Stocks hit new highs...

Stocks hit new highs... GM is hiring... The Treasury bubble... The primary dealers... Stocks versus Treasurys... An American icon on sale... More on foreign Treasury sales...

 The S&P 500 closed yesterday over 1,300 for the first time since July. A good trader I know told me a couple weeks ago that you should buy the dips, and the market is going higher from here. He's right so far.

 As is usually the case, the worst-performing stocks last year are among the best performers so far this year. Netflix, First Solar, Bank of America, and Sears Holdings all got killed last year. They're all among the top 10 performers so far this year. I'm not a fan of any of them as long-term holdings. In fact, the stock market overall, measured by the S&P 500, has put in its best performance since 1987. In the first 11 trading days of 1987, stocks rose 10%. They were up 4% over the same period this year.

Yes, 1987 got pretty ugly by the end of 2011, when the market crashed 22% in one day. But what are the odds that'll happen again this year? Super, duper remote... Nonexistent, even...

I doubt a great first few days means much. But it does show that you can make money betting on the market to rise after it has fallen substantially. The S&P 500 is up more than 20% from its October 4 low of 1,074.

 Why are stocks moving higher? I think it's simply because they moved a lot lower last year, while corporate earnings continue to move much higher.

But most folks don't care about any of that. Most folks just read the daily news and swear by every word...

Today's news says unemployment applications sank by 50,000 to 352,000 last week. It says the stock market is up (which everybody loves to hear). It says folks are hiring workers (more below). It says there's a new solution to the Greek crisis on the table. Everything is suddenly wonderful, and the market is up as I write this. I can't imagine reading the news and then buying stocks because of it, but apparently lots of people do it.

 A few newly employed folks are working the third shift at General Motors. GM has added third shifts in four states, putting about 4,300 more people to work. Just two years after Komrade Obama bailed GM out to the tune of $50 billion, it's selling more cars than anybody... GM sold more cars than any other company last year, more than 9 million worldwide. The biggest car buyers were the Chinese (2.55 million) and Americans (2.5 million). Toyota overtook GM as the biggest carmaker in 2008, but last year's earthquake caused production declines. Toyota is now No. 3 worldwide. Volkswagen is No. 2.

 We warned of a potential pullback in stocks recently.

But the market didn't seem to notice our cautionary words. It keeps rising. It's almost like the market doesn't know we're here! The impertinence!

If the stock market keeps moving higher, I bet investors will start falling out of love with cash. For now, they've all fallen in love with it… just as we predicted last April...

 Say what you will about U.S. Treasury obligations (and there's a lot of bad stuff to say)... had you bought them a year ago, you'd be up more than 20% right now, with zero risk of loss of principal.

Of course, Treasurys are printed (and printed and printed) in a paper currency that, like all those before it, is doomed to fail. And who would lend money to a bankrupt borrower for any length of time on any terms? Yet most folks have fallen deeply in love with this awful idea. They've pushed the yield on 10-year Treasury notes from more than 3% last April – when yours truly said to buy cash – to less than 2% today.

Another problem with putting your faith in Treasurys is that everybody else has, too. And they've placed huge bets at tiny yields...

Just look around at the big money... Treasurys are more popular today with big bond investors than anything else. Bill Gross, manager of the world's largest bond fund (the $244 billion PIMCO Total Return Fund, also the world's largest mutual fund of any kind), absolutely loves U.S. Treasurys now, after hating them not too long ago.

 Gross isn't the only big gun in love with U.S. Treasurys... The Federal Reserve trades directly with 21 "primary dealers" of U.S. Treasury securities – the usual Wall Street suspects, like Citigroup, JPMorgan, and Goldman Sachs. According to a recent Bloomberg report, for the first time in history, the 21 primary dealers are holding more Treasury securities than corporate debt on their balance sheets. As of December, they held $74.7 billion of Treasury debt and $61 billion of corporate debt. They've got 29% of their balance sheets in Treasurys, more than in any other category of fixed income.

The primary dealers and Bill Gross' PIMCO are joined by U.S. banks, which continue to raise their Treasury holdings, from $1.13 trillion in 2008 to about $1.8 trillion today.

Everybody loves cash. So naturally, I HATE IT...

 Tiny yields (which means soaring high prices) plus everyone bullish all at once... this is a classic run to the other side of the boat. It bodes well for stocks that so many folks are holding so much cash. Having ventured a guess about a short-term pullback and been wrong, I'll stick to what I know – valuation.

