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Tuesday May 24, 2011

Looking Past the Numbers of MLPs Reveals Some Compelling Investments

To find the best income investments it's important to look beyond your computer screen--sometimes you just
have to go see for yourself. Which is why I jumped on an airplane flying from Oregon to Connecticut this
morning to attend the National Association of Publicly Traded Partnerships (NAPTP) Master Limited
Partnership (MLP) conference.

During this trip I’ll be meeting one-on-one with CEOs and CFOs from a number of companies, including
Boardwalk Pipeline Partners (BWP), Plains All American (PAA), Enterprise Products Partners (EPD), and
Linn Energy (LINE). And outside these official interviews there will be plenty of schmoozing with analysts
and fund managers which generally yields come surprisingly productive information. I'm looking forward to
sharing some of these insights with you and am confident the information will yield some great investments
for our growing portfolio.

The Strategy

 The broad market finally appears to be pulling back in a serious way. The realization has sunk in on
investors and politicians, that even if Greece had the growth of Brazil or China, it could not grow its way out
of its current debt predicament. As it stands, the country has such a tiny private sector, expectation of more
than 2% growth is wildly optimistic.

The Spanish elections, which thrashed the ruling Socialist party, have aggravated general concerns about
Europe. It appears, more and more, that Irish, Spanish, and Greek citizens are not willing to suffer austerity
programs and Germans and Finns are not willing to pay extra taxes, in order to keep bondholders (i.e. mostly
banks) from taking a haircut on sovereign debt.

We hope that the current decline will bring some of the stocks we really like down to attractive price levels.
However, after the spectacular run-up of the last 9 months, we should avoid getting trigger-happy. Markets
tend to overshoot in both directions, rewarding those who are patient.

Some Speculative Buys

There are a few speculative buys we’re watching right now in the MLP sector.

StoneMor Partners (STON)

One of the more peculiar MLPs, StoneMor Partners (STON), operates over 300 funeral homes and
cemeteries across the U.S. STON has been the darling of several of my fellow newsletter writers, who were
recommending it strongly at $30. Unfortunately for them (and their subscribers) it has gotten absolutely
hammered over the last few months, dropping nearly 30% since its January high.
I met with STON’s management two years ago and have never been 100% comfortable with their
accounting. State laws require them to set aside money in trust funds to provide pre-purchased
merchandise/plots and to maintain cemeteries for perpetuity. This makes revenue recognition and
determination of ―distributable cash‖ tricky. However, STON has consistently made accretive acquisitions
and has increased their distribution 3 quarters in a row. With the big price decline, it now sports a 9.5%

STON’s chart pattern is typical of a large holder dumping their holdings in an MLP. As you can see in the
chart of Monday’s trading, all the large down moves are made on big block sales, with these blocks
accounting for more than half the day’s volume The pattern has been similar for several weeks now. . The
declines have mostly occurred in the first 3 hours of trading.

I’m meeting with the CEO and CFO of STON on Thursday and hope to work through some of my concerns
with them. As an interesting aside, a Morgan Stanley analyst will also be attending the meeting. At the
moment, MS does not cover the company--but it looks like they are considering it.

I am not ready to add STON to our watch list before talking with management. However, if you have some
―risk trade‖ money you would like to put to work in the meantime, you may want to buy on any massive
drops, e.g. below $23.
Breitburn Energy Partners (BBEP)

BBEP is an upstream or ―exploration and production‖ (E&P) MLP. It owns oil and gas properties primarily
in Michigan, California, Wyoming, and Florida. Unlike conventional E&P companies, upstream MLPs
hedge nearly all of their production for as much as 5 years in the future. Breitburn has hedged its 2011-2015
production at 84%, 76%, 72%, 39%, and 23%. Hedging enables MLPs like BBEP to assure a steady income
stream, from which they can pay regular distributions. BBEP currently yields 8%.

