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To: Ponzio Capital Clients

From: Joe Ponzio
Date: July 15, 2010
Re: Quarterly Letter to Clients

Dear Partners,

If I had to give a name to each quarterly letter, this one would be called “But Not Without Pain.” I’ll explain
why in this letter. Also, you may also want to see my thoughts on the European debt crisis at F Wall

Ponzio Capital Investment Performance

Your account is a “separately managed account” as it is a separate account in your name, held at
Interactive Brokers. At any time, you can log in to Interactive Brokers to view your positions and
transactions, add or withdraw funds, generate reports and more.

Ponzio Capital Composite Performance Summary 1

Ponzio Capital
DJIA NASDAQ S&P 500 (net to clients)
1/1/2010 - 3/31/2010 +4.8% +5.9% +5.4% +7.4%
4/1/2010 - 6/30/2010 -9.4% -11.8% -11.4% -12.8%

1/1/2010 - 6/30/2010 -5.0% -6.6% -6.7% -6.4%


In my last letter, I told you that we were in the process of setting up online account access through the
Ponzio Capital website. Unfortunately, this project has been scrapped for now. Though their trading
technology is top-notch, Interactive Brokers does not have a good system for distributing data to portfolio
management software or websites (due to their security concerns).

As much as I would have preferred to offer you a simpler, more user-friendly interface through the Ponzio
Capital website, our hands are tied for now. If Interactive Brokers begins distributing data in a secure,
developer-friendly way, I can assure you that we’ll bring this project back to life.

The Markets

When the first quarter closed, I had stated the following in my quarterly letter:

The broad stock market indices advanced again through the first quarter of 2010, with
the S&P 500 adding 5.4% (including dividends) through March 31st. For many, this has
been a “hold your breath” rally in stocks - buy or hold and hope that we don’t see a
correction, or trade frantically to stay nimble in the markets.

Market indices returns include dividends. Ponzio Capital return is net of all fees and expenses. Individual client results vary. Past
performance is not indicative of future results. Results less than one year are actual, not annualized.

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The chickens came home to roost. Though I was not surprised to see the markets fall, I didn’t have any
positions that I wanted to dump in anticipation of a correction. Some of our stocks held up very well and
are even trading higher (as of July 14) than where they were on March 31 (BBEP +4.7%, PETD +21.9%,
GIS +1.9%, WINN +4.5%); some have been clobbered (IPSU -23.1%, KND -30.6%, TSO -15.7%).

Over the long-term, I expect our results to be largely independent of the broad markets. I benchmark our
results against the markets for comparison purposes only; however, over the long-term, I expect that we
will outperform the markets by a satisfactory margin, net of all fees and expenses.

Value Investing In Volatile, Flat Markets – This Stuff Works

In my opinion, a period of ten or twelve months is too short a timeframe to judge investment results.
Considering, though, that almost every position at the firm has been purchased in the past 18 months, it’s
worth discussing given the recent market melt-down. (With the exception of “permanent” positions like
Coca-Cola or Walmart, every position held by clients has been purchased at some point in the past 18
months, either at Ponzio Capital or by me while at Meridian. Though I am limited by law in what I can
discuss about my performance at prior firms, I can discuss what follows here.)

On September 15, 2009, I sent a letter to clients introducing them to BreitBurn Energy Partners (BBEP)
and Petroleum Development Corporation (PETD) – two new positions I purchased in their portfolios. I am
including that letter with this one so that our newest clients can read the full story on the purchase.

Since our original purchase, the S&P 500 has advanced 5.8% (including dividends) while BBEP and
PETD have advanced 40.9% and 71.9%, respectively. Another such position is Volt Information Sciences
(VOL), purchased in July of last year and up roughly 4% more than the S&P 500.

It’s easy to look at these past purchases and think, “Why didn’t we buy more?” or, “I sure would have
liked to get in on that one!” Though I do not want to count our returns until they are realized, I’ll use them
for illustrative purposes to explain why I continue to ignore the markets and their volatility. None of these
positions were/are held without a certain degree of pain – particularly in the first few weeks/months/
quarters after we purchase them:

Petroleum Development Corp was up 30% in the month after I first purchased it versus 4.5% for the S&P
500. I looked really smart that month. Two weeks after that, it was down 24% – a full 19.5% more than
the markets, and below the September 15th price. Up and down it went, giving gains and then taking
them away – not bit by bit, but 20% and 30% at a time over the course of a few short weeks. Today, we’re
significantly higher than we were just nine months ago...but not without pain.

