Dear Subscriber,

Welcome to the $10K Monthly Investment Income 2020 Club—The MOST Exclusive Club On The Internet For Income Investors!
 
As promised, we are splitting our $10k-a-Month Investment Income portfolio from our Transformity Investing PRO newsletter service into a new stand-alone high yield investing service. The reason is obvious; they are really two different services. We want to go deeper with more recommendations in both high growth and high-income research and because, as I mentioned previously, our 2020 plan is to join a larger investment newsletter publisher so we can just focus on our macro and microeconomic analysis and forecasting and leave the marketing, editing and customer service to them.

You will continue to get this service at no cost till your renewal date (a majority of our subscribers renew is 2020.) At your renewal, you can choose to continue this separate high-income advisory service or just renew your Transformity Investing PRO service alone.

The Big Idea: I Can Get >$10,000 a Month in Income from Just a $750,000 Portfolio IF I Apply the Transformity Investing Principle to High Yield.  

The impetus for our new $10K Monthly Investment Income Club advisory service came from my twin brother Brian who decided to go all-in early retirement this year (I tried early retirement—I failed miserably). One day after golf he said, “Tobe—all I really need is $10k a month in investment income and I’m done—can you help me get there and KEEP my income portfolio healthy through the next recession and bear market?"
 
I said “Sure—our Transformity Investing PRO high-income portfolio has delivered 16%+ annual monthly and quarterly yields and about 21% equity appreciation annually since we broke it out into a separate portfolio 5 years ago. At those rates, you can generate $10,000 a month in dividend/distribution income on just $750,000 of capital—and grow the value of that portfolio much faster than the US inflation rate, too.”
 
Then I talked with a number of my long-time ChangeWave and Transformity PRO subscribers via e-mail. I shared our basic idea and they came back and said: “love the idea, but could you also add XYZ?"  Here is our list of how we can make this service the ULTIMATE high income investing advisory service in the world.

We will also soon offer a REALLY hands-on Transformity Inner Circle upgrade to both Transformity Investor PRO and $10k-a-Month Investment Income Club subscribers shortly, too. Look for our Transformity Investing Inner Circle program coming soon--it will blow you away! 
 
Here the $10k-a-Month Income Investor Deal

1) Brian and I will run our own money in these model portfolios—real money. We are $7-figures all in and at-risk right along with our members--that means commitment!

2) We will run two model portfolios:

• The $10K Monthly Investment Income Builder Portfolio is for those of you who are still building enough capital to get to $10,000 per month (or more!) in investment income. This portfolio will reinvest 100% of its dividends in each position—the idea is to dollar-cost-average your dividend-paying positions to double your portfolio value and income every 4-5 years until you are earning $10,000 per month (or more!) 

• We will also judiciously use up to 25% margin leverage to take advantage of special situations or 20% market flash crashes (like Dec 14-24 2018) that come every one or two years in bull and bear markets

• We will use up to 5% of the income to maintain an out-of-the-money hedge position on the S&P 500 Index and the TLT 20+ Year Treasury Bond when appropriate (basically when positions reach >75 RSI overbought levels)

• The $10k+ Monthly Paycheck Portfolio is our income-paying portfolio without reinvestment. We will use the PFFA ETF to maintain a 5% cash reserve We will build the basic portfolio from lowest risk/lowest return (10%-12%) to highest risk secured payout turnaround securities (20%-40% upside plus 15-20% income) to deliver a real 15-16% cash-on-cash yield on $800,000 of capital. We will also use up to 25% leverage to take advantage of special situations and flash crashes. 5-10% of income will be invested in stock market and interest rate hedges when appropriate

3) This is a collaborative analyst/member/sponsor venture. Our members are not just subscribers—they are crowdsourcing participants too in the discovery research, due diligence and on-going research on all our portfolio investments. In a few weeks we will have an online community on Slack.com where members can:

1. Participate in new investment ideas and discovery

2. Ask questions of our Transformity Research analyst team

3. Participate in Q&A forums with managers/CEOs of our portfolio investments in “Why Should We Own This?” pitch on prospective investments

4) Syndicated Independent Research. We will subscribe to the best aid high-income research in the world. As an old hedge fund and mutual fund manager, I have been doing this long enough to have every major sell-side research in my email box every morning. But there is some great high-income research that is subscription only—and we will pay for those subscriptions out of membership fees. Some of these research products are $1,000+ a year—no worries.