Like STON, BBEP has been hammered down by ongoing sales from several large holders. The Baupost
Group hedge fund and Quicksilver have both been big sellers and apparently continue to be. I’ve met several
times with BBEP management in the past 3 years and will meet with them again this week. I will be paying
careful attention to the tenor of questions from certain hedge funds in the public presentations--that can tell
us a lot about what they are thinking and where they plan on deploying new money in addition to painting
the overall backdrop for these kind of investments right now.

Once again, sometimes there is no substitute for being there. I'll share a complete report in our next

Watch List
   Company            Symbols     Exchange Buy Below Price             Target      Yield        Upside
   Expressway         0995.HK     HK          6.4          6.45        8           2.70%        26.70%

   Pipeline           BWP         NYSE        30           29.55       36          7.00%        28.80%

   Chorus Aviation CHR-A.TO TSE               5            5.17        6           11.60%       27.70%
   Duet Group         DUE.AX      ASX         1.65         1.71        1.9         11.70%       22.80%
   Hopewell Hwy       0737.HK     HK          5            4.96        6           6.50%        27.40%

   LeisureWorld       LW.TO       TSE         10.67        10.6        12          8.00%        21.20%
   Philippines Long
   Telephone        PHI           NYSE        48.26        55.52       56.31       6.80%        8.30%
   P.T. Telekom       TLK         NSYE        33.5         34.75       41.92       3.10%        23.70%
   SingTel            SGAPY.PK U.S. OTC       23.23        25          28.03       5.40%        17.50%
                      SGT.AX      ASX
                      Z77.SI      Singapore
   Telesp             TSP         NYSE        23.81        27.18       28.08       7.70%        11.00%
                      TLPP4.SA    Brazil
   Zhejiang Expy      0576.HK     HK          6.85         6.11        8.5         5.10%        44.20%
                    ZHEXY.PK OTC
                    ZHEXF.PK OTC

Portfolio Update

P.T. Telkom (TLK) and SingTel (SGAPY.PK)

TLK and SGAPY.PK are working on a deal for TLK to buy back SGAPY’s 35% stake in its mobile unit.
Until the terms are declared, it is not clear which company will benefit more.

Tracking Portfolio
   Company          Symbols     Add Date Add Price Price       Dividends Gain        Return
   Anhui                        3/25/2011
   Expressway       0995.HK               6.27     6.45                              2.90%
   Pipeline         BWP         5/11/2011 29.63     29.55                            -0.30%

   Chorus Aviation CHR-A.TO                 4.98    5.17       0.15       4.00%      10.90%
   Duet Group       DUE.AX      2/15/2011 1.7       1.71                  2.60%      3.20%
   Highway          0737.HK     5/9/2011 4.98       4.96                             -0.40%

   LeisureWorld     LW.TO       2/15/2011 10.85     10.6       0.212      4.00%      3.70%
   Philippines Long             3/1/2011
   Telephone        PHI                     48.5    55.52      2.48                  19.60%
   P.T. Telekom     TLK         3/4/2011 33.06      34.75                            5.10%
   SingTel          SGAPY.PK 2/22/2011 22.4         25                               11.60%
   Telesp           TSP         3/21/2011 23.24     27.18                            17.00%
   Zhejiang Expy    0576.HK     3/16/2011 6.8       6.11       0.211                 -7.00%
   Cash Flow Magnet Portfolio                                                        6.00%

To more income than you'll ever need,

Tuesday May 17, 2011

How Careful Research--and a bit of Patience--Makes You Money

Detailed research is time consuming--but it pays off. Here's a great example--two months ago, we wrote the
following about one of the stocks in the newsletter portfolio:

         [it] has a very conservative balance sheet with debt/equity under 20% and debt/EBITDA under 0.8.
         Management has expressed that this is sub-optimal gearing. For this reason, [it]is very likely to
         issue a special dividend or increase the regular dividend payment sometime this year.

This is where really taking the time to dig turns up the gems--the company referenced above just announced
a huge special dividend, more than doubling its regular dividend--so if you own it right now--

In depth research is a lot more trouble than just reviewing a balance sheet but when you are buying these
companies for the long term it's an absolute necessity.

