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Whitney R. Tilson and Glenn H.

Tongue phone: 212 386 7160


Managing Partners fax: 240 368 0299
www.T2PartnersLLC.com

November 1, 2009

Dear Partner,

Our fund declined 2.5% gross and 2.1% net in October vs. -1.8% for the S&P 500, +0.1% for the
Dow and -3.6% for the Nasdaq. Year to date, our fund is up 32.7% gross and 26.2% net vs.
17.1% for the S&P 500, 13.7% for the Dow and 30.5% for the Nasdaq. If the year ended with
these numbers, it would be our best year ever and nearly all of our investors would earn 31.4%
net, reflecting the benefit of the high-water mark.

It was an ugly month for our long portfolio, as there were no winners of note and many losers.
Double-digit percentage decliners included Ambassadors International (-43.7%), Borders Group
(-37.6%), Iridium warrants (-30.0%), Iridium (-22.0%), Resource America (-19.8%),
Wendy’s/Arby’s Group (-16.5%), General Growth Properties (-15.9%), Winn-Dixie (-15.5%),
Huntsman (-12.7%) and Yahoo! (-10.7%).

So how were we only down 2.1% during the month? Our short book, which had dampened our
returns during the big market rally from March through September, finally worked and helped
cushion last month’s downturn. Winners of note among our shorts included MBIA (-47.7%),
Conn’s (-44.1%), PMI Group (-43.1%), MGIC (-41.8%), CIT Group (-40.5%), Palm (-33.5%),
Pre-Paid Legal Services (-22.2%), Regions Financial (-22.1%), Zions Bancorporation (-21.1%),
Garmin (-19.8%), Pulte Homes (-18.0%), Dineequity (-14.5%), Bank of America (-13.8%),
Research in Motion (-13.2%), Lennar (-11.6%), Toll Brothers (-11.4%), Alliance Data Systems
(-10.0%) and the iShares Dow Jones U.S. Home Construction Index (-9.5%).

CIT Group
In last month’s letter we wrote the following about CIT Group:

“[The] stock strangely bounced as it announced a debt exchange offer which, if unsuccessful, will
lead to a bankruptcy filing. In either case, the equity will essentially be wiped out. We’ve
profitably shorted CIT in the past so, like MBIA, this is the gift that keeps on giving.”

We shorted all we could during the month and will likely earn a total of approximately one
percentage point of return as CIT filed for bankruptcy this afternoon. Our only regret is that we
couldn’t short more, as it was difficult to get the borrow.

Berkshire Hathaway
Under Warren Buffett’s direction, Berkshire's performance has been nothing short of remarkable
over the past two years. His disciplined capital retention looked overly conservative for many
years, but when the crisis hit there were few buyers and waves of panicked sellers, so he was
able to deploy tens of billions of dollars in some terrific businesses, on highly favorable terms.

145 E. 57th Street, 10th Floor, New York, NY 10022


Thus, ironically, while Berkshire’s stock is down 30.1% since the beginning of 2008 (-31.8% in
2008 and up 2.5% this year), the company’s intrinsic value has actually risen.

Berkshire Hathaway reports earnings on Friday and we are confident that it will be a blowout
quarter. Operating earnings of the wholly owned businesses will be mixed: the largest
businesses, insurance and utilities, probably held up well, but businesses exposed to the
consumer likely did poorly so, in aggregate, earnings should be around $1.0 billion. In addition,
investment income should add another $1.2 billion.

The truly exciting news is in Berkshire’s investment portfolio, which we calculate grew by over
$8 billion in the quarter. This gain was driven by stock appreciation as well as gains in warrants
(mostly Goldman Sachs) and the conversion feature in the Swiss Re fixed income investment.
Another contributor was the Chinese company, BYD, a $230 million investment that is now
worth over $2 billion. Finally, the equity put contracts generated another roughly $1 billion of
gains.

In total we expect that Berkshire’s book value grew by approximately $9 billion (after taxes), or
approximately $6,000 per A share. This represents an 8% gain in book value for the quarter,
resulting in book value of $80,000 per share, an all-time high for Berkshire. We believe the
company has never been worth more. We believe Berkshire’s intrinsic value is approximately
$135,000/share, a 36% premium to today’s price of $99,000.

We believe Berkshire is safe, cheap, growing nicely and has a near-term catalyst (the quarterly
earnings), so that’s why it’s among our largest positions.

Our Presentation at the Value Investing Congress


At the Value Investing Congress on Tuesday, October 20th, we presented our latest work on the
housing/economic crisis and shared our best long and short investment ideas: Iridium and the
homebuilders, respectively. Attached are the slides we presented.

