SEVENTEEN MILE

E VENT -D RIVEN , V ALUE -O RIENTED I NVESTMENT D IARY

INVESTMENT LETTER
J UNE 15

TH

O CTOBER 31

ST

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N OVEMBER 20 , 2014

Dear Reader,
Welcome to the first official investment letter of the 17 Mile Investment Diary. For new readers, 17
Mile is a personal investment diary designed to document my investment process and
performance. The diary is public in order to exert as much reporting and performance pressure on
myself as possible even if nobody reads my work, the mere fact that it is on a public website
and sent out via Twitter provides all the pressure I need. What follows is an analysis of how I
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invested from June 15 thru October 31 of this year, looking at Performance, Portfolio
Management, the Market Mosaic, Security Analysis and Portfolio Activity. As with the 17 Mile site
itself, the quality of content, formatting and readability will get better over time as I write more of
these letters. Unfortunately, this initial letter is the guinea pig.
The original intent was to write a quarterly letter, but I quickly found out that simply will not be the
case as I am too long-winded to produce this much content on a quarterly basis in a timely
manner. My goal is to produce at least two if not three per year. Though depending on market
events, I sometimes may produce shorter letters in order to provide updates on recent events.
Ideally the investment letters should provide updated analysis on each portfolio holding, but with
this letter I simply ran out of time. I wanted it out in November and I leave for vacation next week;
so updated work on YHOO, BAC, JPM and DISH is not provided in detail here.
So, onto the analysis

PERFORMANCE
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The 17 Mile Portfolio returned a net +7.7% for the period (June 15 , 2014 is the inception date
of the Portfolio) versus +4.3% for the Benchmark, the Dow Jones U.S. Total Stock Market Total
Return Index (DWCFT). Also, on a total return basis the S&P 500 and NASDAQ 100 returned
4.9% and 10.5% for the period.

17 Mile Performance
17 Mile
DWCFT
SPXT
XNDX

Current
7.7%
4.3%
4.9%
10.5%

YTD
7.7%
4.3%
4.9%
10.5%

Inception
7.7%
4.3%
4.9%
10.5%

Positive returns from BAC, DISH, FOX, IRM, JPM, LMC, V, VRX and YHOO were somewhat
offset by losses in FNMA/FNMAS, DVN, HTZ and TMUS. Of note, excluding the FNMA/FNMAS
position, the Portfolio returned over 15% in the period. While not dismissing the FNMA/FNMAS
loss, due to the very special nature of the position one that will A) likely take years to work out,
and B) potentially hinges on a single ruling or congressional decision and will thus generate
enormous returns, negative or positive, in a very short period of time analyzing performance net
of the FNMA/FNMAS position provides a cleaner look at underlying security selection and
portfolio management performance.

Performance Goal
The goal is to beat the DWCFT by 5% per annum, net of hypothetical fees, over all trailing
periods greater than 3 years. The hedge fund industry judges performance on a monthly basis;
Buffett a 5-year basis so three years seems to be a happy medium. Hypothetical fees consist of
a 2% management fee and a 25% performance fee over a 6% hurdle. The performance fee is
stolen directly from Buffetts BPL model. A more intricate performance fee construction that took
into account various alpha hurdles was attempted, but surprisingly the highly simplistic 25%-over6% is the most LP-friendly, simplistic method around. As per usual, Buffetts brilliance comes
through in a model that can be explained to a 2-year old.

PORTFOLIO MANAGEMENT
Investments are allocated between the following categories: Generals, Events and Special
Situations. Generals are undervalued issues with no identifiable near- or medium-term catalyst;
Events are undervalued issues with an identifiable near- or medium-term catalyst such as spinoffs, recaps, M&A, board change, etc.; and Special Situations are market-neutral situations such
as merger arbitrage, liquidations, events, etc. Capital allocation is agnostic to each category as
long as a securitys expected return is at least 10% higher per annum than the broad market, as
defined by GMOs most recent U.S. Large 7-year expected return calculation. As of September
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30 , GMOs U.S. Large 7-year expected return is approximately .70% per annum.
When the broad market environment is favorable (as discussed in the Market Mosaic section),
leverage is employed for diversification purposes. Leverage is not utilized to amplify returns by
boosting a position say 50% higher than it otherwise would be. With a watch the 1-egg basket
approach to position sizing, enhancing a large position size with leverage would be extremely
dangerous. Of course, in a volatile market environment where correlations go to 1, the
diversification-by-leverage approach will lead to out-sized portfolio volatility; thus a rigorous
understanding of the market environment is critical.
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June 15 Portfolio
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As of June 15 , gross assets were comprised of 30% Generals, 59% Events and 11% Special
Situations. Individual securities over 10% were: VRX (20.3%), LMCA (11.3%), V (10.6%) and
FNMA/FNMAS (10.5%). The balance of the Portfolio was comprised of BAC, DVN, DISH, HTZ,
IRM, JPM and YHOO.
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October 31 Portfolio
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As of October 31 , gross assets were comprised of 24% Generals, 70% Events and 5.5% Special
Situations. Individual securities over 10% were: VRX (31.2%), LMCA/LMCK (11.6%), V (11.3%)
and HTZ (10.1%). The balance of the Portfolio was comprised of BAC, DISH, FNMAS, JPM and
YHOO.