The Strategy

Right now we are seeing a major liquidation in the MLP sector which may continue for some time. As I’ve
noted before, hedge funds employed carry-trades and extensive leverage in the MLP sector, which drove
valuations to very high levels--and now it is all unwinding. The MLP runup was so massive, it may take a
while--which is where a dab of patience will really pay off.

The current turnaround has only taken us back to the levels of January--but we can expect to see many more
liquidations in the weeks ahead. Some individual MLPs down 5% or more in a single day as margin calls
drive leveraged traders into forced liquidations. The overall sector could easily plunge another 10-20%. The
key is patience. In previous downturns, MLPs have dropped so that yields were as much as 4 or 5 full
percentage points above the historical spread to Treasury yields setting us up for a very attractive buying

So we're not buying anything this week--but look at it this way--you'll be getting paid to wait.

Watch List
       Company    Symbols       Exchange Buy Below Price             Target      Yield       Upside
       Expressway 0995.HK       HK          6.4          6.27        8           2.80%       30.40%

       Pipeline     BWP         NYSE        30           28.5        36          7.30%       33.30%

       Aviation     CHR-A.TO TSE            5            5.02        6           12.00%      31.50%
       Duet Group DUE.AX        ASX         1.65         1.71        1.9         11.70%      22.80%
      Hwy           0737.HK     HK          5           4.95        6           6.50%       27.70%

      LeisureWorld LW.TO        TSE         10.67       10.4        12          8.20%       23.60%
      Telephone     PHI         NYSE        48.56       55.4        56.65       6.90%       9.10%
      P.T. Telekom TLK          NSYE        33.5        35.65       41.98       3.00%       20.80%
                    TLKM.JK     Jakarta     7350        7700        9000
      SingTel       SGAPY.PK U.S. OTC       23.2        25.45       28          5.50%       15.50%
      Telesp        TSP         NYSE        23.84       26.21       28.12       8.00%       15.30%
      Expy          0576.HK     HK          6.85        6.02        8.5         5.10%       46.30%
                    ZHEXY.PK OTC
                    ZHEXF.PK OTC

Portfolio Update

SingTel (SGAPY)

SingTel reported earnings for the first quarter. SingTel’s domestic business and its Australian business did
very well, growing around 7%. The associates (the regional Telcos that it owns major stakes in, such as
Bharti Airtel) were a significant drag. The income from these associates dropped by 11%. Much of that
decline was due to exchange rate differences, with the Indian Rupee dropping 6% against the Singapore

It is important to view the associates’ revenue drop in context. These companies are investing heavily in
ramping up and have barely begun to see the vast Mobile Internet market. Bharti Airtel in India, for
example, is just now rolling out 3G infrastructure. As we’ve discussed before, the potential for Mobile data
use in countries like India is spectacular. Overall, the associates’ mobile customers number nearly twice the
number of mobile phone customers in the U.S. and a whopping 37% more than a year ago. The upside
potential remains enormous.

In the meantime, Singtel’s cash flow and cash position has done so well, that they have declared a massive
0.10 SGD special dividend on top of the regular 0.09 SGD dividend. This brings the stock’s yield over 8%.

LeisureWorld (LW.TO)

LW announced earnings for Q1. They were generally in line with expectations, with Net Operating income
increasing 3.7% and the more key measure of Adjusted Funds From Operations (AFFO) increasing 15%
YOY. The dividend payout ratio stands at 82%, which is relatively conservative for this business. LW
continues to be attractive at the current price level.

Boardwalk Pipeline Partners (BWP)

BWP continued its decline after we added it to the portfolio. As you can see in the chart below, BWP has
been trading at 3 to 4 times the normal volume since the beginning of May. Generally speaking, the higher
the volume on any given day, the bigger the decline. Looking at the intra-day charts, we see downspikes on
huge block trades. For example, on May 4, an entire normal day’s volume traded in 5 minutes, with the price
dropping nearly 3%. This has all the marks of one (or possibly a few) very large holders getting out as
quickly as they can.