Regarding the former, we think Iridium is a very good business, will be able to grow at a high
rate for many years, and the stock, at around 4x EV/EBITDA, is a steal. As for homebuilders
(many of the specific stocks are noted on the previous page), we think the national housing
inventory overhang today totals nearly 10 million homes, almost two years supply, and this
number is still growing every month. Needless to say, therefore, we see little need for any new
homes, which simply exacerbate the already severe excess inventory problem. We believe that
the fundamentals for homebuilders are dreadful and will remain so for years, yet the stocks have
roughly doubled since March based on the belief (mistaken, we think) that the housing market
and housing prices have bottomed. When investors realize this is not the case – likely within the
next few months – we see substantial downside in these stocks.

Tax Estimates
As we do every year, we asked our bookkeeper to prepare tax estimates for the fund reflecting
realized gains and losses as well as interest and dividend income through September 30th. While
every investor’s report will be different, the estimates show modest short-term realized gains,
which are more than offset by somewhat larger long-term realized losses. In other words,
despite our fund’s substantial gains this year, it had net realized losses through September 30th.

-2-
Overall we expect 2009 to be a very tax efficient year. To receive your individualized tax
estimates, simply call or email Kelli at (212) 386-7160 or KAlires@T2PartnersLLC.com.

Conclusion
Thank you for your continued confidence in us and the fund. As always, we welcome your
comments or questions, so please don’t hesitate to call us at (212) 386-7160.

Sincerely yours,

Whitney Tilson and Glenn Tongue

The unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvested
dividends) is:

October Year-to-Date Since Inception


T2 Accredited Fund – gross -2.5% 32.7% 203.2%
T2 Accredited Fund – net -2.1% 26.2% 147.3%
S&P 500 -1.8% 17.1% 1.8%
Wilshire 4500 -5.9% 23.1% 19.6%
Dow 0.1% 13.7% 34.6%
NASDAQ -3.6% 30.5% -4.6%
Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2
Accredited Fund was launched on 1/1/99. Gains and losses among private placements are only reflected in the returns since
inception.

T2 Accredited Fund Performance (Net) Since Inception


160

140

120

100

80

(%) 60

40

20

0
Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul-
99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09
-20

-40

T2 Accredited Fund S&P 500

-3-
T2 Accredited Fund, LP (the “Fund”) commenced operations on January 1, 1999. The Fund’s
investment objective is to achieve long-term after-tax capital appreciation commensurate with
moderate risk, primarily by investing with a long-term perspective in a concentrated portfolio of
U.S. stocks. In carrying out the Partnership’s investment objective, the Investment Manager, T2
Partners Management, LLC, seeks to buy stocks at a steep discount to intrinsic value such that
there is low risk of capital loss and significant upside potential. The primary focus of the
Investment Manager is on the long-term fortunes of the companies in the Partnership’s portfolio
or which are otherwise followed by the Investment Manager, relative to the prices of their stocks.

There is no assurance that any securities discussed herein will remain in Fund’s portfolio at the
time you receive this report or that securities sold have not been repurchased. The securities
discussed may not represent the Fund’s entire portfolio and in the aggregate may represent only a
small percentage of an account’s portfolio holdings. It should not be assumed that any of the
securities transactions, holdings or sectors discussed were or will prove to be profitable, or that
the investment recommendations or decisions we make in the future will be profitable or will
equal the investment performance of the securities discussed herein. All recommendations within
the preceding 12 months or applicable period are available upon request.

Performance results shown are for the T2 Accredited Fund, LP and are presented gross and net
of incentive fees. Gross returns reflect the deduction of management fees, brokerage
commissions, administrative expenses, and other operating expenses of the Fund. Gross returns
will be reduced by accrued performance allocation or incentive fees, if any. Gross and net
performance includes the reinvestment of all dividends, interest, and capital gains. Performance
for the most recent month is an estimate.

The fee schedule for the Investment Manager includes a 1.5% annual management fee and a 20%
incentive fee allocation. For periods prior to June 1, 2004, the Investment Manager’s fee
schedule included a 1% annual management fee and a 20% incentive fee allocation, subject to a
10% “hurdle” rate. In practice, the incentive fee is “earned” on an annual, not monthly, basis or
upon a withdrawal from the Fund. Because some investors may have different fee arrangements
and depending on the timing of a specific investment, net performance for an individual investor
may vary from the net performance as stated herein.

The return of the S&P 500 and other indices are included in the presentation. The volatility of
these indices may be materially different from the volatility in the Fund. In addition, the Fund’s
holdings differ significantly from the securities that comprise the indices. The indices have not
been selected to represent appropriate benchmarks to compare an investor’s performance, but
rather are disclosed to allow for comparison of the investor’s performance to that of certain well-
known and widely recognized indices. You cannot invest directly in these indices.

