We're saved!...

Sjug: 'The best bet for high income in 2013'… If dividend taxes are rising, why are these income investments rallying?…

In today's issue of Digest Premium… we explain why right now we have the best opportunity in a decade to buy two of our favorite income-paying stocks… And why their shares are rallying despite the rising dividend tax.

To subscribe to Digest Premium and access this today's analysis, click here.

We're saved!... Holiday cocktails and the fiscal cliff... Gross' 2013 predictions... The Global Bernanke Asset Bubble... European stocks hit new highs...

 The negotiations carried on into the New Year. But the federal government reached an agreement late Tuesday night... While we were drinking champagne with friends, Congress and the president sacrificed their New Year's Eve celebrations to save our country from Armageddon.

 Over the holidays, everyone was obsessed with the prospect that the U.S. would plunge over the "fiscal cliff." To refresh your memory… the "cliff" was a series of automatic tax increases and spending cuts totaling $600 billion that would have come into effect on January 1. The higher tax burden and austerity measures would have allegedly forced our economy into recession.

At every holiday party I attended – from Augusta, Georgia to Santa Fe, New Mexico – as soon as people heard I worked in finance, all they wanted to talk about was what was going to happen with the fiscal cliff.

My answer was the same advice we offered repeatedly in the Digest… Don't worry. The debate was mostly theatrics. Just like they did with the debt ceiling "crisis"… the politicians will let the drama play out until the last minute before coming to an agreement. They want to remind the American people how much we need their help.

Remember… The fiscal cliff only existed because the government placed an arbitrary expiration date on tax cuts and married it to a set of spending cuts. The government engineered this entire debacle so it could come to the rescue.

 And sure enough… Congress and the president rode to our rescue on cue. (Actually, they missed the deadline… But what are a few hours difference when staving off catastrophe?)

Still, the deal the government reached is far from comprehensive. As former Clinton administration advisor Thomas McClarty said on the financial news network CNBC this morning, "I think we kind of went over the cliff, had a parachute that put us right back on the cliff, but battle's ahead for sure... I don't think there's any victory laps here."

 The new bill reinstates tax cuts that expired on December 31 for individuals earning more than $400,000 a year and couples earning more than $450,000. Top earners now face a marginal tax rate of 39.6%, up from 35% (including the phasing out of certain deductions, the top rate will be closer to 41%). Taxes will also increase on capital gains and dividends from 15% to 23.8%.

Higher taxes on the wealthy are expected to raise $600 billion over 10 years. (Of course, this doesn't take into account what higher income, capital gains, and dividend taxes will do to an already investment-shy population.)

 The estate tax will rise from 35% to 40% with an exemption up to $5 million. (The rate would have been 55% without a deal.) In other words, your reward for saving post-tax money your entire life is giving 40% of it to the government when you pass.

 The government didn't reinstate a two-year Social Security tax cut... The so-called "payroll tax" will increase to 6.2% from 4.2%. That equals a $1,000-a-year tax increase for individuals earning $50,000 a year.

 While the government was quick to raise taxes, it didn't cut spending. And it created more deadlines for it to once again save our nation. The first comes within weeks, when Congress will be back at the bargaining table to raise the $16.4 trillion debt ceiling.

Then, there's the automatic spending cuts set to take place on March 1. A second set of spending cuts is slated for March 27.

 It should all make for an entertaining start to 2013. Regardless of the absurdity of the fiscal cliff negotiations… the markets are happy. The Dow Jones and S&P 500 are both up more than 1.7% today. Yields on 10-year Treasurys jumped to 1.84% from 1.76% – the biggest one-day jump in two months – as investors dumped the safe-haven asset on the news. The Volatility Index, the market's fear gauge, plunged nearly 12% to below 16.

We don't expect the jubilation to last... This was yet another temporary fix. Our nation's fiscal issues still loom. And while higher taxes will add to the government's coffers, the real savings would only come from cutting entitlement spending. We don't believe that will happen under the current administration.

 Bond King Bill Gross, manager of the nearly $2 trillion PIMCO Total Return Fund, made some predictions for the year. Gross sent out a message via the social networking service Twitter saying he believes stocks and bonds will return less than 5% in 2013. He said unemployment (currently at 7.7%) will stay above 7.5%. And he predicted "gold goes up."

 Our own Steve Sjuggerud also made a big prediction for 2013 in his latest issue of True Wealth…

 True Wealth subscribers have already made double-digit gains on German stocks, Chinese real estate, and Australian stocks. And Steve says these markets are still dirt-cheap.