THE MARKET MOSAIC

[For readers keeping track, the following description of the Market Mosaic differs slightly from the original outlined in the
Lessons from Residency and formerly under the 17 Mile Investing tab.]

The Market Mosaic is a weight-of-the-evidence approach to market risk management that

incorporates valuation, momentum, and economic & monetary conditions. It is not designed to
avoid every -10% to -20% market decline based on the assumption that the market quickly
recovers from non-recessionary bear or near-bear markets but rather to A) get portfolio
exposure in line with multi-year/quarter market trends and B) avoid the bulk of large-scale
recessionary bear markets. The model is comprised of the following components: Economy
(Recession Yes/No), Market Model (40% weight), SPX Price/200dma (30%), SPX 200dma
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Direction (20%) and Monetary (10%). The model is intentionally designed to be slow moving,
long-term oriented and hedged against itself. For example, while it is notoriously difficult to
precisely forecast recessions, market price action and monetary conditions often lead
recessionary environments, which the model will pick up on prior to a Yes reading from the
Economic component. Once inside of a recession, the fact that a recession is in progress is
relatively straightforward to pick up on, thus portfolio exposure can be reduced prior to the bulk of
recessionary bear market declines once the Economic component turns Yes.
Portfolio exposure is managed via a two-part system. First, a general range of exposure is
determined based on the Economic component: 50% minimum gross/net to 200% maximum
gross under a No reading; -50% minimum net to 100% maximum gross under a Yes reading.
Second, within the established range, portfolio exposure is managed based on the Market
Mosaic Composite, a weighted average score of the Market Model, P/200dma, 200dma
Direction and Monetary components with each component receiving a rating between -100 and
+100 in increments of 50.
Updated Market Mosaic
Economy. With jobless claims plumbing new lows and rail traffic strong and steady, it is safe to
say a recession is currently off the table. As such, the allowed portfolio exposure range at this
time is 50% to 200%. The following charts are courtesy of www.pragcap.com:

Market Model. The Market Model went to a HOLD rating on 11/13/14 after being on a BUY since
1/27/14. A HOLD rating coming off of a BUY warrants a score of +50.
The Market Model is a long-term oriented composite of various valuation, technical and trend
indicators.

SPX P/200dma. The S&P 500 currently trades for approximately 1.06 times its 200dma.
Comfortably within the range of .95 to 1.15, the S&P 500 appears quite healthy from a technical
standpoint not too cold, not too hot as such, a score of +100 is assigned.
While this ratio is certainly on the squishier end of indicators, the S&P 500s trading history
indicates that a sustained decline below 95% of the 200dma and a sustained advance above
115% of the 200dma each warrant caution. A healthy amount of judgment is required to interpret
the indicator on its own in real time, but within a composite such as the Market Mosaic, it is a
useful hedge against the other slower-moving indicators.
SPX 200dma Direction. The slope of the 200dma is determined by the 200-day growth rate of
the 200dma i.e. where is the 200dma now versus 200 days ago. At present, the S&P 500s
200dma is approximately 1922, which is 12.7% higher than the 1706 200dma 200 days ago. The
trend of the 200dma is simply whether the 200dma is currently rising or falling. At present, the
S&P 500s 200dma is rising. With both components positive, a score of +100 is assigned.
Monetary. This is the squishiest component of all, which is why it is assigned a weight of only
10%. A general observation of credit growth, high yield spreads and Fed policy is the extent of
the analysis. At present, commercial credit is expanding; consumer credit is slowly but surely
healing; high yield spreads are low but trending in the wrong direction; and Fed policy is
extremely easy with the potential to begin tightening sometime in the next 12 to 18 months.
Really, the only fly in the monetary ointment is the trend in high yield spreads. Given that the
upward move in high yield spreads has not coincided with any deterioration in real-time economic
data, more than likely the move is simply a reversion to the mean, as evidenced by the fact the
recent move is barely noticeable on a 10-year chart. So outside of the slight risk posed by the
unfavorable trend in HY spreads, monetary conditions are extremely friendly to economic and
capital market participants. A score of +100 is assigned.
MARKET MOSAIC COMPOSITE SCORE = 80
With expansionary economic conditions in place, and a Composite score of 80,
maximum gross exposure is 185%.
The Great Crash of 2014
[At risk of the following being construed as Monday Morning Quarterbacking, the majority of these thoughts were shared
in real time via Twitter, and have not been deleted.]