Although we anticipate the MLP sector could decline much further, we feel comfortable with our stake in
BWP. Here’s why:

        BWP never had as big a run-up as the rest of the sector. It is exactly where it was one year ago
         (despite 3 distribution increases in the meantime). By contrast, the broader MLP sector is still 20%
         higher than it was a year ago.
        Out of the large-cap MLPs, it has the least commodity price exposure (virtually none). This is part
         of the reason it never went up as much as the others. BWP gets the same revenue regardless of
         where the price of oil is.
        BWP has one of the most stable, recession-proof businesses in the sector, with a very high
         percentage of firm capacity agreements. With these agreements, it gets paid even if the shipping
         volume is reduced.
        BWP has predominantly interstate pipelines, which are FERC-regulated, and therefore get rate
         increases based on the Purchaser Price Index (PPI). Whatever the Fed says about ―core inflation,‖
         the PPI has been going up fast.

Duet (DUE.AX)
As we’ve described before, Duet owns major stakes in a variety of utility/infrastructure companies. The
Canadian utilities company, Atco, is negotiating to buy the remaining stakes in several of these companies
currently owned by AET&D: the DBP pipeline, Multinet, and WA Gas Networks. This could be a
tremendous positive development for Duet. It is anticipated that Duet may exchange stakes in one or all of
these companies so that it has complete ownership of the companies it retains. This simplification would
greatly increase Duet’s overall value.

Hopewell Highway (0737.HK) and Zhejiang Expressway

We see the decline in the tollroads as a reflection of the decline in the overall Chinese market rather than any
problems with their specific businesses. The Shanghai index is off nearly 7% in the last few weeks. The
tollroads generate excellent income and dividends, so movements of the broader Chinese market don’t need
to concern us that much other than providing a more attractive entry point for new money.

Tracking Portfolio
     Company         Symbols     Add Date Add Price Price             Dividends Gain           Return
     Anhui                       3/25/2011
     Expressway      0995.HK               6.27     6.27                                       0.00%

     Pipeline        BWP         5/11/2011 29.63          28.48                                -3.90%

     Chorus                      2/15/2011
     Aviation        CHR-A.TO                4.98         5.02        0.15        4.30%        8.10%
     Duet Group      DUE.AX      2/15/2011 1.7            1.71                    2.70%        3.20%
     Highway         0737.HK     5/9/2011 4.98            4.95                                 -0.60%

     LeisureWorld LW.TO          2/15/2011 10.85          10.4        0.212       4.30%        2.10%
     Philippines                 3/1/2011
     Long Distance
     Telephone     PHI                       48.5         55.47       2.48                     19.50%
     P.T. Telekom TLK            3/4/2011 33.06           35.71                                8.00%
     SingTel         SGAPY.PK 2/22/2011 22.4              25.45                                13.60%
     Telesp          TSP         3/21/2011 23.24          26.24                                12.90%
     Zhejiang Expy 0576.HK       3/16/2011 6.8            6.02        0.211                    -8.40%
                                                                 Cash Flow Magnet Portfolio 5.00%

To more income than you'll ever need,


Tuesday May 10, 2011

Watching MLPs

Fear of tax changes buffeted the MLP sector last week. Combined with ex-dividend dates and a 10% drop in
oil prices, that fear helped drive the entire sector much lower. The Alerian MLP index (^AMZ) dropped
nearly 7% in less than 5 trading days. Some individual MLPs dropped 10% or more.

I counted no less than five brokerages issuing statements that fears of adverse tax changes were greatly
overblown. This helped the sector stage a modest recovery, with the decline being shorter and more shallow
than we were hoping.

The prices of some MLPs have come tantalizingly close to attractive levels. However, it is important to
maintain an extremely disciplined approach to buying. This is the case with any stock, but it is particularly
so with MLPs. Here’s why...

One attractive feature of MLPs is that their distributions are mostly counted as return of capital and are tax-
deferred. The flip-side of this is that the distributions lower your cost basis, so that when you sell, your
taxable gain (sales price minus adjusted basis) is increased by the untaxed amount you received.
To maximize the MLP tax advantages, you want to avoid trading in and out of MLPs. In fact, the best
strategy is to hold the MLPs you choose for your entire life and pass them on to your heirs. When you pass
them on, the cost basis to the market price is reset to the current market price, which helps avoid much of the
tax burden.

