Dear Investors, Okay, time to exhale. It's been a week for the record books. For the week, the Dow lost 1.5%. Tarpon was down 2.7%. Gecko was essentially flat, eeking out a 0.01% gain. None of that is particularly notable, however. Here is what was historic: - Monday was the sixth largest point-drop in the history of the Dow Jones. - On Tuesday the Dow notched its 10th largest point gain in its history - a nearly 600 point rally. In the final hour of trading, no less. - Wednesday had the 9th worst single-day drop in the 115 year history of Dow. And by the way, in percentage terms, those first three days of the past week ranked in the top 100 craziest days the market has ever seen. - Thursday was notable because it was the fourth straight day with a move of 400 points or greater - a first in the Dow's history. - And Friday's close represented the first back-to-back gains for the Dow since July 7th. There's easily an entire investor letter to be written to try and explain all that volatility, but high frequency trading and inverse ETFs probably aren't nearly as relevant as is “plain old panic and '08 flashbacks.” And I suspect you may be familiar with those concepts already. My real message in this letter is a simpler one. Namely: We are still in the fight. Both portfolios have certainly taken some shots the last few weeks - on top of the market's already unsettling drop, I mean. I had to make some tough choices this past week in particular about what we would continue to own and what we wouldn't. But this week was also an absolutely electrifying time to be a value investor. So when it comes to the performance of either Tarpon or Gecko lately, I can't blame any of you for being frustrated, upset or disappointed. What's more important to me, though, is that you don't lose respect for the process of value investing. The storm came. We rode it out. We took some lumps. But we didn't alter course. We didn't tuck tail and run. And we came out stronger then we went in. So when you go to that party this weekend, and your friends ask how you fared in the crazy market this week, you can rightly look them in the eye and say, “Meh. No biggie. I've got nerves of titanium.” What's Next That 'storm' metaphor above underscores my belief that we are through the worst of the market's gyrations. Number one, it's hard to imagine much more fear than we just saw in the market this week, and emotions will, like most things, return to the mean. Plus, valuations were apparently ridiculous enough that even formerly petrified buyers couldn't help but to start to return to the market on Thursday. And lastly, the functional equivalent of “QE3” began with last Tuesday's announcement from the Fed - although the financial media and punditry does not seem to have grasped this yet. But this guy from Freakonomics got it. And so did these guys. Let me be clear about that last point - the Fed's decision to specify mid-2013 as the date until which it would keep interest rates low has, for all practical purposes, the same effect as the Fed starting to buy hundreds of billions more in Treasuries in another “quantitative easing” program. Different arrow, same quiver. And while it certainly isn't a panacea for all that ails our economy, it does give us a longer runway to get things moving. More relevant - if rates are going to stay low for that long, money will find its way back into stocks again. There, see that? You haven't even had your coffee yet, but you're already smarter about this than most of the talking heads on the tee-vee box. That said, investing by taking cues from the Fed is just silly. And even if we were in a recession right now, it wouldn't change anything I'm doing with our money on a daily basis. So to some extent that pseudo-QE3 thing is an academic point. But it is also one important positive that has been temporarily lost in all the noise - though I don't expect it will remain ignored for long. I am now going to skip a detailed discussion of our macroeconomic challenges. Forgive me. I have macro-fatigue. Instead I'll summarize my thoughts on the economy as follows: What we are in for, to paraphrase the Fed, is a couple more years of slow growth. If the economy were an airplane, it would be flying slightly above stall speed right now. Any big further shocks would be bad news, but as this point, we are still flying, and some gauges - particularly corporate profits - look downright excellent. So now is not the time to relax, but fretting about an engine that might inexplicably fall off doesn't strike me as particularly rational, either. More alarms would be going off first. And there has been no force in history that has been successful at stalling the march of American businesses. None. See that Buffett quote from my last letter. At some point, productivity gains will simply stop, and businesses will have to take a leap and start to hire in order to grow. That's just how every business cycle works. And if we can get through this current crisis of confidence, and businesses start to make even a little leap-of-hiring-faith, then growth will pick up again, and things will get a little easier. If not, then we'll deal with whatever may come. But I think history and the odds favor the former. So to continue with the airplane thing from above - expect that seat in front of you to recline, and prepare yourself accordingly. But we'll make it. Smiling Inside I'm tempted to get into how fired up I am about the prospects of both Tarpon and Gecko now after making some key changes this week, but I think that may go without saying. Plus, I'm afraid we've got more than a few of you newer