While it has been over three years since a market decline of over -10%, and thus somewhat
justifiable that market participants would be skittish at the first sign of such a decline, the speed
with which observable market sentiment jumped to crash-mode in mid-October was truly
stunning. With the market down less than -10%, market participants suddenly turned into 1987
Crash specialists (hence the exaggerated crash title). This market environment looks nothing
like historic "crash" environments, and if anything looks like it is at the beginning stages of a
sustained move higher. When market sentiment is firmly in "buy the dip" mode after a -10%
decline that will be the time to worry. The Great Crash of 2014 is profiled not to chide the crash
callers, but rather to highlight the first true test of the Market Mosaic philosophy and document my
risk/portfolio management thought process through the decline.
Leading up to the September market peak there were some ancillary signs of market "fatigue",
such as underperforming small caps, narrowing leadership, optimistic sentiment readings and
widening HY spreads; but nothing overly alarming from a LT perspective, as evidenced by a +100
reading on the Market Mosaic Composite. The one caveat in my mind was the official end of the
Fed's QE program in October. Previous conclusions of QE coincided with double digit market
declines; but correlation does not imply causation, and with the market and economic
environment stronger than previous QE conclusions in 2010 and 2011, I put the risk on the back
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burner. As the market decline reached the -7% mark in early October however, the 2011 scenario
moved to the forefront as volatility and sentiment began carving out eerily similar patterns to the
June 2011 -7% pre-bear market decline. Also, hovering at around 97% of its 200dma, the S&P
500 teetered on the edge of breeching the 95% level that would turn the Price/200dma
component of the Market Mosaic Composite negative.
While I viewed a 1987 Crash scenario as a very remote possibility, I was mentally preparing for a
stiff -15% to -20% correction and ready to cut exposure though reluctantly if the SPX
breached the 95% level. However, as the 1987 Crash talked accelerated, composite sentiment
turned extremely negative, and the market appeared to show signs of ST bottoming, I believed
there was a high probability of a snap-back rally to, or close to, previous highs before a full-blown
correction ensued. If the market were to follow the 2011 template, then it would top out at or close
to previous highs with composite sentiment topping out at a lower high.
As the market sat just below the highs heading into the Fed meeting that would officially end the
quantitative easing program, and composite sentiment at a lower high, the market appeared
vulnerable to another decline. My inner market timer desperately wanted to begin layering on
hedges, but I thought composite sentiment still had some room to rise. I got lucky on the Friday
of Fed week (10/31), the BOJ shocked markets with a significant expansion of its own QE
program and the S&P 500 rallied to close to the highs on huge volume. The fact that market
participants used the BOJ announcement as an excuse for the high-volume market rally a
ridiculous proposition, since the BOJ has committed to doing virtually whatever it takes to reach
its 2% inflation target bolstered my belief that the 2011 scenario was off the table. Markets look
for excuses to conform to the fundamentally rooted trend in place. It is this fundamental trend that
the Market Mosaic is designed to capture; not to take advantage of the ST trading opportunity
created by the BOJ announcement surprise.