Past results are no guarantee of future results and no representation is made that an investor will
or is likely to achieve results similar to those shown. All investments involve risk including the
loss of principal. This document is confidential and may not be distributed without the consent
of the Investment Manager and does not constitute an offer to sell or the solicitation of an offer
to purchase any security or investment product. Any such offer or solicitation may only be made
by means of delivery of an approved confidential offering memorandum.

-4-
An Overview of the Housing and Economic Crisis, Why
There Is More Pain to Come, and Two Investment Ideas
Whitney Tilson & Glenn Tongue
T2 Accredited Fund, LP
Tilson Offshore Fund, Ltd.
T2 Qualified Fund, LP

Value Investing Congress


October 20, 2009
T2 Partners Management L.P.
Manages Hedge Funds and Mutual Funds
and is a Registered Investment Advisor
145 E. 57th Street, 10th Floor
New York, NY 10022
(212) 386-7160
Info@T2PartnersLLC.com
www.T2PartnersLLC.com
Disclaimer

THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL


PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE
INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE
A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR
SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT.

INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENN


TONGUE OWN STOCK IN MANY OF THE COMPANIES DISCUSSED HEREIN.
THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED
HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE
INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION.

WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE


ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION,
TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION.
WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN,
OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION
CONTAINED IN THIS PRESENTATION.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND


FUTURE RETURNS ARE NOT GUARANTEED.
3
Background on the U.S. Housing Market
Percentage of Home Loans
Q
4
Q 19

0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
4 79
Q 19
4 8
Q 19 0
4 81
Q 19
4 8
Q 19 2
4 8
Q 19 3
4 84
Q 19
4 8
Q 19 5
4 86
Q 19
4 8
Q 19 7
4 8
Q 19 8
4 8
Q 19 9
4 9
Q 19 0
4 91
Q 19
4 9
Q 19 2
4 93
Q 199
4
Q 19 4
4 9
Q 19 5
4 96
Q 19
4 9
Q 19 7
4 98
Q 19
4 9
Q 20 9
4 0
Q 20 0
4 01
Q 20
4 0
Q 20 2
4 03
Were Delinquent or in Foreclosure as of Q2 2009

Q 20
4 0
Q 20 4
4 0
Q 20 5
A Record 10% of Mortgages on 1-to-4 Family Homes

4 06
Q 20
4 07
20
08
Source: National Delinquency Survey, Mortgage Bankers Association; T2 Partners estimates. Note: Delinquencies (60+ days) are seasonally adjusted.
5
All Types of Loans Are Seeing a Surge in
Delinquencies, Led by Subprime

45%
Alt A
Option ARM
40%
Jumbo
Subprime
35% Prime
Home Equity Lines of Credit
30%
Percent Noncurrent

25%

20%

15%

10%

5%

0%

Q 07

Q 07

Q 08
08
Q 03

Q 04

Q 06

Q 06
Q 00

Q 01

Q 02

Q 03

Q 04

Q 05
Q 99

Q 99

Q 00

Q 01

Q 05
Q 02

20

20
20
20

20

20
20

20
20

20

20

20
20

20

20

20
19

20

20
19

1
3
1
3

3
3

3
1

3
1
1

3
Q

Sources: Amherst Securities, LoanPerformance; National Delinquency Survey, Mortgage Bankers Association; FDIC Quarterly Banking Profile;
T2 Partners estimates. Note: Prime is seasonally adjusted. 6
The Wave of Resets from Subprime
Loans Is Mostly Behind Us

$35

We are
$30 here

$25
Loans with Payment Shock (Bn)

$20

$15

$10

$5

$0
6

07

08

09

0
6

0
06

09

10

0
8

9
-0

-0

-0

-1
l-0

l-0

l-0

l-1
-0

r-0

-0

-0

-1
l-0

n-
n-

n-

n-

r-

n-
ct
pr

pr

pr
ct

ct

ct

ct
Ju

Ju

Ju

Ju
Ju
Ap

Ap
Ja

Ja

Ja

Ja
Ja

O
A

Sources: LoanPerformance, Deutsche Bank; slide from Pershing Square presentation, How to Save the Bond Insurers, 11/28/07. 7
The Mortgage Meltdown Has Moved
Beyond Subprime

Prime Mortgage

Commercial Real Estate

Alt-A

Other Corporate

Commercial & Industrial

Subprime
Subprime is only a small
High-Yield / Leveraged Loans
part of the problem
Jumbo Prime

Home Equity

Credit Card

Auto

Option ARM

Construction & Development

Other Consumer

CDO/ CLO

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0
Amount Outstanding (Trillions)

Sources: Federal Reserve Flow of Funds Accounts of the United States, IMF Global Financial Stability Report October 2008, Goldman Sachs Global Economics
Paper No. 177, FDIC Quarterly Banking Profile, OFHEO, S&P Leverage Commentary & Data, T2 Partners estimates. 8
Delinquencies of Prime and Alt-A
Mortgages Are Soaring

Source: New York Times, 5/24/09.