So why is MLP ownership like marriage?

You want to carefully choose the very best and maintain the relationship for the rest of your life. If you do
this, it can be fabulously rewarding.

If you are not familiar with MLPs, it’s worth taking a quick look at information provided by the National
Association of Publicly Traded Partnerships ( Some particularly useful (but brief) documents are:

The Strategy

MLPs undergo seasonal weakness in May-June and October. We want to keep a very close watch on the
sector and look for a few of the more attractive names to drop under our ―Buy Below‖ prices.

The Producer Price Index (PPI) is released on Thursday this week and the Consumer Price Index (CPI) on
Friday. Market expectations for both these inflation numbers are relatively low. An upside surprise for either
number could send bonds and other income investments (like MLPs) lower. This might provide a convenient
entry point into the MLP sector.

This Month’s Charity: Injured Marine Semper Fi Fund

A few years ago I discovered that the veterans’ organization I was donating to spent 40% of their budget on
fundraising and administration; only $0.60 of each dollar was going to the veterans. What a waste and a

That discovery inspired me to search methodically for the best, most efficient charity that helps injured U.S.
soldiers and their families. The top pick was the Injured Marine Semper Fi Fund. The Semper Fi fund was
founded by a military wife and still draws much of its staffing from military families. They run a bare-bones
operation on the bases at Camp Pendleton and Quantico, with 96% of their revenue going directly to the
soldiers and families who need help. Marine officers know they can count on the Semper Fi Fund to get
immediate help for Marines when they are injured. On a moment’s notice, Semper Fi Fund arranges direct
assistance, as well as wheelchairs, adaptive housing and other accommodations for injured soldiers and their

I like this charity so much that I am making a donation that exceeds all my Cashflow Magnet profits to date.

For those who would like to do some of their own research on the best charities, I recommend as a starting point. Also look for the IRS form 990 on the charity website. Pay particular
attention to Part VII, which lists compensation of officers.

Top MLP Picks
In choosing the best MLPs, we like to focus on the following factors:

                Distribution Yield
                Type of business: MLPs engage in a variety of businesses with different degrees
                 of risk. Fee-based, interstate products pipelines tend to be the most stable,
                 followed by storage, and intrastate transportation. For riskier businesses,
                 particularly those with commodity price exposure (such as natural gas
                 processing), we require a higher yield.
                Price to Distributable Cash Flow Ratio: how much we’re paying for each dollar of
                 distributable cash
                Distribution Coverage: how much of distributable cash the company has in relation
                 to what it pays out
                Compounded Annual Growth Rate (CAGR): how fast the company is growing

Based on these factors, we have a ―top four‖ list of MLPs:

 MLP                     Symbol       Yield         Price/DCF     Distr.       CAGR
 Boardwalk Partners      BWP          7.0%          13.24         1.09         4%
 Kinder Morgan           KMR          7.1%          13.17         1.07         4%
 Energy Transfer Ptnr    ETP          7.1%          13.61         1.04         3.5%
 Enterprise Products     EPD          5.7%          14.22         1.23         5%

Note: We include the Kinder Morgan i-shares (KMR) on this list instead of KMP. The only real difference
between KMP and KMR is that KMR pays distributions in the form of additional shares rather than cash –
it’s a sort of automatic dividend re-investment arrangement. KMR currently trades at an unbelievable $10
discount to KMP.

Management has repeatedly stated that KMR should trade close to the same price as KMP. And they’re
putting their money where their mouths are too. Insiders have overwhelmingly favored KMR over KMP for
their own purchases. There is no reason to buy KMP when KMR shares are available at such a large
discount. This is discussed in more detail here. KMR, unlike many MLPs, is okay to own in an IRA, too.