Your benefit? You will get the advantage of NOT paying $25,000 a year in high-end bespoke income investment research.
 
5) We will participate in the Orlando and Las Vegas Money Shows. I have participated in those shows for 25 years—it’s great to meet our members in person!
 
6) Transformity Family Office. If you get to the point that you want us to manage a separate account for you and do all the work for you, we will have the Transformity Family Office up and running mid- 2020. We use the Interactive Brokers Managed Account platform. Management fees are discounted for >$1 million accounts.

Our 2019 $10k a Month Investment Income Portfolio Results—Amazing!
 
I will be the first to say that you and I should NOT expect to get our 2019 income and appreciation results every year—ok? The December 15-28 meltdown in 2018 in both equity and income securities gave us an amazing opportunity to buy our favorite high-income ETFs and ETNs ( and high secular growth stocks too) at literally insane 30%+ discounts to their actual values.
 
That all said, our 2019 results speak for themselves!

 
New Portfolio Recommendation: BKEPP Preferred LP offers a 13.8% yield with 1.5X coverage and 20% Upside Buy under $5.50 

To say the last couple of years have not been kind to Blueknight Energy Partners L.P. (BKEP) and Blueknight Energy Partners L.P. Preferred (BKEPP) could be the understatement of the decade. Everything bad that could happen to BKEP happened. Margins fell at its Cushing oil storage facilities as oil moved into backwardation where it no longer paid traders to store oil to sell later at higher prices. This forced a reduction in the quarterly common dividend from 14.5 cents to 4 cents. Then their big planned Cimarron Express pipeline project was aborted at a cost of $12 million as the expected production growth in the STACK fracking regions failed to materialize and former pipeline partner Alta Mesa Resources (AMR) lurched towards bankruptcy.

Then general shareholder grief was compounded further when BKEP General Partner Ergon launched a lowball takeover offer that was withdrawn following shareholder outcry. Meanwhile, the midstream sector, in general, has become an equity value killing field. There are irrational fears that U.S. oil production will drop 25%+. While Elizabeth Warren, Bernie Sanders, and other leading Democratic U.S. Presidential candidates are clearly enemies of the oil and natural gas sector, they are NOT going to be elected if they maintain their "I will outlaw hydrocarbon fracking my first day in office" because they know that economic insanity would take oil prices to $5 a gallon and cut US GDP by 15% or more which would throw the US economy into a deep recession. 

What these economic terrorists don't appear to understand is that in 2020, the macroeconomic impact of a 25% rise in the price of gasoline pales in comparison to a 30% drop in the energy extraction and refining industry. The Trump 2020 campaign would spend hundreds of $millions in adds showing voters what Energy Armageddon would do to the American economy and win by a landslide. 

With such rampant economic insanity being peddled, it is no wonder that the $6.50 par value BKEPP cumulative preferred stock now trades at just $5.39 with a hefty 13.6% yield ( BKEPP in a limited partnership so it will generate a K-1 FYI). 

Yets Q3 earnings Rocked--But No One Follows the Preferred!

Despite all this doom and gloom negativity, BKEP delivered surprisingly solid Q3 results. Q3 EBITDA was $18.0 million vs. $14.5 million in the prior year. This was especially impressive as these improved results were achieved without 3 asphalt terminals that had been sold to help finance the Cimarron Express pipeline fiasco. 