9
Percent Noncurrent (60+ days)
Q
1

0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
19
Q 99
3
19
Q 99
1
Are Soaring

20
Q 00
3
20
Q 00
1
20
Q 01
3
20
Q 01
1
20
Q 02
3
20
Q 02
1
20

Source: Mortgage Bankers Association National Delinquency Survey.


Q 03
3
20
Q 03
1
20
Q 04
3
20
Q 04
1
20
Q 05
3
Delinquencies of Prime Mortgages

20
Q 05
1
20
Q 06
3
20
Q 06
1
20
Q 07
3
20
Q 07
1
20
Q 08
3
20
08
10
Fannie Mae and Freddie Mac Serious
Delinquencies Are Soaring

4.0%

Fannie
3.5% Freddie

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%
7
7

8
08

08

08

08

08

08

08

08

09
08

09

09

09

09

09

09

09
07

07

/0

/0

/0

/0
/0

/0
1/

2/

3/

4/

5/

6/

7/

8/

9/

1/

2/

3/

4/

5/

6/

7/

8/
8/

9/

10

11

12
10

11

12

Note: Serious delinquencies are loans that have missed three or more consecutive payments (90+ days).
Source: Company filings. 11
15 States With the Highest Prime
Mortgage Foreclosure Rates

Source: New York Times, 5/24/09.


12
Two Waves of Losses Are Behind Us…
But Three Are Looming

Losses Mostly Behind Us


• Wave #1: Borrowers committing (or the victim of) fraud, as well as
speculators, who defaulted quickly. Timing: beginning in late 2006 (as
soon as home prices started to fall) into 2008. Mostly behind us.
• Wave #2: Mostly subprime borrowers who defaulted when their
mortgages reset due to payment shock. Timing: early 2007 (as two-
year teaser subprime loans written in early 2005 started to reset) to the
present. Now tapering off as low interest rates mitigate payment shock.
Losses Mostly Ahead of Us
• Wave #3: Prime loans (most of which are owned or guaranteed by the
GSEs) defaulting due to job loss and home price declines (i.e.,
underwater homeowners). Timing: started to surge in early 2008 to the
present.
• Wave #4: Jumbo prime, second lien and HELOCs (most of which are
on banks’ books) defaulting due to job loss and home price declines/
underwater homeowners. Timing: started to surge in early 2008 to the
present.
• Wave #5: Losses among loans outside of the housing sector, the
largest of which will be in the $3.5 trillion area of commercial real estate.
Timing: started to surge in early 2008 to the present.
13
Existing Homes Sales Have Risen in Recent Months, Leading
to a Decline in Inventory – But Inventory Is Still at Double
Historical Levels – And Shadow Inventory Lurks

Annualized Rate of Existing Home Sales Months Supply


7.5 12

11
7.0

10
6.5 3.6 million units, equal to 8.5 months
9
as of the end of August 2009
6.0 8

Months
Millions

7
5.5

6
5.0
5
5.1 million units as of the
4.5
end of August 2009 4

4.0 3
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: NATIONAL ASSOCIATION OF REALTORS® Existing Home Sales data series; estimates prepared for The
Wall Street Journal by LPS Applied Analytics, WSJ, 9/23/09 14
Home Prices Look Affordable Due to Price
Declines and Ultra-Low Interest Rates

800
CASE SHILLER USA (1975 = 100)

Modeled Home Prices - Interest Only

700 Modeled Home Prices - 30yr Fully Amortizing

600

500
Index Value

400

300

200

100

Date

Source: Case-Shiller, Bureau of Labor Statistics, Amherst Securities.


