Whitney Tilson T2 Partners October09

8/14/2019 Whitney Tilson T2 Partners October09

1/73

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 theDow 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 withthese 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%),Wendys/Arbys 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 ourreturns during the big market rally from March through September, finally worked and helpedcushion last months downturn. Winners of note among our shorts included MBIA (-47.7%),Conns (-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 months letter we wrote the following about CIT Group:

[The] stock strangely bounced as it announced a debt exchange offer which, if unsuccessful, willlead to a bankruptcy filing. In either case, the equity will essentially be wiped out. Weveprofitably 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 onepercentage point of return as CIT filed for bankruptcy this afternoon. Our only regret is that we


2/73

percentage point of return as CIT filed for bankruptcy this afternoon. Our only regret is that we

Thus, ironically, while Berkshires stock is down 30.1% since the beginning of 2008 (-31.8% in2008 and up 2.5% this year), the companys intrinsic value has actually risen.

Berkshire Hathaway reports earnings on Friday and we are confident that it will be a blowoutquarter. Operating earnings of the wholly owned businesses will be mixed: the largestbusinesses, insurance and utilities, probably held up well, but businesses exposed to theconsumer 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 Berkshires 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 nowworth over $2 billion. Finally, the equity put contracts generated another roughly $1 billion ofgains.

In total we expect that Berkshires book value grew by approximately $9 billion (after taxes), orapproximately $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 thecompany has never been worth more. We believe Berkshires intrinsic value is approximately$135,000/share, a 36% premium to todays price of $99,000.

We believe Berkshire is safe, cheap, growing nicely and has a near-term catalyst (the quarterlyearnings), so thats why its 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 thehousing/economic crisis and shared our best long and short investment ideas: Iridium and thehomebuilders, 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 highrate 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 housinginventory 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 newhomes, which simply exacerbate the already severe excess inventory problem. We believe thatthe fundamentals for homebuilders are dreadful and will remain so for years, yet the stocks haveroughly doubled since March based on the belief (mistaken, we think) that the housing marketand housing prices have bottomed. When investors realize this is not the case likely within thenext few months we see substantial downside in these stocks


3/73

Overall we expect 2009 to be a very tax efficient year. To receive your individualized taxestimates, simply call or email Kelli at (212) 386-7160 or [email protected].

Conclusion

Thank you for your continued confidence in us and the fund. As always, we welcome yourcomments or questions, so please dont 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 reinvesteddividends) 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 T2Accredited Fund was launched on 1/1/99. Gains and losses among private placements are only reflected in the returns sinceinception.

T2 Accredited Fund Performance (Net) Since Inception

0

20

40

60

80

100

120

140

160

(%)
mailto:[email protected]:[email protected]


4/73

T2 Accredited Fund, LP (the Fund) commenced operations on January 1, 1999. The Fundsinvestment objective is to achieve long-term after-tax capital appreciation commensurate withmoderate risk, primarily by investing with a long-term perspective in a concentrated portfolio ofU.S. stocks. In carrying out the Partnerships investment objective, the Investment Manager, T2Partners Management, LLC, seeks to buy stocks at a steep discount to intrinsic value such thatthere is low risk of capital loss and significant upside potential. The primary focus of theInvestment Manager is on the long-term fortunes of the companies in the Partnerships portfolioor 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 Funds portfolio at the

time you receive this report or that securities sold have not been repurchased. The securitiesdiscussed may not represent the Funds entire portfolio and in the aggregate may represent only asmall percentage of an accounts portfolio holdings. It should not be assumed that any of thesecurities transactions, holdings or sectors discussed were or will prove to be profitable, or thatthe investment recommendations or decisions we make in the future will be profitable or willequal the investment performance of the securities discussed herein. All recommendations withinthe 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 netof incentive fees. Gross returns reflect the deduction of management fees, brokeragecommissions, administrative expenses, and other operating expenses of the Fund. Gross returnswill be reduced by accrued performance allocation or incentive fees, if any. Gross and netperformance includes the reinvestment of all dividends, interest, and capital gains. Performancefor 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 Managers feeschedule included a 1% annual management fee and a 20% incentive fee allocation, subject to a10% hurdle rate. In practice, the incentive fee is earned on an annual, not monthly, basis orupon a withdrawal from the Fund. Because some investors may have different fee arrangementsand depending on the timing of a specific investment, net performance for an individual investormay 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 Fundsholdings differ significantly from the securities that comprise the indices. The indices have notbeen selected to represent appropriate benchmarks to compare an investors performance, butrather are disclosed to allow for comparison of the investors performance to that of certain well-known and widely recognized indices. You cannot invest directly in these indices.