We particularly like BWP because it has one of the most stable businesses in the MLP sector. Other large-
cap MLPs such as Oneok Partners and Kinder Morgan Partners have a mix of businesses, some fee-based
and some with commodity price and volumetric risk. BWP is a pure-play on fee-based long-haul pipelines
and storage. In fact, 75% of BWP’s pipeline revenue is based on firm capacity reservations—they get paid a
set amount regardless of how much gas is actually shipped! BWP’s long-haul pipelines also benefit from PPI
inflation adjustments allowed by FERC. When inflation goes up, BWP gets to charge more. MLPs with
short-haul and gathering pipelines don’t enjoy this benefit.

BWP has been a laggard compared to the rest of the sector, rising only 6.7% YOY, versus 26% for the sector
as a whole. This is largely because investors have flocked to the riskier names in the sector—companies with
gathering and processing and commodity exposure. In the long run, we expect BWP, with its stable and
steady growth to outperform these companies on a risk-adjusted basis.
We are adding the BWP our regular watch list with a ―Buy Below‖ price of $30.

 Boardwalk Pipeline Partners Quick View
 Tickers                  BWP (NYSE)
 Price                    30.07
 Buy Below:               30 USD
 Market Cap               5.79 Billion
 EV/EBITDA                13.9
 Price/Book               1.8
 Yield                    7% (paid quarterly)
 Dividend Coverage        109%
 Thesis                   BWP is an MLP engaging primarily in
                          long-haul interstate transportation and
                          storage of natural gas. BWP has one of
                          the most stable businesses in the MLP
                          sector, with three-quarters of its
                          contracts being firm capacity

Watch List

We are removing AES Tiete ordinary and preferred (AESAY.PK, AESYY.PK) shares from the watch list.
Although we really like this company, it has run too far above our ―buy below‖ price to keep it on the list.
We are removing the Thai Telco Advanced Info Services for the same reason.

Company       Symbols    Exchange Buy Below Price        Target Yield     Upside

Expressway 0995.HK       HK          6.4         6.49    8       2.70%    26.00%

Pipeline      BWP        NYSE        30          30.07 36        7.00%    26.70%
Aviation      CHR-A.TO TSE           5          5.1     6       11.80% 29.40%

Duet Group DUE.AX        ASX         1.65       1.69    1.9     11.80% 24.30%
              DUETF.PK U.S. OTC
Hwy           0737.HK    HK          5          4.98    6       6.4      26.90%

LeisureWorld LW.TO       TSE         10.67      10.5    12      8.10%    22.40%
Telephone     PHI        NYSE        48.88      57.65 57.02 6.60%        5.50%
              TEL:PM     PSE

P.T. Telekom TLK         NSYE        33.5       35.54 42.08 3.00%        21.40%
              TLKM.JK    Jakarta
SingTel       SGAPY.PK U.S. OTC      23.51      25.47 28.37 5.60%        17.00%
              SGT.AX     ASX
              Z77.SI     Singapore
Telesp        TSP        NYSE        24.28      26.53 28.64 7.90%        15.80%
              TLPP4.SA Brazil
Expy          0576.HK    HK          6.85       6.25    8.5     5.00%    41.00%
              ZHEXY.PK OTC
              ZHEXF.PK OTC

Portfolio Update

LeisureWorld (LW.TO)

LeisureWorld (LW.TO) announces Q1 results after the close today. We think this stock is still a bargain. It
pays one of the most solid, recession-proof 8% dividends around and offers appealing growth prospects,
both from acquisitions and an aging population. The company is gradually getting recognition from
brokerage research departments. TD Newcrest recently rated it as a Buy and Scotia raised its price target
0.25 to $11.25. Collecting those nice monthly dividends makes it easier to wait for the share price to rise.

Chorus (CHR-A.TO)

Paradigm initiated coverage on Chorus with a Buy rating. Chorus’ share price has floundered over the last
few weeks. Discussions with the company reveal no causes for this weakness. Chorus continues to offer a
whopping double-digit yield that is well-covered by cash flow.

Hopewell Highway (0737.HK)
We added Hopewell Highway to our portfolio on 5/9/11 when it dropped to 4.98 HKD. At this price level, it
sports a yield of nearly 6.5%, which is very high for any Chinese stock, and particularly for one with such a
stable income stream. We continue to see Chinese tollroad stocks as an excellent vehicle to pocket secure
dividends while waiting for Chinese Yuan appreciation. The Chinese Yuan is one of the best currencies to
bet on dollar weakness, with virtually no downside risk.