15
Home Prices Were in an Unprecedented
Freefall Until A Bounce in Recent Months

220
S&P/Case-Shiller U.S. National Home Price Index
S&P/Case-Shiller 20-City Composite
OFHEO Purchase-Only Index
200
NAR Median Sales Price of Existing Homes

180

160

140

120

100
00

01

03

04

06

06

08
00

01

02

02

03

04

05

05

07

07

08

09
20
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
1

1
3

1
Q

Q
Sources: Standard & Poor’s, OFHEO Purchase-Only Index, NATIONAL ASSOCIATION OF REALTORS® Existing Home Sales data series.
16
Recent Signs of Stabilization Are Likely
the Mother of All Head Fakes

Rather than representing a true bottom, recent signs of stabilization


are likely due to seven factors that are (or are likely to be) short-term:
1. Ultra-low interest rates
2. The $8,000 tax credit for first-time homebuyers
3. More middle- and upper-end homes are being sold (either
voluntarily or via foreclosure), which has the effect of raising the
price at which the average home is sold – but more defaults of
higher priced homes is very bad news for mortgage holders
4. A decline in resets
5. A reduction in the inventory of foreclosed homes
6. The FHA is providing massive support to the housing market, in
part by doing extremely risky lending
7. Home sales and prices are seasonally strong in April-July due
to tax refunds and the spring selling season

17
Another Wave of Resetting Loans Is On the Horizon
The Last Wave Was Driven By Subprime Loans;
This Time, It Will be Option ARMs

Option ARM Alt A Prime Subprime


20
We are
Total Loan Balance  ($Bil)

here
15

10

Source: Loan Performance, Amherst Securities.


18
Banks Are Selling Their REO, But
Foreclosures Have Plunged By More Than
Half, Ballooning the Inventory Pipeline

25%
Monthly Roll Rates
Non-Performing to Foreclosure
20%
REO to Liquidation
Monthly Roll Rates (%)

15%

10%

5%
Foreclosure to REO Inventory Pipeline
0% 1,400,000

1,200,000
90 Days & Foreclosure
1,000,000

Non Performing to  Foreclosure Foreclosure to  REO REO to Liquidation


800,000

600,000

400,000
REO
200,000

REO 90 Days PLUS Foreclosure

Source: Loan Performance, Amherst Securities.


19
The Current “Housing Overhang” Is 7 Million Homes –
Which Doesn’t Include Any New Defaults, Which Are
Running at Approximately 300,000/Month!

Source: Mortgage Bankers Association, Loan Performance, Amherst Securities.


20
FHA’s Loan Book Is a Rapidly Growing Disaster
17.9% of Loans Are in Some Stage of Default;
For 2007 Loans, It’s 32.4%

Source: HUD/FHA, through August 31, 2009, NY Times, 10/8/09.


21
Existing Home Sales Are Highly Seasonal

Source: National Association of Realtors.


22
Existing Home Sales Are Highly Seasonal

HPA Seasonality Coefficient -- Deviation From Mean

Source: National Association of Realtors.


23
Home Prices Bounced From April-July…

Sequential Home Prices March 2005-July 2009

2.0%
July 2009: +1.6%
1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5%

-2.0%

-2.5%

-3.0%

-3.5%
06

09
05

07

08
6

7
6

9
5

7
5
05

07

08

8
-0

-0
-0

-0
-0

-0
-0

-0

-0

-0
n-

n-
n-

n-

n-
p-

p-

p-
ar

ar
ar

ar
ep
ec

ec

ec

ar
ec
Ju

Ju

Ju
Ju

Ju
Se

Se

Se
M

M
M

M
D

D
S

Source: S&P Case-Shiller 20-city index.


24
…But They Always Bounce in the Spring
and Early Summer!

Sequential Home Prices February 2000-July 2009

3.0%

2.0%

1.0%

0.0%

-1.0% Red circles represent April -


June each year
-2.0%

-3.0%

-4.0%
O 6
O 1

Ap 8
Ap 3

N 08
Ju 8
Ju 3
N 03

9
Se 0 4

Ju 5

Au 0 7
M 06
Ju 0

M 01
Au 0 2

Ja 7
Fe 04

D 05
M 05
D 00

Ja 2
M 00

-0
-0

-0
-0

0
0

r-0
0
0

0
0

r-

n-
n-
n-
n-

b-

-
b-

-
-

g-
p-

l-

-
l-

g-
-

ov

ay
ay

ov
ar
ar

ec

ct
ct
ec
Fe

Source: S&P Case-Shiller 20-city index.


25
Outlook for Housing Prices

• We think housing prices will reach fair value/trend line, down 40% from the peak
based on the S&P/Case-Shiller national (not 20-city) index, which implies roughly
a 10% further decline from where prices were as of the end of Q2 2009
• The key question is whether housing prices will go crashing through the trend line
and fall well below fair value. This is a real possibility, though continued massive
government subsidies could prevent it. In the long-term, housing prices will likely
settle around fair value, but in the short-term prices will be driven both by
psychology as well as supply and demand. The recent bounce in home prices
has improved psychology, but the supply-demand trends are very unfavorable
– There is a huge mismatch between supply and demand, due largely to the tsunami of
foreclosures. In addition, the “shadow” inventory of foreclosed homes already exceeds
one year and there will be millions more foreclosures over the next few years, creating a
large overhang of excess supply that will likely cause prices to overshoot on the
downside, as they did in California
• Therefore, we expect housing prices to decline at least 40% from the peak,
bottoming in mid-2010
• We are also quite certain that wherever prices bottom, there will be no quick
rebound
– There’s too much inventory to work off quickly, especially in light of the millions of
foreclosures over the next few years
– We don’t think the economy is likely to provide a tailwind, as we expect tepid economic
growth at best for a number of years

