The S&A Digest: About Those New Taxes

Stansberry & Associates Top 10 Open Recommendations
(Top 10 highest-returning open positions across all S&A portfolios)

As of 07/02/2013

No more EverBank ads... A new dividend "grab"... Wall Street looks backwards at housing... A GM bid for Chrysler?... Your thoughts on democracy... Tax hike!

While Wall Street focused on the rearward-looking, double-digit decline in housing starts, Steve Sjuggerud sent me the following note:

"All three forward-looking housing indexes registered improvement this month... The index gauging current single-family home sales gained six points to 42, while the component measuring the traffic of prospective buyers rose five points to 31. Of particular note, the index gauging sales expectations for the next six months jumped over the 50 threshold for the first time since last June, posting a seven-point gain to 55. Builders, themselves, are increasingly convinced better times are ahead."

Signs of a market top... In the section usually reserved for analyst opinions, Bloomberg.com has a video interview of Tan, a feng shui master, and his views on India in the "year of the pig."

Another "dividend grabber" opportunity. Steinway Musical Instruments (LVB) has declared a $3 special cash dividend, nearly 10% of its market cap, payable on March 9 to shareholders of record on February 23. The dividend is likely taking place because Steinway decided against acquiring music retailer Dennis Bamber last month. Steinway has great numbers: It has been steadily increasing revenues and cash flows for the past 10 years, while decreasing capital expenditures. Share prices are up only 1.7% to $34.56 after the announcement. We think this is a very safe dividend to grab.

One common question we've gotten about "dividend grabbing" is: Why bother to collect the cash dividend? Why not simply buy the stock ex-dividend and make the resulting expected capital gain as the share price increases over time to its pre-dividend price? There have also been variations of this question asked, about using call options rather than direct share purchases. Our answer? Dividends are taxed at a lower rate than short-term capital gains. Unless you're planning to hold the stock for more than a year, it's more tax-efficient to take the dividend. Regarding the various options strategies? No comment. My past experiences with options have been unfailingly expensive, so now I leave them to others.

Toyota overtook DaimlerChrysler in European sales for January, as its new vehicle registrations increased 21%. DaimlerChrysler had long held seventh place in Europe auto sales, with Toyota eighth. There's talk of GM buying Chrysler. Frankly, the move doesn't make sense to us. Scale doesn't matter when you're losing money on every car you sell. You're not going to "make it up on volume..."

We wrote it... did you buy it?

In addition to ruling the diamond market, AngloAmerican rules the platinum market, contributing 40% of the world's platinum production. While gold grabs all the headlines, the price of platinum has more than doubled since 2002... The stock is really cheap. The business has always been very profitable, even in the bad times for commodities. And yet nobody knows anything about it. – Steve Sjuggerud, True Wealth, January 2006.

AngloAmerican has been hitting new highs all week and is up 41% in the past 52 weeks.

S&A Gold Report pick Southern Copper (PCU) is another commodities play that has been posting great returns. Southern Copper has shot up 69% since July 2006. Matt Badiali recommended it near the bottom in June.

We want to let you know about a minor policy change at Stansberry & Associates Investment Research. In the past, as you've probably seen, we've accepted advertising from EverBank. The decision to accept advertising from EverBank was easy. Our analysts like its products, and we are fond of the company's founders and managers. They are old friends.

However, our intentions when we launched this business were to independently serve the interests of our subscribers. In that spirit, we've made a painful decision to no longer accept advertising from EverBank (or any other financial services company).

You see, this month Steve Sjuggerud decided that a new EverBank product was the safest way for most people to invest in Japanese real estate. EverBank created the product with our readers in mind. This put us in a quandary: If Steve went forward with his recommendation, we'd end up accepting ad revenue from a company whose investment product is being recommended in our pages. The conflict was innocent: Steve Sjuggerud isn't involved in our advertising sales. Our marketing people aren't aware of Steve's upcoming recommendations. Nevertheless, I knew as long as EverBank was an advertiser, there would be the appearance of a conflict of interest if Steve recommended its products.