BreitBurn made me look dumb, then smart, then really dumb, and then smart again. Two weeks after I
bought it, it was down more than 3% in an up market. A few weeks later, we were up 18% – 15 points
over the market’s 3% return. Two months after that, our BreitBurn purchase was sitting at an 8% loss
versus a 6% gain for the S&P during that time. Today, we’re significantly higher than we were just nine
months ago...but not without pain.

Volt Information Sciences made me look like a genius, then an idiot, then a genius...then an idiot. Within
weeks of our original July 2009 purchase, we were up nearly 80%...then down 34%...then up 64%...and
back down again. Today, we’re higher than we were a year ago and marginally higher than the return of
the S&P 500...but not without pain.

So...Buy and Hold or Trade Like Mad?

This, of course, causes one to ask, “With results like these, wouldn’t it be better to trade in and out of
these stocks rather than buy and hold?” You bet! If, of course, we can trade in the rearview mirror. When
buying smaller companies like these, one should expect a certain degree (even extreme) volatility.

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The problem with trading these stocks is that it is impossible to know when the top or bottom is in. Take,
for example, Petroleum Development Corp. Here is a chart of its price versus the S&P 500 since
September 15, 2009:

PETD S&P 500








As a trader, you would have to determine when to sell. Within days of the purchase, you’re up 6% while
the market is down 3%. Sell? If so, you miss the run up to +25%? Maybe you sell then? But if 6% was
attractive, how do you know +25% is the top?

And then...when do you buy back in? Trading books will tell you to wait for a pullback of 8% or 10%. So
you do. And do you avoid the pain? No! Even if you timed it perfectly, selling at +25% (highly unlikely) and
then buying in again on an 8% pullback, you still have to suffer through a 13% loss before the stock starts
rising again.

Still, you’re a perfect trader. would you have fared? If we look at the first run up, crash and
bounce of PETD (the two months from 9/15/2009 to 11/15/2009), your “trading” strategy puts you ahead
by 0.79% if you execute it perfectly (and net of short-term gain taxes at 35%). Buy or sell a few minutes
too early or too late, and you’re behind.

And what happens when that “pullback” never comes? When you sell expecting a pullback, but Mr.
Market’s fear finally wanes and he likes your stock again? Traders are in cash, scrambling for another
opportunity, while investors are finally enjoying the ride.

Buying the Dips

“If we’re not trading these stocks, should we be adding to them?” It’s a logical question, and one I hear
often – particularly when a position is down 25% or more. Some people ask because they’re curious and
love discussing value investing; some ask just to make sure that I’m awake.

My response is always the same: I add to down positions based on my conviction and the opportunities
available. Every stock we hold is a “high conviction” stock; however, some naturally tend to come with
higher convictions than others. Four and five months ago, I was adding BreitBurn for new clients. Though
we weren’t purchasing it at September 2009 levels, I discussed this exact situation in my last letter:

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I really liked BreitBurn at $11.00, and continued to like it up to about $14.50 per share.
That’s why I added some for many existing clients, and happily opened positions for
new clients. BreitBurn is currently our largest stock position at the firm.

As I write this on April 5, 2010 (this letter is written over the course of a few days),
BreitBurn is trading at $15.23 per share. I doubt that I will continue to add to our
position at these levels as I think the company is still cheap, but not cheap enough to add
more money (based on my goal of trying to find you significantly undervalued

With BreitBurn, I had (have) a lot of conviction – enough to add at prices well above where we first started
purchasing it. The same was true with Wells Fargo in the first quarter of 2009 – I liked it at $22, really
liked it at $18, and loved it at $11 for clients that still needed more.

Four months ago, I was adding new positions with moderately high conviction (no more or less conviction
than I had in Petroleum Development Corp in September 2009). Today, the markets and individual stocks
are cheaper; so, I have a choice – add to existing positions or open some new ones.

Right now, I’m looking at three new ones that might provide more value and more conviction than some of
our existing, beat down stocks. Should I add any (or all) of these, I’ll use cash or sell some of the lower
conviction/less value stocks, regardless of whether we are up or down on them. At the end of the day, my
goal is to have you (us) invested in the stocks offering what I perceive to be the greatest value.

Portfolio Cross-Section

Due to the length of this letter (including the BreitBurn/Petroleum Development email that follows), I’ll skip
the position discussion in this letter and will instead send out separate letters that discuss the individual
positions we hold.