26
The Current Unemployment Situation Is the
Most Severe Since the Great Depression
There Have More Than 8 Million Jobs Lost So
Far in This Recession, Though the Monthly Rate
of Losses Has Eased in Recent Months
150,000 jobs/month are required to absorb
600 new entrants to the workforce and prevent
unemployment from rising
Change in Nonfarm Payroll Employment (000s)

400

200

-200

-400

-600 There have been job


losses every month since
-800
December 2007
-1000
Ja 3

Ja 5

Ja 6

Ja 7

09
Ja 1

Ja 7

Ja 8

Ja 9

Ja 1

Ja 2
Ja 2

Ja 3

Ja 4

Ja 5

Ja 6

Ja 0

Ja 4

Ja 8
Ja 0

0
9

0
9
n-

n-

n-

n-

n-

n-
n-

n-

n-

n-
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
Ja

Source: Bureau of Labor Statistics.


28
The Unemployment Rate Continues to Rise,
Reaching 9.8% in September
If part-time and discouraged workers are factored in, the unemployment rate would have
been 17.0% in September. The labor force participation rate was 65.2%, the lowest in 22
years. Finally, the average work week hit a record low of 33.0 hours. To return to the
average of 33.8 hours would be the equivalent of three million new jobs not created.
11%

10%

9%
Unemployment Rate

8%

7%

6%

5%

4%

3%
70

73

76

79

82

88

91

94

97

00

03

06

09
85

n-

n-

n-

n-
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja
Source: Bureau of Labor Statistics. 29
Chronic Unemployment Is Skyrocketing

35.6%

Source: Labor Department, WSJ, 10/3/09. 30


The Average Weeks Unemployed is 26.2

26.2

Source: Labor Department, WSJ, 10/3/09. 31


The Percentage of Unemployed Not on
Temporary Layoff Has Risen to 54%

54%

Source: Labor Department, WSJ, 10/3/09. 32


Ju
n

0%
10%
20%
30%
40%
50%
60%
M -72
ar
De -73
c-

S
Se 73
p-
Ju 7 4
n-

D
M 75
ar
De -76
c-
Se 76
p-
Has Soared

Ju 7 7
n-
M 78

fL b
ar
De -79

h
c-
Se 79
p-

//
Ju 8 0
n-
M 81
ar

d l
De -82
c-
Se 82

/
p-
Ju 8 3
n-
M 84
ar

l
De -85
c-
Se 85

/ l i
p-
Ju 8 6
n
M -87
ar
De -88
c-

Source: Labor Department, http://ows.doleta.gov/unemploy/claimssum.asp.


Se 88
p-
Ju 8 9
n
M -90
ar
De -91
c-
Se 91
p-
Ju 9 2
n
M -93
ar
De -94
c-
Se 94
p-
Ju 9 5
n
M -96
ar
De -97
c-
Se 97
Unemployment Benefits Have Expired
The Proportion of Unemployed Whose

p-
Ju 9 8
n
M -99
ar
De -00
c-
Se 00
p-
Ju 0 1
n
M -02
ar
De -03
c-
Se 03
p-
Ju 0 4
n
M -05
ar
De -06
c-
Se 06
p-
Ju 0 7
n
M -08
ar
-0
9
33
There Are Now Six Unemployed People for
Every Job Opening

Source: Bureau of Labor Statistics, NY Times, 9/27/09. 34


5.2% of All Jobs Have Disappeared, Far
Worse Than Any of the Past Five Recessions

1980 1974 - 76 1981 - 83 1990 - 93


-0.5% 2001 - 05

-1.5%

-2.5%

-3.5%

-4.5%

2007- present
-5.5%
0 6 12 18 24 30 36 42 48
Months after pre-recession peak

Source: Bureau of Labor Statistics; John Burns Real Estate Consulting.


35
Consumer Spending, Which Accounts for 70% of
GDP, Is Weak and Likely to Remain So
Consumer Confidence Has Rebounded
Somewhat But Remains Low

160

140

120
Consumer Confidence Index

100

80

60

40

20

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Note: 1985=100. Source: The Conference Board (www.pollingreport.com/consumer.htm)


37
Total Consumer Credit Is Falling Sharply

Total Amount of Revolving and Nonrevolving Total Consumer Credit Outstanding


Consumer Credit Outstanding (Change From Year Earlier)

Down $119 billion or 4.6% from its peak in 7/08.


