Quarterly Update

We have decided to start providing quarterly updates of our views on the market and especially on our holdings. Our take on these quarterly updates is very different than what the traditional market view is. The markets are addicted to a constant stream of data. The company’s quarterly reporting has dramatic impact on the market’s valuation of the companies. We do not believe a company’s quarterly performance makes or destroys a company or industry. Instead we see these quarterly reporting sometime creating buying of selling opportunities depending on Mr. Market’s over reactions.

The quarter ended 6/30/09 is like a kid overdosed with chocolate. The kid has been hyper and running around making everyone laugh. The audience is over joyed and entertained by the childish actions. Mr. Market is the kid over dosed by earnings that ‘beat the expectations.’ The audience are the players in the market, who have become jovial by these ‘unexpected good news.’

Although the companies are reporting strong earnings, the results are altered by short-term cost cutting measures. Companies have slashed jobs, cut back on capital expenditures, and have used accounting gimmicks (most common is buying back debt at discount to par value) to show strong earnings. These earnings might look good in the short-term but companies can only slash fat so far. After that, you start eating away at the meat, which can have adverse impact in the long term. Investors who are taking these earnings to mean that good times are here, will be regretting it soon.

A review of the our holdings and their quarterly performance:

Caraco Pharma: This is our largest holding. We know the company is struggling with FDA compliance issues and were expecting the operating performance to be dismal. Our main concern was the cash position on the company and whether the company is still positioning itself for the long-term prospects. The company’s cash position is strong 65M (47M net cash after the 18M of debt is taken out). The company is also making investments in R&D and building long-term value. The company changed its CEO, bringing back Jitendra Doshi. We believe the new CEO and the company’s strong cash and long-term prospects look extremely strong compared to the price we built our position.

If Mr. Market takes a negative position on the company’s short-term outlook and starts selling the company for a bigger discount than we initially purchased shares, we will be backing up the truck.

WellCare: The company had phenomenal earnings and strong future guidance. We expected the company to have a strong future outlook. The main concern with the company was the legal issues with the FDA. The company looks to have resolved these issues and is starting to look beyond it. The market is starting to realize the value in the shares and we will believe the shares will appreciate substantially from here.

China Marine Food: The company keeps delivering on the growth and generating the cash flow we expect. The management team is building its IR and getting the word out about the company. The company got approval for listing on AMEX and has started trading on AMEX on Aug 10th.

PhotoChannel: The company keeps growing and generating cash. The margins and the business model is working beautiful and the company is positioning itself for a huge 2010. Even in one of the worst economic environment, the company keeps producing strong growth.

Ternium: We invested in this steel producer because of its ability to generate strong cash flow and the exceptional management team. The management closed on the Venezuelan plant and we believe the company will use the $2B in proceeds to build a plant in Brazil. Ternium’s strong position in Mexico, Argentina, and likely Brazil will produce strong cash flows for one of the best run steel companies in Latin America.

Pinnacle Corp: A wonderful quarter. The management delivered on everything it has promised over the last 12 months. The company got a $25M loan secured by its spare parts. This should basically guarantee the company’s ability to pay off the debt in Feb ’10. Management has fixed the problems at Colgan and the Colgan operations showed the results. The company is finalizing the labor agreement. And, management is close to materializing on its ARS holdings. The company won’t get par value on ARS but it will get lot more than the 85M in loan it backed by the ARS. Finally, the company is currently making around $3 per year in CF, with growth potential in 2010. The company’s shares look cheap at current prices. We have believed in management’s ability to delivery and management delivered big time. We need to be patient with this holding and let Mr. Market realize the value here.

Harvest Natural Resources: We are dumb founded at the prices this company is selling for. At one point the company was selling for less than cash on hand, not to mention they have millions barrels of proven oil and rights to development in many other parts of the world. We believe the oil prices are bound to move up and HNR will keep producing strong cash flows. Management is exception at allocating the capital from the Venezuelan reserves into potential fields in the rest of the world.

Penn Traffic Corp: The management is working on stabilizing the company’s EBITDA. The company has cleaned up its balance sheet and it looks like the operations are stabilizing. We invested in the company with expectations of the company being bought out by a large competitor. Management has its bonus package lined with acquisition of the company at double-digits. We are pleased with what management is doing and are happy to wait until an acquirer comes with a strong offer.

General Growth Properties: Major news has moved the shares up substantially. The bankruptcy is proceeding as expected. GGP is in the driver’s seat in the bankruptcy. We don’t expect any major breakthrough until 2010. We believe the return on this investment will be substantial.

We are excited about the potential for our businesses. We believe in the business models of our investments and believe we have an exceptional management team running them. Mr. Market will take its time to come around and realize the value in these companies. While we plan to wait for Mr. Market to come around, we have made a major mistake in our capital allocation that cost us on substantial returns. We enjoy an environment where we can find plenty of investment opportunities, we sometimes cannot act on it because we don’t have the cash on hand. In the previous quarter we didn’t have cash on hand to invest in our holdings, even though Mr. Market was giving it away for a much bigger discount then when we initially purchased our stake. Holding cash is a defensive position that allows for a quick offense when the stocks drop. Some of my holdings dropped over 70% in the last 12 months. Not having cash around, we couldn’t double or triple down. Going forward, we will always keep a strong cash position, ready to strike it things get even cheaper.

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