Stocks aren't terribly expensive right now, after going sideways while corporate earnings soared 20%. They traded at more than 15 times earnings a year ago. They sit at less than 14 times earnings today.

So what do you do? Whether you like it or not, you sell Treasurys and buy stocks. It might not feel good, but it is rational.

 I'm not bullish on every stock in the market. But in my service The 12% Letter, I've just recommended an iconic American company trading at a dirt-cheap price – less than 12 times earnings. My report is due out this evening. In it, I show you how it's a no-brainer to expect this company to more than double its dividend payout over the next five years. It's got huge plans for this year, which have been slightly overshadowed by some bad news that isn't really that bad at all.

It's one of the greatest businesses ever created in American history. It's got a huge competitive advantage. It's so resilient that it continued growing sales every year, right through the financial crisis. And management has just signaled it's going to pay out more in dividends over the next few years...

It's a perfect time to buy a fantastic company before it goes on a five-year run of 20% annual dividend increases. It yields 26% more than 10-year Treasurys right now. Plus, it'll cream Treasurys' performance in the next five years, as tiny Treasury yields are eaten alive by inflation and unable to grow. Treasurys are what just worked, so all the suckers will pile into them. You need to look ahead and get the next thing, not the last thing. Take advantage of a great time to get a piece of a fantastic business. To access The 12% Letter and discover this excellent opportunity, click here.

 New highs: MSDW Insured Municipal Income Trust (IIM), Nuveen Premier Municipal (NIF), Westport Innovations (WPRT), Automatic Data Processing (ADP), Monsanto (MON), McDonald's (MCD).

 Please tell us how scared you are... how much you hate stocks right now... and how much you'd rather sit on your cash. Write us at feedback@stansberryresearch.com.

 "You say that China and Russia are selling paper. Who are they selling to?" – Paid-up subscriber IJ

Ferris comment: Excellent question! Always ask who's on the other side of the trade. As we said above, everybody loves Treasurys… except the central bankers. Bill Gross has loaded up on U.S. Treasurys. So have the 21 primary dealers who trade with the Federal Reserve. And the yields are still near record lows. So we're probably in early innings of any big sales. Not all sovereigns are sellers. Japan bought $60 billion worth in November.

 "I have been a subscriber for, if my memory serves me, since 2007 – and love your research. I was hampered early on by earning an economics degree at an eastern institution of higher learning in the late 70s extolling Keynesian policy (with no exposure to the Austrian theory. My free market views have been bolstered by successful self-employment since 1985 – but the excessive debt today scares the beejeesus out of me...

"The only question I have, which the press has touted as the Federal Reserve's 'silver bullet,' and could negate your 'End of America' scenario, is Bernanke's thesis to replace policy accommodation by the of draining bank reserves. My understanding is this approach has never been implemented by any Central Bank (at least as far as the financial media in the NY metro area reports). The theory is such slow ratcheting upward of interest rates by reserve reduction will tame inflation as the economy strengthens and protect our world reserve currency franchise. This scenario, in my mind, is the only "fly in the ointment" to your End of America thesis. Could you respond?" – Paid-up subscriber James L. Smith

Ferris comment: Given that the only way to continue paying the government's bills is to print the money... and that the more debt the government amasses the more interest it has to pay... where's the incentive to let rates rise? And who at the Fed is truly worried about inflation? Bernanke's biggest worry is that we won't print enough money.

 "I just heard it again yesterday. 'The crisis of 2008 happened because no one asked the right questions early enough, it was a blind spot that became visible only in hindsight,' or words to the effect that no one saw it coming.

"I can't prove it, although I believe there are enough public records to do so if I had the time, but my hypothesis is that those who engineered the catastrophe knew exactly what was happening and didn't care. That includes Goldman Sachs and all it's cousins, the politicians and their staffers, the Fed, Mozillo and his fellow mortgage thieves and so many more who are now sitting on piles of money while lamenting that 'gosh, it's just capitalism and the natural ups and downs of the business cycle, yes this was particularly bad but hey, we just didn't see it coming.'

"I call Bulls**t on the lot of them, they knew exactly what was coming and it profited them at our expense. I do recognize that Porter has likely said exactly this given everything I have read, I just haven't heard it exactly that way. Keep up the good work." – Paid-up subscriber BP

Ferris comment: Yes, many people knew. Goldman rode it up, then changed gears… sold garbage to clients, and rode it back down. I've said it before, and I'll say it again. Goldman mysteriously winds up on the right side of every trade, even if it starts out wrong.

Regards,

Dan Ferris

Medford, Oregon

January 19, 2012