Issue #20

Dear Subscriber,

Our Latin American dividend-paying stocks posted a great month, especially the utilities. During the last month the U.S. stock prices fell 7%. In contrast, the LSI Dividend portfolio gained 8.4% to end at $154,052. It seems no matter what the world economic outlook, people still need water, electricity, food and housing.

The uncertainty in the U.S. and European economies and the massive surge in supply of dollars are affecting Latin American financial markets in some unexpected ways.

The sentiment among many Brazilians is that their central bank has bought too many U.S. dollars. Brazil has $255 billion in foreign currency reserves at mid-year. The government has long been investing in U.S. dollars to keep its own currency, the real, from appreciating too rapidly.

The large Brazilian banks saw an advantage in this and have taken huge short positions in the U.S. dollar, leading to even more uncertainty among investors.

Brazil’s policy of limiting gains in the real is also preventing the government from taking advantage of the cheapest international borrowing costs in 16 months.

The Brazilian government has held only one international issue this year, raising $788 million in April. The bond yields 4.6 percent, less than the local real-denominated debt – a huge potential interest savings of over 800 basis points if they want to issue more debt.

But the key point here is that Brazil does not need more U.S. dollars. With an investment grade rating and only $60 billion of debt outstanding, the country is in a better position today than it’s ever been.

With over 200 million people, the demand for housing will fuel the Brazilian economy for the next few years. Add on investments in major infrastructure projects, worth $450 billion between 2011 and 2014, and you have a recipe for strong inflation. In fact, the government is trying to cool off its own China-like growth. The 1Q 2010 GDP showed the strongest economic growth and investment in 15 years.

The Brazilian central bank is widely expected to raise its benchmark rate to 11-percent soon, with an eventual rise to 12 percent this summer.

Could the Brazilian economy cool too quickly? What if the U.S., Europe and other industrialized nations also cut back spending abroad. We’ll be watching closely to see how Brazil, and other economies throughout Latin America, react to what could be another recession in the United States.

In the meantime, the Chinese are buying up natural resources companies and investing in the growth of Latin America.

In May, China agreed to pay $1.7 billion for a Brazilian transmission firm.

Where do you find value now as an investor? This month I will be looking to add industrials and other stocks that have lagged the recent recovery.

So go ahead and act now on the new investment ideas in this newsletter.

Best wishes and happy trading!

+ Rudy