Down $12 billion in August, a 5.8% seasonally
adjusted annual rate, the seventh straight month
of declines, the longest stretch since 1991.

Source: Federal Reserve Board, WSJ, 10/9/09.


38
Household Credit Market Debt Outstanding
Has Declined for the First Time Since This
Was Measured Beginning in the Early 1950s

Source: St. Louis Fed.


39
The Percentage of Banks Tightening Standards
for Consumer Loans Has Risen Sharply

Source: Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices, July 2009.
40
The U.S. Savings Rate Hit a 15-Year High of 6.9%
in May, but Fell to 3.0% in August
This is good news in the long run, but could be a severe economic headwind in
the short run, given that consumer spending is 2/3 of GDP

Peaked

Source: Paul Kedrosky’s blog, 6/26/09; http://paul.kedrosky.com/archives/2009/06/the_black_swan.html; www.bea.gov/newsreleases/national/pi/2009/pi0709.htm.


41
Household Liabilities as a Percentage of
Disposable Income Remains Very High

Peak: 138%

2000: 101%

1991: 90%
Peaked
Today: 129%

Source: U.S. Federal Reserve, WSJ, 10/13/09.


42
Investment Idea #1
Short the Homebuilders Via the
iShares Dow Jones US Home Construction ETF (ITB)
Housing Starts, Completions and Sales
Are At or Near All-Time Lows

2000
Starts
Completions
1800
New Homes Sold
Seasonally Adjusted Annual Rate (000s)

1600

1400

A slight
1200
rebound in
1000 starts and
sales in
800 recent
months
600

400

200
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Source: Commerce Department, data through 9/09.


44
Ja Median Age (months
n-
9

2
4
6
8
10
12
14
Ja 0
n-
9
Ja 1
n-
9

Source: Census Bureau, through 8/09.


Ja 2
n-
9
Ja 3
n-
9
Ja 4
n-
9
Ja 5
n-
9
Ja 6
n-
9
Ja 7
n-
9
Ja 8
n-
9
Ja 9
n-
0
Ja 0
n-
0
Ja 1
n-
0
Ja 2
n-
0
Ja 3
n-
0
Ja 4
n-
0
Ja 5
n-
0
Ja 6
The Average New Home Has Been on the Market for 12.9 Months

n-
0
Ja 7
n-
0
There Is an Enormous Inventory Glut of New Homes

Ja 8
n-
09
45
Vacant Housing Stock Creates an
Enormous Inventory Overhang

1.1-1.5 million excess units, equal to


2-3 years of existing home sales

Source: Census Bureau


Source: Census Bureau, Moody’s Economy.com.
46
Nearly 6% of Homes Built This Decade
Are Vacant

Vacancy Rate By Date of Construction


5.9%

2.0%

March 2000 or earlier April 2000 to present


Source: Census Bureau
Source: Census Bureau, through Q4 2008.
47
Unlike Past Housing Downturns, New Home Sales
Have Fallen Far More Than Existing Home Sales

A slight
rebound
New homes from March-
sales fell 76% August
from the peak;
still down 69%
through August

Source: National Assoc. of Realtors (existing sales) and Census Bureau (new sales), both via Haver Analytics; chart from the New York Times, 6/27/09;
manually updated through 8/09. 48
Debt-to-Equity Ratio of
Major Homebuilders

1.97 6.76
2.0

1.5 1.40

0.99
1.0

0.59 0.64
0.53 0.55
0.48
0.5
0.26
0.17
0.00 0.00
0.0

-0.5
-11.98
NVR MDC TOL RYL MTH DHI LEN MHO PHM BHS KBH SPF BZH HOV
Source: Census Bureau
Source: Company filings.
49
Inventory-to-Equity Ratio of
Major Homebuilders

4.0 8.74

3.5 3.37
3.12
3.0

2.5
2.10
2.0 1.80 1.71
1.50 1.56 1.55 1.46
1.5 1.33

1.0
0.50
0.5 0.30

0.0

-0.5
NVR MDC TOL RYL MTH DHI LEN MHO PHM BHS KBH SPF BZH HOV
-12.89

Source: Census Bureau


Source: Company filings.
50
Price-to-Book Ratio of
Major Homebuilders

3.0
2.69
2.43
2.5

1.97
2.0
1.76
1.62
1.55
1.5 1.41 1.37
1.21 1.27
1.08
1.0
0.70

0.5 0.39

0.0

-0.5
NVR MDC TOL RYL MTH DHI LEN MHO PHM BHS KBH SPF BZH HOV
-3.09
Source: Census Bureau
Source: Company filings.
51
Investment Idea #2
Iridium (IRDM)
Overview