1.2X common stock dividend coverage

BKEP is now more than fully covering its reduced dividend as noted by CEO Mark Hurley on the Q3 earnings conference call:

"Distribution coverage for the third quarter was 1.43 times and for the first nine months of the year above 1.2 times, these values compared to 0.92 times in the third quarter of 2018 and 0.88 times for the first nine months of 2018."

1.5X Preferred stock dividend coverage

The 4 cents quarterly dividend on 40.8 million shares of BKEP amounts to $6.5 million annually. The 17.88 cent quarterly dividend on 35.1 million shares of BKEPP amounts to $25.1 million annually. Therefore, the company's projection of 1.2X dividend coverage (including both the common and preferred) implies an annual distributable cash flow of 1.2 X ($6.5 + $25.1) million = $37.9 million.

The BKEPP preferred is senior to the BKEP common. Therefore, the preferred dividend coverage for 2019 is about $37.9 million / $25.1 million = 1.5X.  Why the $6.50 par preferred is discounted to $5.39 is short term insanity.

Key Point: Asphalt can't be replaced with windmills and solar panels

The midstream sector has traded lower in part due to concerns about a move towards "greener" energy sources and some institutional investors becoming "ESG"  compliant investors. ESG investing is a fast-growing category of investment choices that blend environmental, social, and governance factors into traditional investment evaluations. You will hear the term used interchangeably with "socially responsible investing (SRI)" and "sustainable investing."

But with such a low market cap around $50 million, NO institutional ESG money was or could have been in BKEPP shares. Furthermore, BKEP is primarily in the asphalt terminal business which accounts for almost 3/4 of BKEP's cash flow. Even if we all switched to electrical cars tomorrow, asphalt would still be needed to pave the roads we drive on.  In fact, asphalt is recycled when roads are repaved. It's a surprisingly stealth green product.

Our Thesis: The GP Ergon (with a Private Equity Partner) WILL Make >$6.40 per unit bid. 

On 8/5/2019 Ergon (the General Partner) made a bid to take the company private. The bid of $1.35 per share for BKEP and $5.67 per share for BKEPP was withdrawn on 9/11/2019 after many shareholders vigorously complained that this lowball bid by Ergon was inadequate. Both BKEP and BKEPP have since traded lower. A realistic Ergon+ PE partner bid (who would undoubtedly refinance the preferred shares) is the catalyst for BKEPP to trade >$6.40-$6.50.

The sale of the Cushing terminals may be a catalyst, too 

Shareholders were especially critical of the proposed Ergon buyout on the Q2 earnings conference call. The proposed transaction significantly undervalued the Cushing oil terminals. As investor Kurt Hoffman noted in one of his questions:

"... we saw a deal in May where CVR Energy sold 1.5 million barrels of Cushing storage to Plains All American for $36 million, around $24 a barrel storage. Can you comment on that transaction, and if that $24 barrel valuation metric could be fairly applied to the storage of Blueknight"

BKEP owns 6.6 million barrels of crude oil storage at Cushing. At $24 per barrel, those facilities would have a valuation of $158 million. The Q3 operating margin for those terminals was $3.3 million or $13.2 million on an annualized basis. A sale of the Cushing oil terminals on similar terms would be about 12X EBITDA. Such a sale is right out of the PE playbook and, with a retirement of the preferred shares at par ^$6.50 would enable BKEP to substantially deleverage its balance sheet and focus on the much more consistent asphalt business.

Conclusions

Despite strong Q3 earnings and improving dividend coverage, BKEP and BKEPP have been destroyed along with their midstream peers by insane fear of the "Green New Deal" coming immediately to America--insane. At BKEP, the surviving asphalt business would not actually be harmed by such insanity anyway.  A PE-based sale of the Cushing oil terminals and reasonable higher bid by Ergon + PE Partner get us a 20% return in 6-18 months with a 1.5X fully covered 13.8% yield while we wait for the 2020 election to complete. 

Welcome to $10k-a-Month Income Investing!

Toby