Professional Documents
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Whitney Tilson T2 Partners October09
Whitney Tilson T2 Partners October09
Whitney Tilson T2 Partners October09
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.
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.
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,
The unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvested
dividends) is:
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
-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
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
Alt-A
Other Corporate
Subprime
Subprime is only a small
High-Yield / Leveraged Loans
part of the problem
Jumbo Prime
Home Equity
Credit Card
Auto
Option ARM
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
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
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
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)
600
500
Index Value
400
300
200
100
Date
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
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
here
15
10
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
600,000
400,000
REO
200,000
REO 90 Days PLUS Foreclosure
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
3.0%
2.0%
1.0%
0.0%
-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
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ar
ar
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Fe
• 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
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
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%
26.2
54%
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-
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
-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
160
140
120
Consumer Confidence Index
100
80
60
40
20
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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
Peak: 138%
2000: 101%
1991: 90%
Peaked
Today: 129%
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
2
4
6
8
10
12
14
Ja 0
n-
9
Ja 1
n-
9
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
2.0%
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
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
55
Iridium’s Market Share Has Grown Rapidly
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
62
Iridium NEXT
66
Iridium’s Operational EBITDA is Projected
to Double in Only Three Years
69