SECURITY ANALYSIS
Valeant Pharmaceuticals (VRX)
Growth Runway. VRX is intriguing for a multitude of reasons; but it is the financial engineering
aspect that is most endearing. Capital markets are wide open, valuations are reasonable and Big
Pharma R&D budgets are as bloated and ineffective as ever; with an $80B enterprise value and
over $1T in acquisition targets, VRX is in phenomenal position to continue aggressively building
its earnings power via acquisition. VRXs Mike Pearson-led acquisition record is exceeded only
by the greatest acquisition machines in history Berkshire Hathaway, TCI and Teledyne, among
others. Give VRX another five to ten years under Pearsons leadership, and its track record will
likely mirror these legends.
VRX management projects that it can grow adjusted EPS by 15% to 20% even after the proposed
merger of equals with AGN. With combine sales of less than 40% of Pfizers, the pro forma
VRX/AGN entity has significant room to grow, and will more than likely exceed its 15% to 20%
post-merger target.
Consider, if the VRX/AGN entity were to target a PFEs 2016E sales level of $48.5B, it would
need to acquire over $29B of sales. At a target acquisition multiple of 3 times sales, $29.44B of
sales would cost $88.33B. At a 45% EBIT margin and a 27% tax rate, incremental NOPAT would
be $9,672 million. If 50% of the cost was financed with 6% debt, incremental after-tax interest
expense would be $1,934, and incremental adjusted net income $7,738. If 50% of the cost was
financed with equity issued at a fair value of $230 per share, share issuance would be 192
million, resulting in pro forma shares out of 797 million. After all that, pro forma adjusted EPS
would be $18.43. If it were to take 5 years to complete such an acquisition program, and
terminally it traded at 20 times, the 5-year IRR would be 23% per annum from a recent $133 VRX
PPS.
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This example is merely illustrative of the growth runway a VRX/AGN entity would have before it,
and does not account for organic growth and likely shareholder distributions along the way.
Earnings Quality. The biggest concern with VRX, and the focal point of the short thesis, is the
quality and sustainability of its Cash Earnings, a figure that adds back the following items to
GAAP earnings: Amortization, Restructuring, In-Process R&D, Acquisition-Related and Other
expenses. The shorts claim that by adding back these expenses, VRX is overstating the ROIC on
its acquisition program and underestimating the economic cost of maintaining its earnings power.
VRX management has gone to great pains to outline why organic growth is alive and well under
its R&D program, and even if they are on the aggressive side estimating 5% to 10% organic
growth, it should be noted that a 0% organic growth figure would validate its cash earnings
calculation, as that would indicate its expense base is an appropriate representation of the
economic cost to maintain earnings power. There is nothing wrong with growth coming purely
from acquisition investment as long as there is an economic return generated on that investment.
The bigger concern is whether VRX is earning an economic return on its acquisition program. A
low cost of debt, an artificially depressed capital base and inappropriate exclusion of restructuring
costs from the ROIC denominator can inappropriately inflate the headline ROIC of such a
program. The following analysis looks at VRXs total investment program from 2009 thru 3Q14:
From FYE 2008 thru 3Q14, VRX grew its Net Operating Assets (Total Assets Cash Non-Debt
Liabilities) by $19.68B. Over that time, cumulative growth-oriented Income Statement charges
(Amortization, Restructuring, IPR&D, Acquisition and Other) totaled $7.75B, which brings the total
period investment to $27.43B. Adjusted NOPAT, using a 27% tax rate, grew $2.52B from $203
million in 2008 to a projected $2.72 billion in 2014, for a return on invested capital of 9.2%. At a
10% tax rate closer to the 5% rate VRX manages to the ROIC is 11.3%. VRX employed
$11.63B of equity over the period to fund 42% of its investment program. Change in Adjusted Net
Income, using a 27% tax rate, was $1.91B, for a ROE of 16.5%.
For a company investing a significant amount of capital in such a short amount of time, with the
intent to build large scale in order to create a platform for future growth, these are absolutely
phenomenal returns on invested capital. Paying a full and fair price for wonderful assets requires
accepting a lower initial return on investment. Over time, the underlying ROIC will shine through.
PGs purchase of Gillette is a prime example though stated ROIC is below the PG historic
average, the ROIC on capital reinvested back into the Gillette asset is far higher. All that to say,
the fact that VRX is generating returns of 9.2% and 16.5% on total and equity capital invested into
its own Gillettes indicates high management competency, deft strategy and strict return
requirements.
Valuation. Using VRX management 2014 Adjusted EPS guidance of $8.27 and an estimated tax
rate of 5%, 2014 EBT per share is ~$8.71. At a 27% tax rate, normalized EPS is $6.36.
v Base Case. EPS grows 20% p.a. for 6 years and VRX trades for 17.5 times at YE 5.
Using a 10% discount rate, VRX is worth $206 today.
v Home Run. 30% growth and a 17.5 multiple. $334 FVPS today.
v Grand Slam. 30% growth and a 20 times multiple. $381 FVPS.
AGN Update. As I write this on the evening of November 16, 2014, it has been announced that
AGN is set to announce a deal to sell itself to Actavis (ACT) before trading begins tomorrow
morning. ACT is reported to offer more than $215 per share, which is more than the $200 VRX
said it would go up to. Tomorrow will be interesting, to say the least. VRX has a huge opportunity
to prove its price discipline and let AGN and ACT shareholders to writhe under the weight of an
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overvalued acquisition; but depending on how VRX views its stock valuation, perhaps they will
surprise and outbid ACT.
VRX is in phenomenal position even without AGN. This saga has proved enormously valuable, as
VRX has been forced to defend its business model and has done so in stunning detail. As the
Bausch & Lomb acquisition has lapped, VRXs balance sheet is in great shape to re-launch its
acquisition program in 2015. Management has even indicated it has capacity and willingness to
conduct a large-scale buyback program at these share price levels. At present, VRX is leveraged
4.1 times 2014 Adjusted EBIT boosting leverage by 1.5 turns would free up capacity of over
12% of the current market cap.
I truly have next to no idea how VRX will trade tomorrow. While the first thought is it will be weak
given the value AGN would bring to VRX, the strength in VRXs stock price last week, and the
fact that the ACT/AGN tie-up has been discussed for weeks now, indicates to me that the market
will view the end of the AGN saga as a removal of uncertainty and thus positively.