But Steve sees the Bernanke Asset Bubble creating 1,000% upside potential in one market. It's an opportunity you probably haven't considered before… you certainly won't hear much about it in the mass media. It's a market Steve invested in once before… and enjoyed gains of more than 100% in a little more than a year. To subscribe to True Wealth and get access to Steve's research on this opportunity, click here.

 On the topic of the global Bernanke Asset Bubble, European stocks hit a 22-month high on news of the U.S. budget deal. The Stoxx Europe 600 Index, an index of 600 leading European companies, jumped 2% today to the highest level since February 2011... And that tops off a 12% rally in 2012, the biggest annual rally in three years.

 New 52-week highs (as of 12/31/12): Targa Resources (TRGP), Monsanto (MON), Cheniere Energy (LNG), and Home Federal Bancorp (HOME).

 A strong mailbag to start us off in 2013. What are your investment goals this year? And how can we help you reach them? Let us know here... feedback@stansberryresearch.com.

 "I love your thought processes and philosophy. The only hate directed your way from inept reader-investors can only be a result of their self-loathing. Partially thanks to your vision of dysfunctional govt., I was able to earn 50-100%/yr returns for nearly a decade in gold and silver stocks (buying on sell-offs) and continue a reasonably good life-style in overpriced NYC while reimbursements for physicians (my profession) continued to plummet.

"I find your distaste for traditional medicine both understandable given the majority of disaffected, disgruntled physicians and their hence cursory examination of patients, but also worrisome, given the proved worthlessness of alternative therapies in general.

"I have been the first in Brooklyn, NY to start a 'concierge' medical practice, where patients pay an annual fee ($1000-1500/yr, depending on age) for round-the -clock availability, unlimited house-calls, immediate office appointments, etc. Early cancer diagnosis and prevention of heart attacks and stroke are the most important things I do.

"Growing steadily and limiting it to 500-600 patients, has brought back the joy in a profession that has been decimated by the corporate HMO-govt tryst. I like to think this will be the model for physician-entrepreneurs in the future and seems to me much like the Stansberry anti-govt. style. Please don't change a thing." – Paid-up subscriber Eric Kenworthy

 "Just finished reading your long newsletter. I enjoyed the read. I know you must get tired of reading those hate letters. You have got to realize that common sense is not hereditary, nor is it common. People want to be handfed, like they were most of their lives. Don't ask people to think on their own, it is asking too much. There are a million examples of this in our political system and welfare system.

"If I seem critical of society it is only because I am. Thirty years in Law Enforcement has made me that way. It has also made me conscious of my need for personal safety (CCW) which is still legal for retired [officers].

"Your boat sounds like a special getaway with rewards. Congratulations on your purchase, I hope you enjoy every minute of ownership (forget the money hole) and use it the way you currently are.

"Keep up the good work and realize that most of us appreciate what you are trying to do. Hopefully 2013 will be better than 2012." – Paid-up subscriber Marlin Matlock

 "I was so affected by this edition of the 'Fri. Digest' that I started my response as soon as I finished reading, but another demand intervened and I'm just now able to get back to it. After reading it I felt exhilarated like after reading a few other Fri. editions, like the one that laid out capital efficiency at some length, for example. Except even more so; I think because the scope here was more encompassing.

"I really think if one reread this until he had fully internalized its content, she would become a successful investor. I had long been interested in becoming a capable investor, but not until I retired from teaching (first grade mostly) could I really take it on. I read widely, but you guys have been the most useful, and you in particular, in the Fri. forum. You, Jeff, and Steve; you men highlight the big ideas with focus and clarity. I have gained a real understanding of the process of investing. I'm truly grateful." – Paid-up subscriber Rop Harbi

Regards,

Sjug: 'The best bet for high income in 2013'… If dividend taxes are rising, why are these income investments rallying?…

In today's issue of Digest Premium… we explain why right now we have the best opportunity in a decade to buy two of our favorite income-paying stocks… And why their shares are rallying despite the rising dividend tax.

To continue reading, scroll down or click here.

Sjug: 'The best bet for high income in 2013'… If dividend taxes are rising, why are these income investments rallying?…

 The negotiations carried on into the New Year. But the federal government reached an agreement late Tuesday night... While we were drinking champagne with friends, Congress and the president sacrificed their New Year's Eve celebrations to save our country from Armageddon.

 Over the holidays, everyone was obsessed with the prospect that the U.S. would plunge over the "fiscal cliff." To refresh your memory… the "cliff" was a series of automatic tax increases and spending cuts totaling $600 billion that would have come into effect on January 1. The higher tax burden and austerity measures would have allegedly forced our economy into recession.

At every holiday party I attended – from Augusta, Georgia to Santa Fe, New Mexico – as soon as people heard I worked in finance, all they wanted to talk about was what was going to happen with the fiscal cliff.