investors sitting on some lousy paper losses right now, and, candidly, I'm not so sure you really want to hear me preen. So I suppose the appropriate thing to do is to let the future performance of both funds do the talking for a bit. With regards to the changes I made, then - some you will love, and some may underwhelm you. I'll try to explain them all in due time. Here is a quick list of some highlights: In Tarpon, we averaged down in Leap at below liquidation value. The company's chairman also bought $25M worth of Leap shares around the same price, too. The same with ATP Oil & Gas - we have an entirely new position at below net asset value. We now own a large chunk of Wells Fargo at less than book value. And our new holding Clearwire is so cheap I cannot sleep. We've also got some new but familiar names in Gecko, like Paychex, and I added more to our long-time holding Energy Transfer Equity there, too. ETE not only yields over 6.5% but is in the process of becoming the largest natural gas pipeline company in the country after agreeing to buy the venerable Southern Union. This will be good for us in many ways. We should be set for a while. I am done making changes to both portfolios for some time. I'm not nearly as concerned with trying to time the bottom here as I am with making sure we're getting a really good deal on things, and in that sense it has been a great week. We got some amazing prices on some terrific companies, thanks to all that craziness. So to paraphrase Buddy Garrity from Friday Night Lights, "You all love volatility. You just don't know it yet." On The Downgrade of the U.S. I mentioned in my last email that there were two key questions about the S&P downgrade I'd be trying to answer this week. First, the widescale forced selling of equities was not an issue - at least not in the sense that would have been disastrous (i.e. at DTCC, the Depository…er, never mind). I suspect there was plenty of forced selling due to margin calls at hedge funds this past week, but that sort of thing is an opportunity, not a threat. Also, higher borrowing costs are nowhere to be found. That ironic flight to Treasuries I'd mentioned happened right on cue Monday morning and continued throughout the week. So, right now, there are no negative signs of an impact of the downgrade specifically on the housing market. Applications for refinancing actually rose by almost 30% due to the drop in the 30-year mortgage rate. So there appears to be no immediate risk of further tanking the economy due to the downgrade's impact on housing in particular. Which is to say, of course, housing will still be a slog for a bit yet. China's response to the downgrade of our debt was also an open question - at least it was earlier in the week when a few of you asked about that specifically. There was some posturing about the downgrade by China as the week went on, but in general, I think it's safe to say the dollar was in a long-term decline before last Friday, anyway, and near-term bounce aside, the rhetoric from Beijing will neither stem nor accelerate that here. Plus, China's more intense focus these days continues to be on maintaining social order via full employment. To announce anything that would negatively impact the production of the roughly $300 billion of goods they export to us every year would probably mean higher chances of unrest. So, China has taken some rhetorical swipes at us in the media this week, but I expect that's all the fallout we'll see for the foreseeable future on this issue from China. Also on the international front, the firehose of news out of Europe this week ended on a modestly positive note, too. Specifically, the ECB responded constructively to new Italian fiscal and structural commitments and a Franco-German commitment to engage the EFSF in secondary market purchasing and oh by the hammer of Thor I'm just gonna go get some oysters Rockefeller. Sorry. Too many out-of-breath headlines from Europe went rolling by this week. Let's just boil them down to this: Europe continues to work through its issues, of which it has many, but things in France and/or Italy are not nearly as dire as the headlines might lead you to believe, either. Also - here's something you might not know about Italy: the prime minister is 74 years old and likes to host orgies. Hand in the air - Google “Berlusconi bunga bunga” and see for yourself. So Italy may have some debt problems, but it's running a surplus in pure comedy gold. Ba-dum-bum. To Re-cap We just went through a stock market correction triggered by a crisis of confidence and rooted in slower economic growth as well as the increased (but still moderately low) probability of another recession. In contrast, in 2008, we had a historic funding crisis - meaning the stock market drop was directly related to the absolute refusal of banks to lend to one another. That is absolutely not a problem right now. So to reiterate: This is not 2008. Also, to clarify what “slower economic growth” really means for you and your family, I'd say this: The next few years will belong to the grinders. Still. So, work hard. Be thrifty. And don't fill up on the bread. My next letter to you will be at the end of September. You have already heard enough from me in August. But as usual, please call or email whenever you have questions. And if you'd like a copy of the transcript from the investor conference call I held last week, please just reply to this email. I talked more then about our new position in Clearwire, too. Thank you again for your patience. I hope to be relaying brighter news in the months ahead. Good weekend. - Cale | 
Cale's Notes: 