Liberty Media (LMCA, LMCK)

Overview. Liberty is a media holding company comprised of the following assets (market values
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as of the November 17 , 2014 market close): Sirius XM (SIRI) worth $33.21 per LMC share,
Charter Communications (CHTR) $12.98, and Other assets net of debt (Live Nation, Atlanta
Braves, other minority stakes) $8.58, for a total NAVPS of $54.77. Adjusted for the recent spin of
its CHTR stake into Liberty Broadband Corp (LBRD), LMCA and LMCK currently trade for $48.08
and $47.67, or approximately 87% of NAVPS. Valuing SIRI and CHTR at $4 and $191, LMC is
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worth approximately $62, and trades for ~77% of FVPS at the November 17 market close.
SIRI. SIRI is a reasonable business to own over time, but faces headwinds from the connected
car and consumer subscription overload. As car manufacturers look to pre-install the latest
technology, drivers may begin to have access to their iTunes, Pandora and Spotify accounts.
Though how will consumers pay for multiple hours a week of non-WiFi streaming Internet
access? Where will SIRIs rich library of non-music content go? Will Howard Stern sign on with
Apple? Will Fox News, CNBC and Bloomberg set up their own subscription channels? SIRIs
scale and content will likely protect it against the connected car for years to come. In my opinion,
the biggest headwind facing SIRI is general subscription overload. If consumers are cutting the
cord on video subscriptions that contain low-cost access to the major networks, ESPN, TNT,
TBS, FX, NFL Network, Golf Channel, in order to pay $10 for Netflix, it makes little sense that
consumers would retain a SIRI subscription for more than $15 per month. While perhaps not an
immediate threat, over time SIRIs growth profile will likely be limited.
So why invest in an entity where SIRI comprises over 60% of NAV? First, at a recent $3.52 per
share, I believe SIRIs valuation takes the above risks into account; and second, it is what LMC
management does with the SIRI asset that is most intriguing. With LBRD spun out, LMC can look
to cleanly consolidate SIRI into LMC, which will provide it 100% control over SIRIs cash flows.
Perhaps LMC leverages the SIRI asset to consolidate more cable assets alongside LBRD. As
always, you never know with Malone & Co.
CHTR. CHTR is the crown jewel and the primary reason for investing in LMC. The ultimate goal is
to have a medium- to large-sized position directly in CHTR, but along the way I believe owning it
through LMC securities will provide additional catalysts. For example, a very near-term catalyst is
the Rights Offering to purchase LBRDK shares at a 20% discount to the VWAP. Longer term, I
believe it to be highly likely LBRD is a consolidator of and/or co-bidder alongside CHTR for cable
assets, and ultimately merges into CHTR itself. CHTR is just a fantastic entity run by extremely
talented management even with a failed TWC bid, CHTR managed to boost its subscriber base
and EBITDA Margin, as well as lower its capital intensity. Consider, 2013 CHTR pro forma for the
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TWC/CMCSA asset purchase/swap will have an EBITDA Margin of 37.6% versus 35%
previously, capital intensity of 16.3% versus 22%, and a gross FCF Margin of 21.2% versus 13%.
For valuation purposes, I estimate pro forma CHTR grows its topline at 5% per annum thru 2020,
reaches a 40% EBITDA Margin by 2020, has a Maintenance CAPEX Margin of 11.1%, and
spends an average of 16.3% of Revenue on CAPEX over the forecast period. Further, I assume
$0 cash taxes are paid thru 2019, a 40% terminal tax rate and a terminal PE of 17.5 times. At a
10% discount rate, CHTR is worth approximately $214 today. A $214 FV implies a FV EV/2015E
EBITDA multiple of 9.4 times. At a 15 times terminal PE, CHTR is worth ~$191 with an implied
EV/EBITDA multiple of 8.8 times. [The CHTR valuation excludes the GreatLand Connections
spin-off transaction].