My answer was the same advice we offered repeatedly in the Digest… Don't worry. The debate was mostly theatrics. Just like they did with the debt ceiling "crisis"… the politicians will let the drama play out until the last minute before coming to an agreement. They want to remind the American people how much we need their help.

Remember… The fiscal cliff only existed because the government placed an arbitrary expiration date on tax cuts and married it to a set of spending cuts. The government engineered this entire debacle so it could come to the rescue.

 And sure enough… Congress and the president rode to our rescue on cue. (Actually, they missed the deadline… But what are a few hours difference when staving off catastrophe?)

Still, the deal the government reached is far from comprehensive. As former Clinton administration advisor Thomas McClarty said on the financial news network CNBC this morning, "I think we kind of went over the cliff, had a parachute that put us right back on the cliff, but battle's ahead for sure... I don't think there's any victory laps here."

 The new bill reinstates tax cuts that expired on December 31 for individuals earning more than $400,000 a year and couples earning more than $450,000. Top earners now face a marginal tax rate of 39.6%, up from 35% (including the phasing out of certain deductions, the top rate will be closer to 41%). Taxes will also increase on capital gains and dividends from 15% to 23.8%.

Higher taxes on the wealthy are expected to raise $600 billion over 10 years. (Of course, this doesn't take into account what higher income, capital gains, and dividend taxes will do to an already investment-shy population.)

 The estate tax will rise from 35% to 40% with an exemption up to $5 million. (The rate would have been 55% without a deal.) In other words, your reward for saving post-tax money your entire life is giving 40% of it to the government when you pass.

 The government didn't reinstate a two-year Social Security tax cut... The so-called "payroll tax" will increase to 6.2% from 4.2%. That equals a $1,000-a-year tax increase for individuals earning $50,000 a year.

 While the government was quick to raise taxes, it didn't cut spending. And it created more deadlines for it to once again save our nation. The first comes within weeks, when Congress will be back at the bargaining table to raise the $16.4 trillion debt ceiling.

Then, there's the automatic spending cuts set to take place on March 1. A second set of spending cuts is slated for March 27.

 It should all make for an entertaining start to 2013. Regardless of the absurdity of the fiscal cliff negotiations… the markets are happy. The Dow Jones and S&P 500 are both up more than 1.7% today. Yields on 10-year Treasurys jumped to 1.84% from 1.76% – the biggest one-day jump in two months – as investors dumped the safe-haven asset on the news. The Volatility Index, the market's fear gauge, plunged nearly 12% to below 16.

We don't expect the jubilation to last... This was yet another temporary fix. Our nation's fiscal issues still loom. And while higher taxes will add to the government's coffers, the real savings would only come from cutting entitlement spending. We don't believe that will happen under the current administration.

 Bond King Bill Gross, manager of the nearly $2 trillion PIMCO Total Return Fund, made some predictions for the year. Gross sent out a message via the social networking service Twitter saying he believes stocks and bonds will return less than 5% in 2013. He said unemployment (currently at 7.7%) will stay above 7.5%. And he predicted "gold goes up."

 Our own Steve Sjuggerud also made a big prediction for 2013 in his latest issue of True Wealth…

 True Wealth subscribers have already made double-digit gains on German stocks, Chinese real estate, and Australian stocks. And Steve says these markets are still dirt-cheap.

But Steve sees the Bernanke Asset Bubble creating 1,000% upside potential in one market. It's an opportunity you probably haven't considered before… you certainly won't hear much about it in the mass media. It's a market Steve invested in once before… and enjoyed gains of more than 100% in a little more than a year. To subscribe to True Wealth and get access to Steve's research on this opportunity, click here.

 On the topic of the global Bernanke Asset Bubble, European stocks hit a 22-month high on news of the U.S. budget deal. The Stoxx Europe 600 Index, an index of 600 leading European companies, jumped 2% today to the highest level since February 2011... And that tops off a 12% rally in 2012, the biggest annual rally in three years.

 New 52-week highs (as of 12/31/12): Targa Resources (TRGP), Monsanto (MON), Cheniere Energy (LNG), and Home Federal Bancorp (HOME).

 A strong mailbag to start us off in 2013. What are your investment goals this year? And how can we help you reach them? Let us know here... feedback@stansberryresearch.com.

 "I love your thought processes and philosophy. The only hate directed your way from inept reader-investors can only be a result of their self-loathing. Partially thanks to your vision of dysfunctional govt., I was able to earn 50-100%/yr returns for nearly a decade in gold and silver stocks (buying on sell-offs) and continue a reasonably good life-style in overpriced NYC while reimbursements for physicians (my profession) continued to plummet.