Tracking Portfolio
                                                 Add                                     Currency
Company                              Symbols     Date       Add Price Price    Dividends Gain     Return
Hopewell Highway                     0737.HK     5/9/2011 4.98         4.98                         0.00%

Anhui Expressway                     0995.HK     3/25/2011 6.27        6.49                         3.50%

Chorus Aviation                      CHR-A.TO 2/15/2011 4.98           5.1     0.15       6.80%     12.20%
Duet Group                           DUE.AX      2/15/2011 1.7         1.69               4.40%     3.80%
LeisureWorld                         LW.TO       2/15/2011 10.85       10.5    0.212      6.80%     5.60%
Philippines Long Distance Telephone PHI          3/1/2011 48.5         57.65 2.48                   24.00%
P.T. Telekom                         TLK         3/4/2011 33.06        35.54                        7.50%
SingTel                              SGAPY.PK 2/22/2011 22.4           25.47                        13.70%
Telesp                               TSP         3/21/2011 23.24       26.53                        14.20%
Zhejiang Expy                        0576.HK     3/16/2011 6.8         6.25    0.211                -5.00%
Cash Flow Magnet Portfolio                                                                          8.80%

To more income than you'll ever need,


Tuesday May 3, 2011

“The value of a man resides in what he gives and not in what he is capable of
receiving.”--Albert Einstein 1879-1955

Many of us have enjoyed great investment success over the last two years with the SP-500 running up over
100% since bottoming in the spring of '09. Seeing our portfolios come roaring back from the depths of the
financial crisis reminds us how transient wealth is. We feel a strong urge to ―lock in‖ some of the big gains
we’ve enjoyed. Here's a compelling thought that might take a moment to fully appreciate--there is no better
way to truly ―lock in‖ gains than to give them to charity.

For this reason, I’ve decided to donate cash and stock equivalent of 100% of my profits from this newsletter
to charities. Of course, the publisher of this newsletter needs to cover billing and administrative staff and
business margins--but my whole share will go to charity.

As you might expect, the fanatical research efforts I apply to finding the best stocks will also go to
identifying the best charities. I spend a lot of time researching and reading charity IRS forms, carefully
weeding out those that spend too much on overhead or overpay their leadership. So each month when
contributions are made, I’ll include a brief note on to whom I’m giving to and why. I hope you are able to
leverage this research on charities as much as you do our research on investments--and to at least as great of

                 “The value of a man resides in what he gives and not in what he is capable of receiving.”
                                                Albert Einstein 1879-1955

The Strategy

Contrary to what the general media may tell you stock valuations and U.S. market sentiment are at extremely
high levels. Small-cap indexes persist near record highs and leveraged-long fund speculators outnumber
short-fund speculators by the highest ratio ever. Despite continuing high valuations, there are two areas
where we see potential opportunities over the next few months: Master Limited Partnerships (MLPs) and
Brazilian utilities.

The Treasury Dept. is working on a proposal that could profoundly affect the taxation of MLPs:

Ultimately, we do not expect the taxation of MLPs to change. They play too vital a role in the nation’s
energy infrastructure for Congress to risk tampering with. In the meantime however, the mere talk of
legislation will spook many investors and drive MLP prices down. This, combined with seasonal weakness
in the sector (which typically occurs in June and October), may finally generate some good opportunities for
us. I will be attending the MLP sector (NAPTP) conference later this month to catch up with MLP insiders
and analysts. This should help firm up our list of potential candidates. Expect a full report from this
conference toward the end of the month.

While U.S. stocks, particularly small-caps, have soared over the last 9 months, some fast-growing emerging
markets have been left by the wayside--particularly Brazil. Despite Brazil’s wildly booming economy, the
stocks representing that economy have essentially gone nowhere over the last year. And that is the kind of
undervalued scenario we look for. The chart below does a good job of representing this divergeance--
especially since the beginning of this year:
We’ve done very well with a Brazilian wireless carrier, which is now up over 15% since we added it to our
portfolio. There are other potential opportunities in Brazil as well--companies that produce necessities like
water service and hydropower. Some of these companies offer not only high yields, but also excellent
growth rates. I've assembled a list of some of the best companies and as they get closer to attractive price
levels, we will profile the most promising.

