive recruiting tactics, to name a few.

In its latest quarterly financial disclosure filing with the SEC, Apollo dedicated a full 4.5 pages to various lawsuits and investigations surrounding the firm.

Most recently, according to the New York Times, "attorneys general from more than 20 states have joined forces to investigate for-profit colleges that too often saddle students with crippling debt while furnishing them valueless degrees."

Among the frauds the paper said are being investigated...

 The legal troubles for the for-profit education sector are far from over... These companies use questionable recruiting tactics (including paying recruiters per enrollment, a violation of federal law that would render the companies ineligible for federal money).

And they're leaving students with crushing debt loads... For-profit colleges are responsible for nearly half of student-loan defaults, though they enroll only 10% of students. (As of February 29, Apollo Group held more than one-third of its total student accounts receivable as provisions against losses.)

 So... if you shorted Apollo when we first published the idea a little more than three years ago... how have you fared?

Apollo shares were trading at $75 on December 9, 2011 before Chanos explained the bear case. (They closed the day at $72.) Today, shares of Apollo Group trade for $43... a 40% drop. (The S&P 500 increased 56% over the same time period.)

 An update from yesterday's bullet on China... While the attendees of the Hong Kong Mines and Money conference aren't predicting the current slowdown in the Chinese economy will develop into a crash and period of recession in the Asian nation... one of China's largest steel producers is forecasting that kind of "hard landing"...

Wuhan Iron and Steel Corp., China's fourth-largest steel company, is diversifying outside of its core commodity to protect itself from a slowdown in demand. The company plans to invest $4.7 billion over the next five years in sectors including hog farming, fisheries, and organic agriculture.

 Wuhan isn't the only Chinese steel company to diversify out of steel (others have invested in telecom, real estate, and manufacturing). But Wuhan's choice of farming is interesting...

Jing Ulrich, the JPMorgan managing director who spoke at the Hong Kong conference, said the Chinese central bank cut the reserve ratio by two percentage points (in addition to the two previous cuts) for several hundred branches of the Agricultural Bank of China earlier this month. Lower reserve ratios mean the bank may hold less of its deposits in reserve, freeing capital for lending.

"It's March," she said. "Planting season is coming." The move will allow the Agricultural Bank to lend more money to the Chinese agricultural sector. The central bank wants to specifically support local agriculture with its latest stimulus efforts.

 In the U.S., if a steel company was hemorrhaging cash, it would slow production. That's not the case in China, where most of the large steel producers are state-owned. Chinese steel mills are currently operating at a loss... But the government depends on them for employment and tax revenue, so they won't shut down.

Instead, they take government money and invest in higher-growth areas, like pork... "The price of one kilogram of steel is cheaper than a quarter of one kilo of pork," said Wuhan Chairman Deng Qilin, as quoted by the Toronto newspaper The Globe and Mail.

 New 52-week highs (as of 3/26/12): PowerShares Buyback Achievers Fund (PKW), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), V.F. Corp (VFC), Anheuser-Busch InBev (BUD), Constellation Brands (STZ), Coca-Cola (KO), Abbott Labs (ABT), Exact Sciences (EXAS), Cisco (CSCO), BLADEX (BLX), Target (TGT), Intel (INTC), Altria Group (MO), Philip Morris International (PM), and Tetra Tech (TTEK).

 Do you agree that bonds are in a bubble? Have you been brainwashed into thinking it's a safe place to store your money? Let us know at feedback@stansberryresearch.com.

 "Regarding your writing on your health, and those that object to it... . all I can say (to them) is 'lighten up Francis.' We live in a world that could use a bit more 'humanity'... Money ain't everything... I wish you good health." – Paid-up subscriber John Urbik

 "Would it be possible for you to include a link to a web page for your negative feedback without actually inflicting it on your readers? I read the newsletters and I don't feel that the negative feedback is appropriate to highlight the way you do. If people want to read negative feedback, you could provide a link so that they could read it. If people like me don't want to read the negative feedback, it would allow us to read the newsletter without being reminded that, as Lincoln said, 'You can't please all of the people all of the time.'

"Many people aren't nice. I know this. I don't need to be reminded of it by your newsletter. If I wanted to read a newsletter on people who don't like Stansbury Associates, I would have subscribed to a different newsletter." – Paid-up subscriber Gary Helwig

Goldsmith comment: The irony of this note is not lost on us.

Regards,

Dan Ferris and Sean Goldsmith

Medford, Oregon and New York, New York

March 27, 2012