"I find your distaste for traditional medicine both understandable given the majority of disaffected, disgruntled physicians and their hence cursory examination of patients, but also worrisome, given the proved worthlessness of alternative therapies in general.

"I have been the first in Brooklyn, NY to start a 'concierge' medical practice, where patients pay an annual fee ($1000-1500/yr, depending on age) for round-the -clock availability, unlimited house-calls, immediate office appointments, etc. Early cancer diagnosis and prevention of heart attacks and stroke are the most important things I do.

"Growing steadily and limiting it to 500-600 patients, has brought back the joy in a profession that has been decimated by the corporate HMO-govt tryst. I like to think this will be the model for physician-entrepreneurs in the future and seems to me much like the Stansberry anti-govt. style. Please don't change a thing." – Paid-up subscriber Eric Kenworthy

 "Just finished reading your long newsletter. I enjoyed the read. I know you must get tired of reading those hate letters. You have got to realize that common sense is not hereditary, nor is it common. People want to be handfed, like they were most of their lives. Don't ask people to think on their own, it is asking too much. There are a million examples of this in our political system and welfare system.

"If I seem critical of society it is only because I am. Thirty years in Law Enforcement has made me that way. It has also made me conscious of my need for personal safety (CCW) which is still legal for retired [officers].

"Your boat sounds like a special getaway with rewards. Congratulations on your purchase, I hope you enjoy every minute of ownership (forget the money hole) and use it the way you currently are.

"Keep up the good work and realize that most of us appreciate what you are trying to do. Hopefully 2013 will be better than 2012." – Paid-up subscriber Marlin Matlock

 "I was so affected by this edition of the 'Fri. Digest' that I started my response as soon as I finished reading, but another demand intervened and I'm just now able to get back to it. After reading it I felt exhilarated like after reading a few other Fri. editions, like the one that laid out capital efficiency at some length, for example. Except even more so; I think because the scope here was more encompassing.

"I really think if one reread this until he had fully internalized its content, she would become a successful investor. I had long been interested in becoming a capable investor, but not until I retired from teaching (first grade mostly) could I really take it on. I read widely, but you guys have been the most useful, and you in particular, in the Fri. forum. You, Jeff, and Steve; you men highlight the big ideas with focus and clarity. I have gained a real understanding of the process of investing. I'm truly grateful." – Paid-up subscriber Rop Harbi

Regards,

 Steve Sjuggerud has called it "the best bet for high income in 2013."

Currently, two of Steve's favorite mortgage real estate investment trusts (REITs) – Annaly (NLY) and Hatteras (HTS) – are trading for more than 15% below book value.

We wrote extensively about Annaly in the November 9 Digest. And we shared with you the best time to buy mortgage REITs – when they're trading below book value. At the time, Annaly was trading at a 10% discount to book value.

 Today… they're even cheaper. Before we discuss the reasons for the selloff, let's review how mortgage REITs – or "virtual banks," as we call them – operate…

We call these businesses virtual banks because they make money the same way most banks do. The business model is simple... They borrow money at low interest rates (thanks to the Federal Reserve) and invest it in mortgages that pay at a higher interest rate. (In the case of Annaly and Hatteras… they buy 100%-government-guaranteed mortgages.) They then use leverage to amplify those returns.

 Virtual banks sold off for two reasons… 1) Investors were worried about higher dividend tax rates, and 2) Investors believed virtual banks would have to cut their high dividends.

We've said since November that these companies would definitely decrease their dividends. Annaly's income can only support a $0.30 quarterly dividend. The company paid a $0.45 dividend on December 26. The company is selling bonds to generate extra gains to make these payments.

Even at $0.30, Annaly's yield is near 10%. It's lower than the current dividend, but it’s still an excellent yield considering your alternatives today.

 And now we know what will happen with dividend taxes. The new tax deal establishes the dividend tax rate at 23.8%, up from 15%.

And guess what? With all that fear priced into the stocks… virtual banks rallied today… Annaly is up 1.5%, and Hatteras is up 2.3%.

 As you can see from the chart below, we haven't had an opportunity to buy Annaly at this large a discount to book value in more than a decade.

 Whenever the book value (the blue line on the chart above) falls below "1," shares rally (the black line).

Look what happened when the book value plunged in 2009... Shares rallied from $12.50 in March to nearly $20 in September. You would have made more than 60% in those seven months, including dividends.

Stansberry's Investment Advisory subscribers bought shares in November 2008, when they were trading for a little more than $13. They closed that position in June 2011 for an 81% gain – including more than $6 in dividends.

 You can buy Annaly or Hatteras today to collect safe, double-digit yields and make healthy capital gains. We don't know a place to find higher yields in 2013.