5/73

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

Whitney Tilson & Glenn Tongue

T2 Accredited Fund, LP

Tilson Offshore Fund, Ltd.

T2 Qualified Fund, LP

Value Investing CongressOctober 20, 2009


6/73

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

[email protected]


145 E. 57th Street, 10th Floor

New York, NY 10022

(212) 386-7160

[email protected]



7/733

Disclaimer

THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONALPURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTEINVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE

A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY ORSELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT.

INVESTMENT FUNDS MANAGED BY WHITNEY TILSON AND GLENNTONGUE OWN STOCK IN MANY OF THE COMPANIES DISCUSSED HEREIN.

THEY HAVE NO OBLIGATION TO UPDATE THE INFORMATION CONTAINEDHEREIN AND MAY MAKE INVESTMENT DECISIONS THAT AREINCONSISTENT 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 INFORMATIONCONTAINED IN THIS PRESENTATION.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS ANDFUTURE RETURNS ARE NOT GUARANTEED.


8/73

Background on the U.S. Housing Market


9/735

A Record 10% of Mortgages on 1-to-4 Family Homes

Were Delinquent or in Foreclosure as of Q2 2009

Source: National Delinquency Survey, Mortgage Bankers Association; T2 Partners estimates. Note: Delinquencies (60+ days) are seasonally adjusted.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Q4197

9

Q4198

0

Q4198

1

Q4198

2

Q4198

3

Q4198

4

Q4198

5

Q4198

6

Q4198

7

Q4198

8

Q4198

9

Q4199

0

Q4199

1

Q4199

2

Q4199

3

Q4199

4

Q4199

5

Q4199

6

Q4199

7

Q4199

8

Q4199

9

Q4200

0

Q4200

1

Q4200

2

Q4200

3

Q4200

4

Q4200

5

Q4200

6

Q4200

7

Q4200

8

Percentageof

HomeLoans


10/736

All Types of Loans Are Seeing a Surge in

Delinquencies, Led by Subprime

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Q11999

Q31999

Q12000

Q320

00

Q12001

Q32001

Q12002

Q32002

Q120

03

Q32003

Q12004

Q32004

Q12005

Q32005

Q12006

Q32006

Q12007

Q320

07

Q12008

Q32008

PercentNo

ncurrent

Alt A

Option ARM

Jumbo

SubprimePrime

Home Equity Lines of Credit

Sources: Amherst Securities, LoanPerformance; National Delinquency Survey, Mortgage Bankers Association; FDIC Quarterly Banking Profile;T2 Partners estimates. Note: Prime is seasonally adjusted.


11/737

$0

$5

$10

$15

$20

$25

$30

$35

Jan-06

Apr-0

6

Jul-0

6

Oct-06

Jan-0

7

Apr-07

Jul-0

7

Oct-07

Jan-0

8

Apr-08

Jul-08

Oct-08

Jan-0

9

Apr-09

Jul-09

Oct-09

Jan-10

Apr-1

0

Jul-1

0

Oct-10

LoanswithPaymentShock(Bn)

Sources: LoanPerformance, Deutsche Bank; slide from Pershing Square presentation, How to Save the Bond Insurers, 11/28/07.

The Wave of Resets from Subprime

Loans Is Mostly Behind Us

We are

here


12/738

The Mortgage Meltdown Has Moved

Beyond Subprime

Sources: Federal Reserve Flow of Funds Accounts of the United States, IMF Global Financial Stability Report October 2008, Goldman Sachs Global EconomicsPaper No. 177, FDIC Quarterly Banking Profile, OFHEO, S&P Leverage Commentary & Data, T2 Partners estimates.