Visa (V)
Thesis. With a multi-decade secular growth tailwind at its back, 60%+ operating margins and an
enormous ROIC, Visa is the quintessential wonderful business. While not optically cheap at
23.6 times 2015E earnings, ten years from now 23.6 times has the potential to look like a 52week-low-list bargain. With ~50%/~85% of U.S./Worldwide consumption expenditures noncarded, Visas growth runway is long; and with very little capital required to grow the business,
Visa shareholders can have their growth cake and eat the majority of earnings along the way.
The Base Case valuation scenario is that Visa grows earnings 12.5% per annum, returns 90% of
earnings to shareholders, and trades at a terminal multiple of 20 times Year 6 earnings for a
FVPS of $307 (8% discount rate) after adding back ~$11 of Cash per share.
2014 Review. In its fiscal year ending 9/30/14, Visa generated Revenue of $12.7B, up +10% CC
YOY and Adjusted Earnings of $5.7B, up 15% YOY. Total processed transactions on Visas
network were 64.9B, up 11% YOY. For FY15, Visa projects Revenue growth of low double digits
and earnings growth of mid-teens. Visas $5B buyback is worth just over 3% of its current market
cap (PPS: $252).
Visa Europe. When Visa Inc. reorganized in the mid-2000s, Visa Europe remained independent
while retaining an option to put itself to Visa Inc. at any time. Visa Inc. must pay its own PE
multiple of Visa Europes earnings normalized for extraordinary items and any synergies available
between the two Companies. Visa Europes 2013 EBIT Margin was 22% in 2013 were Visa Inc.
to pay 25 times Adjusted Earnings assuming a ~31% EBIT Margin, I estimate Visa Europe would
add an incremental $10 to Visa Inc.s FVPS if Visa Inc. can boost Visa Europes EBIT Margin to
50% over time, closer to Visa Inc.s 60% margin. This analysis assumes Visa Inc. funds 100% of
the purchase price with 4% debt, and the Euro trades at $1.10.
Risks. Two key risks to monitor with Visa are alternative payments technology and adverse
regulatory action. Regarding technological risk, Visas network was developed via decades of
essentially non-profit investment by its bank-consortium owners this is an unfortunate reality for
incumbents because Visas scale simply cannot be replicated with profit-seeking capital. As
evidenced by the Apple/Visa partnership with Apple Pay, more than likely Visa will be the
backbone of alternative payments technology, not the enemy. While I have little to no expertise
on the regulatory side of the payments industry, I am comforted by the fact that Visas portion of
the payments profit pool is relatively small, thus limiting the incentive to go after its share of the
pie.

Bank of America/J.P. Morgan (BAC/JPM)

BAC and JPM combined to make up 13.1% of gross assets at period end. While both companies
are attractive on a standalone basis, the exposure is managed as one position based on an
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overarching investment theme post-Financial Crisis large-cap banks have turned into quasiutilities; and while more profitable and durable than actual utilities, they trade for significant
discounts to their newfound utility peers multiples of between 15 and 20 times earnings. At 15
times earnings, BAC and JPM would be worth approximately $23 and $75; at recent closing
prices of $17.09 and $60.38, they trade at 76% and 81% of fair value. With an expanding
economy, a re-leveraging private sector and a Fed rate hike on the horizon, BAC and JPM are in
good position to grow Net Interest Income and expand Net Interest Margins. As such, more than
likely the bank-of-the-napkin FV estimates above understate the intrinsic value of the highly
valuable American banking franchises.

Dish Network (DISH)

Running out of time, so quick valuation overview. 2015E EBITDA is approximately $2.9B valued
at 6 times and net of $4B of net debt, the core business is worth $29 per share. 16.71B MHzPOPs of spectrum valued at $2 per MHz-POP is worth $72 per share. Total DISH fair value is
$101 per share.