Look for a follow-up to this next week. As always, if you have any questions, please don’t hesitate to e-
mail me.

I appreciate your referrals and your trust,

Joe Ponzio,
Joe Ponz
Pon io, Managing Partner
Ponzio Capital Inc.
Tel: (800) 520-2124

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This is a letter Joe sent to clients while he was still at The Meridian Business Group.

September 15, 2009

To My Partners,

On Friday we added two new companies to your portfolio. As they are both in similar industries (oil and
natural gas), I figured I'd cover them in a single e-mail. As always, if you have any questions, please don't
hesitate to call or e-mail me.

The Commodities Crash

Both BreitBurn Energy Partners (BBEP) and Petroleum Development Corporation (PETD) generate
profits based on the price of oil and the price of natural gas, both of which are "commodities." Every day,
you use commodities in your regular life - from the orange juice you drink in the morning to the gas you
put in your car.

You will likely remember when gas prices soared last summer and the media was talking about the
"record profits" being made by big oil companies. That was because the price of oil - the commodity -
soared from $70 per barrel in 2006 to nearly $150 per barrel by July of 2008. Because the cost to extract
the oil from the ground didn't grow as quickly, oil companies were making bigger and bigger profits as the
disparity between the price of oil and the cost to extract it widened.

Eventually, the price of oil - along with many other commodities prices - collapsed late last year when the
economy came to a screeching halt. You may not have been following the commodities; however, you
likely noticed gas prices fall from $4 to under $2 - the result of the drop in oil from almost $150 to near
$30. Accordingly, that put pressure on the profits of oil companies. As an example, Exxon Mobile
generated $14.8 billion in profits in the three months ended June 30, 2008 when oil was just nearing its
peak price. In the three months ended June 30, 2009, the company generated $3.9 billion in profits, down
74% as oil was coming off its near-$30 price.

The time to buy commodities-based companies is when the price of the underlying commodity is cheap.
In time, if the price of the commodity returns to a more "normal" level, the company should generate
additional profits. In the stock market, the prospects of higher profits generally pushes stock prices up.

Your Companies

Both PETD and BBEP make their money based on the price of oil and natural gas. As the commodities
collapsed, so did their stock prices. And that's what piqued our interest, as the commodities were cheap
and the prospects for future profits look good.

BBEP owns oil and natural gas fields, hires independent contractors to extract the commodities, and then
sells it - ultimately distributing the excess cash it generates to investors. The collapse in oil prices pushed
BBEP's stock price down from the mid-$20s in 2008 to as low as $5.25. Because the company doesn't
physically extract the commodities, it can control its capital expenditures and costs very well. It generates
gobs of excess cash which it is currently using to pay down debt.

I see no reason why BBEP would go out of business, but if it did, the company is sitting on about $2
billion worth of proven oil and natural gas reserves. In liquidation, the company is worth about $23 per
share at today's commodities prices. And while I think that the price of oil is in a fair range right now,
natural gas seems to be very cheap based on (i) historical prices and (ii) an overabundance of supply
with low demand. Natural gas - now at about $3.25 - was well over $7 two years ago and peaked at $13
last year.

When the supply starts to dwindle, the price of natural gas will likely rise causing both BBEP and PETD to
generate greater profits, and causing BBEP's properties to be worth even more.

PETD is also an oil and natural gas company; however, PETD actually extracts the commodities as well.
The thesis on PETD is the same - if natural gas prices return to a more "normal" level, PETD will likely
see an increase in both profits and assets. Should the company not survive the wait (though I see no
reason it wouldn't), it could be liquidated in an orderly fashion for significantly more that today's purchase

What We're Looking For

Both of these companies are attractive to me because they have the dual component to them - the
prospects of significantly greater profits and more valuable assets should the price of natural gas rise,
and the safety of profits and assets in oil.

If the coming winter proves to be extremely mild, consumers may not use much natural gas which would
ultimately cause supplies to dwindle at a slower pace and cause natural gas's price to rise more slowly. If
not, we may see natural gas's rise come more quickly.

The plan is to hold these companies for two years unless the fundamentals for oil and/or natural gas
begin to fall dramatically again. I think that these are very attractive companies at $70 oil and $3.00
natural gas; but, almost no oil and gas company could survive long at $30 oil and $1.00 natural gas.

If you have any questions, please feel free to call or e-mail me. As always, I want you to be as
comfortable with your investments as we are.

As always, if you have any questions, please let us know.

Joe Ponzio, Co-Founder

The Meridian Business Group