$0.0 $0.5 $1.0 $1.5 $2.0 $2.5 $3.0 $3.5 $4.0 $4.5 $5.0

CDO/ CLO

Other Consumer

Construction & Development

Option ARM

Auto

Credit Card

Home Equity

Jumbo Prime

High-Yield / Leveraged Loans

Subprime

Commercial & Industrial

Other Corporate

Alt-A

Commercial Real Estate

Prime Mortgage

Amount Outstanding (Trillions)

Subprime is only a smallpart of the problem


13/739

Delinquencies of Prime and Alt-A

Mortgages Are Soaring

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


14/7310

Delinquencies of Prime Mortgages

Are Soaring

Source: Mortgage Bankers Association National Delinquency Survey.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Q11999

Q31999

Q12000

Q32000

Q120

01

Q32001

Q12002

Q32002

Q12003

Q32003

Q12004

Q32004

Q120

05

Q32005

Q12006

Q32006

Q12007

Q32007

Q12008

Q32008

PercentNoncurre

nt(60+days)


15/7311

Fannie Mae and Freddie Mac Serious

Delinquencies Are Soaring

Note: Serious delinquencies are loans that have missed three or more consecutive payments (90+ days).

Source: Company filings.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

8/07

9/07

10/07

11/07

12/07 1/0

82/0

83/0

84/0

85/0

86/0

87/0

88/0

89/0

810

/0811

/0812

/08 1/09

2/09

3/09

4/09

5/09

6/09

7/09

8/09

Fannie

Freddie


16/7312

15 States With the Highest Prime

Mortgage Foreclosure Rates

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


17/7313

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 theirmortgages reset due to payment shock. Timing: early 2007 (as two-year teaser subprime loans written in early 2005 started to reset) to thepresent. 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 areon banks books) defaulting due to job loss and home price declines/underwater homeowners. Timing: started to surge in early 2008 to thepresent.

Wave #5: Losses among loans outside of the housing sector, thelargest of which will be in the $3.5 trillion area of commercial real estate.Timing: started to surge in early 2008 to the present.


18/7314

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

Source: NATIONAL ASSOCIATION OF REALTORS Existing Home Sales data series; estimates prepared for TheWall Street Journal by LPS Applied Analytics, WSJ, 9/23/09

Months SupplyAnnualized Rate of Existing Home Sales

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Millions

5.1 million units as of theend of August 2009

3

4

5

6

7

8

9

10

11

12

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Months

3.6 million units, equal to 8.5 monthsas of the end of August 2009


19/7315

Home Prices Look Affordable Due to Price

Declines and Ultra-Low Interest Rates

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

0

100

200

300

400

500

600

700

800

IndexValue

Date

CASE SHILLER USA (1975 = 100)

Modeled Home Prices - Interest Only

Modeled Home Prices - 30yr Fully Amortizing


20/7316

Home Prices Were in an Unprecedented

Freefall Until A Bounce in Recent Months

Sources: Standard & Poors, OFHEO Purchase-Only Index, NATIONAL ASSOCIATION OF REALTORS Existing Home Sales data series.

100

120

140

160

180

200

220

Q120

00

Q320

00

Q120

01

Q320

01

Q120

02

Q320

02

Q120

03

Q320

03

Q120

04

Q320

04

Q120

05

Q320

05

Q120

06

Q320

06

Q120

07

Q320

07

Q120

08

Q320

08

Q120

09

S&P/Case-Shiller U.S. National Home Price Index

S&P/Case-Shiller 20-City Composite

OFHEO Purchase-Only Index

NAR Median Sales Price of Existing Homes


21/7317

Recent Signs of Stabilization Are Likely

the Mother of All Head Fakes

Rather than representing a true bottom, recent signs of stabilizationare 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 (eithervoluntarily or via foreclosure), which has the effect of raising theprice at which the average home is sold but more defaults ofhigher priced homes is verybad 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, inpart by doing extremely risky lending

7. Home sales and prices are seasonally strong in April-July dueto tax refunds and the spring selling season

Another Wave of Resetting Loans Is On the Horizon


22/73

18

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

Source: Loan Performance, Amherst Securities.

0

5

10

15

20

TotalL

oan

Balance

($Bil)

OptionARM AltA Prime SubprimeWe are

here

Banks Are Selling Their REO But


23/73

19

Banks Are Selling Their REO, ButForeclosures Have Plunged By More ThanHalf, Ballooning the Inventory Pipeline

Source: Loan Performance, Amherst Securities.