From the standpoint of our business, this is like cutting off our nose to spite our face – after all, it doesn't really make sense not to accept advertising revenue from a business that you genuinely recommend to your customers. But we know that integrity doesn't come cheaply, and it can be destroyed by even the appearance of a conflict of interest.

New highs: AngloAmerican (AAUK), Anheuser-Busch (BUD), Southern Copper (PCU), Posco (PKX), Sigma-Aldrich (SIAL), Telstra (TLS).

Our mailbag overflowed with comments about yesterday's critique of democracy. I think we might have set a new volume record... we received hundreds of e-mails yesterday. I read them all. Roughly 90% of all the mail agreed with my sentiments. Most people said they simply didn't have the courage to express publicly what they felt: Democracy is a sham and is leading our great nation to ruin.

A few subscribers' replies displayed a basic lack of knowledge about government. For example, many implied that the only choices besides democracy were socialism and communism. Of course, the latter are not forms of government, but legal systems for owning property. A democracy could easily decide to become "communist." In fact, that's what happened recently in Venezuela.

Thankfully, only a very few people mistook my critique of democracy as being an attack on the ideals or the accomplishments of America, which of course, it was not. I love America, but the America I love – a place where people are primarily responsible for themselves, where the government's powers are strictly limited, where people don't tell their neighbors how to live or how to worship, where foreigners striving for a better life are welcome, and where the risks of liberty are happily assumed – has largely disappeared under the tyrannical weight of a government that's become untethered from its historic conventions and operates with complete moral and fiscal turpitude.

The thought that we now have armed soldiers in 120 different countries, that we're constructing a fence at our border, that we've tortured our prisoners, that Russia's income tax rate is a tiny fraction of ours, that we routinely recorded our citizens' innocent phone calls without any probable cause, that we've utterly refused to govern within our means, and that we're burdening generations of future Americans with our debts – both fiscal and moral – repulses me.

These things evidently repulse many of you, too.

One last comment on this... some of you made the argument that I had no right to criticize because I wasn't willing to suggest an alternative. My suggestion, as I thought was clear, was a return to a republican form of government, where suffrage is more limited and where the powers of the government are strictly confined to areas of genuine public good and self-defense. This, of course, will never happen without a severe crisis or a revolution. As Doug Casey says, "It's too late in the game to solve the problems... but it's still too early to line the bastards up and shoot them."

But, in the meantime, criticism is very useful because it reminds us what might have been in America and what might yet be returned to us. Henry Hazlitt wrote: "...criticism, far from being an evil, is the greatest single force in the world for the maintenance of order and decorum and decency, for preventing careless work, for spurring us on to our highest efforts. I shudder to think what would become of civilization if a man could be criticized only by the perfect, who do not exist."

"I never thought I'd take the time to write you, although I enjoy the comments and your witty replies, but I had to say I think you solidified my renewal for life by pointing out that this country was founded as a republic. Every shameful congressman that refers to it as our great democracy ought to be banished from United States soil! And the rest of the lemmings who think democracy is great can follow them. The mere fact that only one in a hundred people in this country (and I'm probably being generous in those numbers) knows that we are supposed to be a republic (as we learn in kindergarten while saying the flag salute) is a testament to the growing erosion of this country and its founding principles. God bless you, man, for being intelligent and funny!"

– Paid-up subscriber Dr. T

"When I read your comments about whether we are a democracy or a republic I am reminded of an oath I occasionally recite: 'I pledge allegiance to the flag of the United States of America, and to the Republic for which it stands...' Yours is the first mention of our republic in print that I have seen in years. The fact that we are not governed by majority rule was quietly changed years ago so that now everyone believes that we are a democracy. I quote a relative of mine: 'Pure democracy cannot subsist long nor be carried far into the departments of state, it is very subject to caprice and the madness of popular rage.' John Witherspoon, signer of the Declaration. I guess those unfortunate enough to end up on the wrong side of a lynch mob's rope would be choosing a republic and not democracy!" – Paid-up subscriber Mark Rising