Watch List
Company                 Symbols      Exchange Below              Price           Target         Yield       Upside
Advanced Info Services AVIFY.PK      U.S. OTC              2.7            3.08        3.33          8.70%     17.00%
                        ADVANC:TB THAI
Anhui Expressway        0995.HK      HK                    6.4            6.42             8        2.70%     27.30%

AES Tiete               AESAY.PK U.S. OTC               12.58              14        14.46          8.90%     12.20%
                        GETI3.SA     Brazil
AES Tiete Pref.         AESYY.PK U.S. OTC               13.83            16.47       15.72          8.80%      4.20%
                        GETI4.SA     Brazil
Chorus Aviation         CHR-A.TO     TSE                    5              5.2             6       11.50%     26.90%
                        CHRVF.PK U.S. OTC
Duet Group              DUE.AX       ASX                 1.65             1.71            1.9      11.70%     23.20%
                        DUETF.PK U.S. OTC
Hopewell Hwy            0737.HK      HK                     5             5.17             6        6.20%     15.00%

LeisureWorld            LW.TO        TSE                10.67            10.59            12        8.00%     21.30%
Philippines Long
Distance Telephone      PHI          NYSE               49.01            56.99       57.18          6.70%      7.00%
                        TEL:PM       PSE
P.T. Telekom            TLK          NSYE                33.5            35.87       42.13          3.00%     20.50%
                        TLKM.JK      Jakarta
SingTel                 SGAPY.PK U.S. OTC               23.65            25.58       28.55          5.60%     17.20%
                        SGT.AX       ASX
                         Z77.SI      Singapore
Telesp                   TSP         NYSE              24.52        26.83          28.93         7.80%      15.60%
                         TLPP4.SA    Brazil
Zhejiang Expy            0576.HK     HK                 6.85            6.37           8.5       4.90%      38.30%
                         ZHEXY.PK OTC
                         ZHEXF.PK OTC

Portfolio Update

LeisureWorld (LW.TO) was ex-dividend on April 27, with a payment of .0708 CAD. One neat thing about
owning Canadian and Australian income stocks is that the weak dollar not only means a higher stock value
in US$, it also means higher dividends. When we added LeisureWorld , the annual payout was U.S.
$0.86/share. It is now $0.90/share. Duet’s payout has gone from $0.20/share to $0.22 share.

PT Telekom (TLK) reported first quarter earnings with revenue rising 1.3% quarter over quarter. The
wireless unit (TLKMsel) added a hefty 5 million subscribers during the quarter. While the revenue and
margin increases were not spectacular, adding that many subscribers is quite excellent. As these new
subscribers and existing subscriber base increasingly use the mobile Internet, we’ll see revenues and margins

Tracking Portfolio
Company            Symbols Add Date            Add Price        Price Dividends Gain     Return
Anhui Expressway 0995.HK                                6.27     6.41                              2.20%

Chorus Aviation    CHR-A.TO                             4.98      5.2           0.15         7.70% 15.10%
Duet Group         DUE.AX                                 1.7 1.705                          5.40% 5.70%
                                   2/15/2011           10.85
LeisureWorld       LW.TO                                        10.59          0.212         7.70% 7.30%
Philippines Long                   3/1/2011
                   PHI                                  48.5 56.99              2.48              22.60%
Telephone          TEL:PM
P.T. Telekom       TLK                                 33.06 35.87                                 8.50%
SingTel            SGAPY.PK                             22.4 25.58                                14.20%
Telesp             TSP                                 23.24 26.83                                15.40%
Zhejiang Expy      0576.HK                                6.8    6.37          0.211               -3.20%
                                                           Cash Flow Magnet Portfolio 9.80%
To more income than you'll ever need,


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