0%

5%

10%

15%

20%

25%

MonthlyRollRates(%)

NonPerformingto Foreclosure Foreclosureto REO REOtoLiquidation

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

REO 90DaysPLUSForeclosure

Inventory Pipeline

Non-Performing to ForeclosureREO to Liquidation

Foreclosure to REO

90 Days & Foreclosure

REO

Monthly Roll Rates

The Current Housing Overhang Is 7 Million Homes


24/73

20

The Current Housing Overhang Is 7Million Homes

Which Doesnt Include Any New Defaults, Which Are

Running at Approximately 300,000/Month!

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

FHAs Loan Book Is a Rapidly Growing Disaster


25/73

21Source: HUD/FHA, through August 31, 2009, NY Times, 10/8/09.

FHA s Loan Book Is a Rapidly Growing Disaster17.9% of Loans Are in Some Stage of Default;For 2007 Loans, Its 32.4%


26/73

22

Existing Home Sales Are Highly Seasonal

Source: National Association of Realtors.


27/73

23

Existing Home Sales Are Highly Seasonal

Source: National Association of Realtors.

HPA Seasonality Coefficient -- Deviation From Mean


28/73

24

Home Prices Bounced From April-July

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

Sequential Home Prices March 2005-July 2009

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Mar-05

Jun-05

Sep-05

Dec-05

Mar-0

6

Jun-0

6

Sep-0

6

Dec-0

6

Mar-07

Jun-07

Sep-07

Dec-07

Mar-0

8

Jun-0

8

Sep-0

8

Dec-0

8

Mar-0

9

Jun-0

9

July 2009: +1.6%

B Th Al B i h S i


29/73

25

But They Always Bounce in the Spring

and Early Summer!

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

Sequential Home Prices February 2000-July 2009

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Feb-0

0

Jul-0

0

Dec-0

0

May-0

1

Oct-0

1

Mar-0

2

Aug-0

2

Jan-0

3

Jun-0

3

Nov-0

3

Apr-0

4

Sep-0

4

Feb-05

Jul-05

Dec-05

May-0

6

Oct-0

6

Mar-07

Aug-07

Jan-0

8

Jun-0

8

Nov-0

8

Apr-0

9

Red circles represent April -June each year


30/73

26

Outlook for Housing Prices

We think housing prices will reach fair value/trend line, down 40% from the peakbased on the S&P/Case-Shiller national (not 20-city) index, which implies roughlya 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 massivegovernment subsidies could prevent it. In the long-term, housing prices will likelysettle around fair value, but in the short-term prices will be driven both bypsychology as well as supply and demand. The recent bounce in home priceshas improved psychology, but the supply-demand trends are very unfavorable

There is a huge mismatch between supply and demand, due largely to the tsunami offoreclosures. In addition, the shadow inventory of foreclosed homes already exceedsone year and there will be millions more foreclosures over the next few years, creating alarge overhang of excess supply that will likely cause prices to overshoot on thedownside, 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 Theres too much inventory to work off quickly, especially in light of the millions of

foreclosures over the next few years

We dont think the economy is likely to provide a tailwind, as we expect tepid economicgrowth at best for a number of years


31/73

The Current Unemployment Situation Is theMost Severe Since the Great Depression

There Have More Than 8 Million Jobs Lost So


32/73

28

There Have More Than 8 Million Jobs Lost SoFar in This Recession, Though the Monthly Rateof Losses Has Eased in Recent Months

Source: Bureau of Labor Statistics.

-1000

-800

-600

-400

-200

0

200

400

600

Jan-9

0

Jan-9

1

Jan-9

2

Jan-9

3

Jan-9

4

Jan-95

Jan-9

6

Jan-97

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-05

Jan-0

6

Jan-07

Jan-0

8

Jan-0

9

Chang

einNonfarmPayrollEmployment(000s)

There have been joblosses every month since

December 2007

150,000 jobs/month are required to absorbnew entrants to the workforce and prevent

unemployment from rising

Th U l t R t C ti t Ri


33/73

29

The Unemployment Rate Continues to Rise,

Reaching 9.8% in September

Source: Bureau of Labor Statistics.

If part-time and discouraged workers are factored in, the unemployment rate would havebeen 17.0% in September. The labor force participation rate was 65.2%, the lowest in 22years. Finally, the average work week hit a record low of 33.0 hours. To return to theaverage of 33.8 hours would be the equivalent of three million new jobs notcreated.