"After reading several posts of your own readers – I must agree. All I seem to have gotten with this subscription is a bunch of spam to buy more advice. I hope you're not expecting any renewal from me. And to any of you reading this – S&A is a bunch of BS – don't waste your time or money! Let's see if the pipsqueak posts this!" – Paid-up subscriber Jim Enright

Porter Comment: We're suckers for letters that insult us. But, when we get letters like yours, we're genuinely baffled. Something must have gone wrong with your order, because you should have gotten the newsletter you ordered and the special reports that were included. Please call our customer service team (888-261-2693). There could be a problem with your e-mail's spam filter. Or maybe we got your credit card number wrong. Who knows? But surely we didn't intend to provide you with poor service. Until it's sorted out, you should be able to access the current issue – and every single back issue – of whatever newsletter you subscribed to our website.

"I used to think you were an arrogant, self-absorbed, frustrated writer but I must admit, you are growing on me, and it's very painful." – Paid-up subscriber Tom Murphy (Conservative Republican, FSU Graduate)

"BAM! You hit the nail on the head with your opinions, commentary, and even most of your investment picks. I also enjoy your opening personal comments, even if it is where your dog is looking for a place to crap. I'm not a relative and don't want a job. Long live the S&A Digest." – Paid-up subscriber Ron Reigelman

"I am Professor of Economics and Finance at Interamerican University of Puerto Rico. Every night when I am back from the University, I sit as your student at my PC, reading your articles and Steve's recommendations. I enjoy and learn from all of your staff. If sometime you come down for vacations, I would like to share your experiences with my young fellows students. ALL OF YOU ARE GREAT." – Paid-up subscriber Victor Castillo, Ph.D.

"One day I'm going to show up at your office at my expense and $50 says you refuse to come down to meet me, you woman. I [expletive] hate you and all that your pathetic imagination comes up with Do me a favor and catch the Asian flu you useless [expletive]. – Paid-up subscriber "DNW"

Porter Comment: Nothing beats living in the public eye, where all the crackpots can see you...

About Those New Taxes...

From the front page of today's WSJ: "The new democratic-controlled Congress is looking to rein in looming tax increases on the middle class... by raising taxes on the upper-income households... Bush administration officials have signaled they may not oppose a likely method of covering those costs: Raising taxes on the nation's wealthiest citizens."

This kind of politicking is exactly what democracy brings.

The mob (the single-largest voting bloc) is, by definition, "middle-class." It will always demand more government services than it is willing to pay for. Thus, it will vote in favor of higher taxes – as long as someone else has to pay for them. None of this is surprising... but the big lie here is that these taxes will impact the wealthy. They will not. Wealthy people don't work, or at least they don't depend on wages for their lifestyle. Warren Buffett, for example, reports his $100,000 salary to the IRS... and pays next to nothing in income taxes compared to the amount his wealth increases each year.

Wealthy people, like Buffett, don't report "income." They report tax-sheltered returns, like muni-bonds, and they report dividend income. This kind of income doesn't trigger W-2 income taxes. That's why the elite powers behind the Democratic party are always in favor of higher income taxes: They won't be paying them. High taxes on income also reduce social mobility, making it very difficult for anyone to become wealthy from the income they get at work.

So, who will pay these new income taxes? Anyone who makes a high income at his job. Right now, high-income earners are paying about 46% of their incomes in taxes, when you measure federal, state, local, and sales taxes. The question the mob might want to consider is, at what point do these people – who make up the horsepower of our economic engine – simply quit? Would you go to work, and work to your full potential, if the government took more than half of what you earned?

Clearly, this kind of tax policy violates the ideal of being "equal before the law." But the worst damage it will cause will be economic. It provides people with a real incentive not to be an employee, which will make it more expensive to build efficient companies.

That's just what America needs...

Regards,

Porter Stansberry

Baltimore, Maryland

February 16, 2007

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