• Iridium is the world’s only communication provider with the ability to provide
real-time voice and data communications over 100% of the earth’s service by
virtue of the company’s 66-satellite low-earth orbit (LEO) constellation. In
addition, Iridium is one of the few satellite operators with the ability to provide
effective voice, machine-to-machine (M2M), and high-speed data services.
• One of two major players in Global Satellite Communications industry
• Single subscriber device works worldwide
• Motorola spent $5 billion launching satellites in late 1990s
• Filed for bankruptcy in 1999 with only 50,000 customers due to too much
debt and clunky phones that didn’t work inside buildings

53
Iridium Serves Many Different Markets

Source: Company presentation, 6/09.


54
A Highly Attractive Business

• Growing market share in a growing industry


• Huge barriers to entry
• US Department of Defense is an anchor customer (22% of
revenues in Q2 ‘09)
• Very high and rapidly expanding margins
• New products and applications

55
Iridium’s Market Share Has Grown Rapidly

Source: Company presentation, 9/08.


56
Iridium Has Shown Extraordinary Growth in
Subscribers

Up 24% YOY in Q2 ’09 to 347,000 subscribers

Source: Company filings.


57
Iridium Has Shown Extraordinary Growth in
Revenue and Operational EDITDA

In Q2 ’09, revenue was only up 1% due to weak equipment sales,


but Operational EBITDA rose 32% and net income grew 53%.

Source: Company filings.


58
Subscriber Growth Has Been Driven by
Commercial and Machine-to-Machine

Source: Stifel Nicolaus, company filings.


59
Iridium’s Stock Has Tumbled Since It Began
Trading a Few Weeks Ago

Source: BigCharts.com.
60
Why Is Iridium Out of Favor?

• SPAC structure
– Many SPAC shareholders were just in it for the cash payout
upon consummation of a deal and are now selling
• Many warrant owners are shorting the stock
– Iridium tried to mitigate technical issues:
• Retired 30.5 million $7 warrants
• Issued 16 million new shares
• Repurchased15.9 million shares
• Large future funding requirement for Iridium NEXT
• Dismal record of early telecom satellite networks
• Prior bankruptcy

61
Iridium Came Public Via a SPAC
Transaction

• SPACs have very poor track records in general


• But Iridium was acquired by a SPAC (Special Purpose
Acquisition Company) controlled by Greenhill, a top
quality private equity sponsor
• The deal price was negotiated during the market
meltdown last fall (deal was announced 9/23/08), then the
price was reduced in April and warrant dilution was cut
back in July

62
Iridium NEXT

• Current satellite constellation will need to be replaced starting


in 2014
– Backwards compatible (existing customers will not need to
replace equipment)
– Improved capacity and data rates
• Total cost: $2.7 billion
– Satellites: $1.9 billion
– Launch: $0.6 billion
– Other: $0.2 billion
• Funding
– Internally generated cash flow
– Debt
– Equity
– Revenue offsets (hosted payloads)
63
Iridium’s Cap Ex Requirements Will Rise to
Fund Iridium Next, and Then Fall

Source: Stifel Nicolaus estimates.


64
Iridium Should Be Able to Fund Iridium NEXT From
Cash Flow, Hosted Payloads and Warrant Conversion

Source: Raymond James estimates.


65
Valuation

Share price (10/19/09): $8.38


Shares outstanding: 68.2 million
$7 warrants 13.5 million
$11.50 warrants 14.4 million
Market cap: $572 million
Less cash: $80 million
Enterprise value: $492 million

2009 EBITDA (E) $130


EV/EBITDA: 3.8x

66
Iridium’s Operational EBITDA is Projected
to Double in Only Three Years

Source: Raymond James estimates.


67
We Expect a Mid-20% IRR on This
Investment for Many Years to Come

Stock Price Based on EV/EBITDA Multiples


Multiple 2016 2017 2018
8 $25.36 $31.20 $37.77
9 $29.05 $35.22 $42.10
10 $32.74 $39.25 $46.43
IRR
Multiple 2016 2017 2018
8 21% 21% 24%
9 23% 23% 26%
10 26% 25% 28%

Source: T2 Partners estimates.


68
Drivers of Stock Price Appreciation

• Low current valuation multiple (40% discount to closest public comp,


Inmarsat)
• Rapid growth in earnings
• Removal of legacy SPAC investors
• Warrant holders finish hedging (shorting the stock)
• Removal of uncertainty overhang related to future capital
expenditures

69