3%

4%

5%

6%

7%

8%

9%

10%

11%

Jan-70

Jan-73

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Jan-09

Unemployment

Rate


34/73

30

Chronic Unemployment Is Skyrocketing

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

35.6%


35/73

31

The Average Weeks Unemployed is 26.2


26.2

Th P t f U l d N t


36/73

32

The Percentage of Unemployed Not onTemporary Layoff Has Risen to 54%


54%

The Proportion of Unemployed Whose


37/73

33

The Proportion of Unemployed WhoseUnemployment Benefits Have ExpiredHas Soared

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

0%

10%

20%

30%

40%

50%

60%

Jun-7

2

Mar-73

Dec-73

Sep-7

4

Jun-7

5

Mar-76

Dec-76

Sep-7

7

Jun-7

8

Mar-79

Dec-79

Sep-8

0

Jun-8

1

Mar-82

Dec-82

Sep-8

3

Jun-8

4

Mar-85

Dec-85

Sep-8

6

Jun-8

7

Mar-88

Dec-88

Sep-8

9

Jun-9

0

Mar-91

Dec-91

Sep-9

2

Jun-9

3

Mar-94

Dec-94

Sep-9

5

Jun-9

6

Mar-97

Dec-97

Sep-9

8

Jun-9

9

Mar-00

Dec-00

Sep-0

1

Jun-0

2

Mar-03

Dec-03

Sep-0

4

Jun-0

5

Mar-06

Dec-06

Sep-0

7

Jun-0

8

Mar-09

Th A N Si U l d P l f


38/73

34

There Are Now Six Unemployed People forEvery Job Opening

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

5 2% of All Jobs Have Disappeared Far


39/73

35

5.2% of All Jobs Have Disappeared, Far

Worse Than Any of the Past Five Recessions

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

-5.5%

-4.5%

-3.5%

-2.5%

-1.5%

-0.5%

0 6 12 18 24 30 36 42 48

Months after pre-recession peak

19802001 - 05

1990 - 931974 - 76

2007- present

1981 - 83


40/73

Consumer Spending, Which Accounts for 70% ofGDP, Is Weak and Likely to Remain So

Consumer Confidence Has Rebounded


41/73

37

Consumer Confidence Has Rebounded

Somewhat But Remains Low

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

0

20

40

60

80

100

120

140

160

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

ConsumerConfidenceIndex


42/73

38

Total Consumer Credit Is Falling Sharply

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

Total 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.

Total Amount of Revolving and NonrevolvingConsumer Credit Outstanding

Household Credit Market Debt Outstanding


43/73

39

gHas Declined for the First Time Since ThisWas Measured Beginning in the Early 1950s

Source: St. Louis Fed.

The Percentage of Banks Tightening Standards


44/73

40

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.

The U.S. Savings Rate Hit a 15-Year High of 6.9%


45/73

The U.S. Savings Rate Hit a 15 Year High of 6.9%

in May, but Fell to 3.0% in AugustThis 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

Source: Paul Kedroskys 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

Peaked

Household Liabilities as a Percentage of


46/73

Household Liabilities as a Percentage of

Disposable Income Remains Very High

Source: U.S. Federal Reserve, WSJ, 10/13/09.42

Peaked

1991: 90%

Peak: 138%

2000: 101%

Today: 129%


47/73

Investment Idea #1Short the Homebuilders Via the

iShares Dow Jones US Home Construction ETF (ITB)

Housing Starts Completions and Sales


48/73

Housing Starts, Completions and Sales

Are At or Near All-Time Lows

Source: Commerce Department, data through 9/09.44

A slight

rebound instarts andsales inrecent

months

200

400

600

800

1000

1200

1400

1600

1800

2000

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

Seas

onallyAdjustedAn

nualRate(000s)

Starts

Completions

New Homes Sold

There Is an Enormous Inventory Glut of New Homes


49/73

There Is an Enormous Inventory Glut of New HomesThe Average New Home Has Been on the Market for 12.9 Months