PORTFOLIO ACTIVITY
Devon Energy (DVN)
Sale During the market dip in early August, DVN was sold in order to increase the VRX
position. At around $70, DVN remained attractive relative to its $90 to $100 FV, but at below
$110, VRX was selling at a much larger discount. Sometimes it is better to be lucky than smart
DVN went on to fall to $55 in the Energy slaughter the last two months, though has since risen to
$64.56. The DVN position pre-dates the Portfolio inception date, as it was first purchased over a
year ago in the mid-$50s. The thesis was/is simple high quality, shareholder-friendly
management, clean balance sheet, portfolio transformation into high margin liquids-focused
production, fully-held latent gas assets ready to be deployed at higher prices, and cheaper SOTP
valuation than higher-leveraged peers. While this thesis remains in place, and the instinct is to
aggressively buy on oil price dips such as this, unfortunately this oil price dip has the high
probability of being different this time. As they say in commodity land, high prices are the best
cure for high prices. The consistently declining price of oil from the 80s into the late 90s begat
the underinvestment that begat the supply/demand imbalance that begat the consistently rising
price of oil from the early 00s through present. As a result, O&G CAPEX and production has
exploded since the early 00s. While various arguments can be made that the supply/demand
picture is now in balance, that the marginal cost of production will act as a floor to prices and the
steep decline rates of North American shale production will quickly correct any over-supply
problem, more than likely the oil price cycle (cycle is used far too loosely in the investment
community, as nobody can actually define a cycle save in hindsight but talks about the cycle in
real time as if they know exactly what theyre talking about so, here cycle is being used with all
possible humility in order to convey a much broader point) will behave as it has in previous
cycles and overshoot to the downside in order to correct the over investment of the last
decade. This view is bolstered by the fact that the aggregate commodity space is currently
getting slaughtered. All that to say while oil is perhaps the proverbial baby getting thrown out
with the commodity bathwater and might be the greatest investment opportunity on the planet, the
unknown unknown of where oil prices will go in the next five to ten years creates the type of
uncertainty that leads to the lack of comfort with establishing large positions (Is there another
kind?) in oil-related investments. One might ask why a position in DVN was even established in
the first place, and is this newfound theory on oil prices simply a reaction to the environment and
thus simply mirroring consensus thinking? Answer: The resilience in oil prices since 2011 in the
face of aggregate commodity weakness combined with XOMs budgeted oil price range of $100
to $110 provided a sense of comfort that $90 to $100 oil was a reasonable equilibrium price off of
which valuations could be established; and the discount to fair value DVN traded at provided a
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margin of safety against this exact sustained oil price decline scenario. While painful on the way
down, the margin of safety embedded in the original purchase price between $55 and $60 worked
out precisely as intended, as there was no permanent impairment of capital from the time of initial
purchase. Regarding the newfound theory perhaps it is consensus, but again the entire
commodity space is in a sustained downturn, and it is difficult to envision oil escaping this pull.
Dish Network (DISH)
Increase During the mid-October market weakness, a portion of the TMUS position (discussed
below) was sold to add to DISH in the high $50s. While the TMUS position was small, it was a
mistake to establish the position in the first place, and with DISH down materially from its
previous highs, the swap was a no brainer.
Fannie Mae (FNMA/FNMAS)
FNMA Sale/FNMAS Increase On the day of the Lamberth decision, the FNMA position was
sold for between $1.80 and $1.90 per share in order to increase the FNMAS position at around
$4.50 per share. Bizarrely, FNMA ended the period at $2.16 while FNMAS at $4.25 while it is
dangerous to argue with the ruthlessly efficient judgment of Mr. Market, this makes zero sense.
Judge Lamberths opinion that the law does not apply to a government agency such as the FHFA,
while operating under a Congressionally sponsored statute such as HERA, at a minimum lowers
the probability of recovery for all F&F private securities. With FNMAs market capitalization higher
than FNMASs at the time of the swap, by definition any increase in FNMA as a result of a higher
probability of recovery should translate into a higher market value for FNMAS. I have no
explanation for the trading anomaly between the two securities but as opportunities arise, and
position sizing warrants, I will continue to take advantage of the anomaly, as I believe there is an
extremely high probability of a private sector-friendly restructuring at levels somewhere between
the current price of $4 and the $25 par value. As such, a portion of the TMUS sale proceeds was
invested in FNMAS below $4 per share in mid-October.
The end goal is to own the common of a restructured Fannie Mae, preferably (no pun intended)
via a conversion of the private preferred stock into common stock. However, if the preferred is
paid off in cash while the current common stock remains outstanding, the plan is to roll the
FNMAS proceeds into FNMA.
Hertz (HTZ)
Sale In conjunction with the early-August DVN sale, HTZ was sold in order to boost the VRX
position. Selling for $26 and $27 at the time of the sale, HTZ was between 70% and 80% of fair
value a very healthy discount for a security with a medium-term catalyst. But again, VRX was
trading a much larger discount and greater concentration in the name was desired. Here again,
luck was involved almost immediately after the sale HTZ ran up close to $32 on the news Carl
Icahn took a large stake in the Company, making the sale look ill timed; however, in the early
October market decline, HTZ sold off to below $20 while VRX remained materially above the
swap price from early August.
HTZ Purchase Just prior to the October market bottom, the HTZ position was reestablished at
an ACB of between $22 and $23. The IRM position was sold in its entirety and VRX trimmed in
order to fund the purchase. The position was reestablished for fundamental reasons, but with the
thought that since the stock was hit so hard in the decline, it would likely materially outperform the
market if the market rebounded. To be honest, the plan was for the stock to quickly move back
toward $30 after which the position could be trimmed by perhaps 25% in order to buy more VRX
or reestablish IRM. The luck involved in the early-August DVN/HTZ swap for VRX was more than
erased with this IRM swap for HTZ. HTZ has lagged atrociously since the early October bottom
while IRM has scaled new heights. It was an inexcusable mistake, as will be discussed in the IRM
section.
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th