Source: Census Bureau, through 8/09.45

2

4

6

8

10

12

14

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

MedianAge

(months

Vacant Housing Stock Creates an


50/73

Vacant Housing Stock Creates an

Enormous Inventory Overhang

Source: Census Bureau

Source: Census Bureau, Moodys Economy.com.46

1.1-1.5 million excess units, equal to2-3 years of existing home sales

Nearly 6% of Homes Built This Decade


51/73

Nearly 6% of Homes Built This Decade

Are Vacant


Source: Census Bureau, through Q4 2008.47

5.9%

2.0%

April 2000 to presentMarch 2000 or earlier

Vacancy Rate By Date of Construction

Unlike Past Housing Downturns, New Home Sales


52/73

Unlike Past Housing Downturns, New Home Sales

Have Fallen Far More Than Existing Home Sales

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

A slightreboundfrom March-August

New homes

sales fell 76%from the peak;still down 69%through August

Debt-to-Equity Ratio of


53/73

Debt to Equity Ratio of

Major Homebuilders


Source: Company filings.49

0.00 0.00

0.170.26

0.480.53 0.55

0.59 0.64

0.99

1.40

1.97

-0.5

0.0

0.5

1.0

1.5

2.0

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

6.76

-11.98

Inventory-to-Equity Ratio of


54/73

Inventory to Equity Ratio of

Major Homebuilders



0.300.50

1.331.50 1.56 1.55

1.80

1.46

1.71

2.10

3.12

3.37

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


8.74

-12.89

Price-to-Book Ratio of


55/73

Price to Book Ratio of

Major Homebuilders



2.69

1.76

1.21

1.62

1.411.55

1.08

0.70

1.27

0.39

1.97

2.43

1.37

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0


-3.09


56/73

Investment Idea #2Iridium (IRDM)

O i


57/73

53

Overview

Iridium is the worlds only communication provider with the ability to providereal-time voice and data communications over 100% of the earths service byvirtue of the companys 66-satellite low-earth orbit (LEO) constellation. In

addition, Iridium is one of the few satellite operators with the ability to provideeffective 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 didnt work inside buildings

I idi S M Diff t M k t


58/73

Iridium Serves Many Different Markets

Source: Company presentation, 6/09.54

A Hi hl Att ti B i


59/73

55

A Highly Attractive Business

Growing market share in a growing industry

Huge barriers to entry

US Department of Defense is an anchor customer (22% ofrevenues in Q2 09)

Very high and rapidly expanding margins

New products and applications

I idi M k t Sh H G R idl


60/73

Iridiums Market Share Has Grown Rapidly

Source: Company presentation, 9/08.56

Iridium Has Shown Extraordinary Growth in


61/73

y

Subscribers


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

Iridium Has Shown Extraordinary Growth in


62/73

y

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%.

Subscriber Growth Has Been Driven by


63/73

y

Commercial and Machine-to-Machine

Source: Stifel Nicolaus, company filings.59

Iridiums Stock Has Tumbled Since It Began


64/73

Trading a Few Weeks Ago

Source: BigCharts.com.60

Why Is Iridium Out of Favor?


65/73

61

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

Iridium Came Public Via a SPAC


66/73

62

Transaction

SPACs have very poor track records in general

But Iridium was acquired by a SPAC (Special PurposeAcquisition Company) controlled by Greenhill, a topquality private equity sponsor

The deal price was negotiated during the market

meltdown last fall (deal was announced 9/23/08), then theprice was reduced in April and warrant dilution was cutback in July

Iridium NEXT


67/73

63

Iridium NEXT

Current satellite constellation will need to be replaced startingin 2014

Backwards compatible (existing customers will not need toreplace 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)

Iridiums Cap Ex Requirements Will Rise to


68/73

Fund Iridium Next, and Then Fall

Source: Stifel Nicolaus estimates.64

Iridium Should Be Able to Fund Iridium NEXT From


69/73

Cash Flow, Hosted Payloads and Warrant Conversion

Source: Raymond James estimates.65

Valuation


70/73

66

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 millionLess cash: $80 million

Enterprise value: $492 million

2009 EBITDA (E) $130

EV/EBITDA: 3.8x

Iridiums Operational EBITDA is Projected


71/73

to Double in Only Three Years

Source: Raymond James estimates.67

We Expect a Mid-20% IRR on This


72/73

Investment for Many Years to Come

Source: T2 Partners estimates.68

Stock Price Based on EV/EBITDA Multiples

Multiple 2016 2017 20188 $25.36 $31.20 $37.77

9 $29.05 $35.22 $42.10

10 $32.74 $39.25 $46.43IRR

Multiple 2016 2017 2018

8 21% 21% 24%9 23% 23% 26%

10 26% 25% 28%

Drivers of Stock Price Appreciation


73/73

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 capitalexpenditures

Documents

Whitney Tilson T2 Partners October09