Sale (Since period end) On November 4 , the HTZ position was closed in order to boost the
VRX position yet again. While admittedly quite technical, the sale was more of the sell your
losers to buy your winners type a stock that barely keeps up with the market after a large-scale
relative decline on the way down is clearly sick and likely to exhibit relative underperformance
going forward either by acting as dead money or undergoing a large-scale, event-driven decline.
Given the length of the accounting investigation going on at HTZ, the guess is that there is a
pretty high risk of the latter. As an objective observer from the sidelines with a favorable
fundamental view of the Company, 17 Mile would beg Mr. Market for such an event-driven
decline, as it would likely represent a tremendous buying opportunity. 17 Mile believes the short
thesis and the focal point of the accounting investigation that HTZ is overstating car fleet
residual values and thus boosting its reported earnings is unfounded in the long run, as HTZs
D&A margin and D&A revisions are well within historic norms. While the shorts are likely correct
to focus on the near-term issues at HTZ accounting investigation, upward near-term D&A
revisions, DTG integration issues, management change, etc. as Mario Cibelli of Marathon
Partners likes to say, the shorts and the longs can both be rightit just depends on time
th
horizon. [The HTZ discussion above was completed prior to the November 14 intra-day decline
below $20].
Valeant Pharmaceuticals (VRX)
Increase The VRX position was increased by approximately 50% in early August while trading
below $110 per share. The increase was funded with the proceeds from the sale of DVN and
HTZ. From a short-term perspective this was a decent trade with HTZ and DVN sold over $26
and $70.
Reduce During the mid-October market weakness, the VRX position was trimmed slightly over
$120 per share in order to purchase HTZ between $22 and $23. This trade was a tremendous
example of selling a winner to buy a loser
Increase (Since period end) After a putrid rally from the mid-October bottom, after period end
HTZ was sold for approximately $21.50 in order to significantly boost the VRX position at around
$133. I deemed VRX to be at an inflection point with the upcoming AGN shareholder meeting,
growing talk of a AGN/ACT tie-up and a technically strong VRX stock price; precisely the opposite
of HTZ, which had failed to recover its losses in the early-October market route and was trading
like death. It remains to be seen how this exact trade works out, as HTZ recovered on massive
volume from its recent plunge below $20, and is currently behaving as if a big announcement is
coming. Likewise, however, VRX is behaving well post-AGN/ACT announcement. Regardless, I
sleep better at night with VRX than HTZ, so I am ok sacrificing any HTZ gains in the short- to
medium-term. Ideally, HTZ would remain dead money over the next 12 months while VRX rererates to fair value, after which the VRX could be trimmed in order to fund a reestablished HTZ
position.
Other
FOXA FOXA was purchased as a Special Situation (specifically a reverse arbitrage situation)
in early August after it announced it would attempt to acquire Time Warner (TWX). The stock
traded down from $35 to $32 on dilution concerns and a potential buyback delay and/or
cancellation. At $32 I thought FOXA was a win-win, as FOXA/TWX was worth between $35 and
$37 on a pro forma basis, and if the acquisition fell thru then FOXA would likely trade back up to
over $35. The position was closed within a week of purchase once the TWX acquisition was
officially dropped and FOXA traded up over $33. This was a dumb sale primarily driven by the
TMUS opportunity made available the same day the FOXA dropped its bid for TWX. FOXA was
sold around $33, but eventually went over $35 in a short period of time perfect example of
needing to let a thesis play out and not jump from idea to idea
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IRM The IRM position was exited during the period in order to fund the HTZ purchase a
horrendous move, as IRM went from $34 to $38 in very short order. I have followed and traded
around IRM since early 2011, and frankly I got bored with itjust as it took off. While the
business clearly faces long-term secular pressures as a result of cloud storage, the decline has
an extremely long tail, and at a minimum IRM can offset these pressures with ancillary revenue
growth, acquisitions and international growth. While the primary catalyst of a REIT conversion is
complete, IRM is cheap relative to its REIT peers and sports a yield that will likely attract investor
interest in a continued low-rate environment. I will look to reestablish a position if the opportunity
arises.
OPEN Purchased based on expectation it would receive a higher offer. Exited via PCLN takeout.
TMUS Purchased in early August as a busted merger arbitrage Special Situation the day Sprint
announced it would not seek to acquire TMUS. While a small position and thus did not inflict
much damage, the stock fell from the $31 purchase price to below $27. While TMUS is likely to
be sold at some point over the medium term Deutsche Telecom is looking to exit its position in
an efficient manner the timing of the purchase was horrific, as I relied too heavily upon the
technical strength of the stock on the day of the Sprint announcement. In hindsight, this
perceived strength was merely short covering, as the stock quickly resumed its decline in the
weeks ahead. The TMUS position was exited in mid-October in order to fund an increase in the
DISH and FNMAS positions.

That concludes the first investment letter for the Seventeen Mile investment diary. Thank you very
much for taking the time to read and please feel free to contact me any time via email or Twitter.
Sincerely,
17M
Seventeen Mile
www.seventeenmile.com
seventeenmile@yahoo.com
@HFM17Mile

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DISCLAIMER
Information provided should in no way shape or form be construed as trade or investment advice.
Information provided by 17 Mile is public for the sole reason of holding my investment process
and performance-reporting accountable to outside opinion. 17 Mile is not itself, or tied to, an
investment adviser registered with any federal or state regulatory agency. As such, please
consume all information provided by 17 Mile for informational and educational purposes only, and
please do your own research when making trade or investment decisions.

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