Old West Investment Management commentary for the third quarter ended September 30, 2016.

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[drizzle]Dear Investor,

It seems hard to believe that we are headed into the home stretch of 2016. This year is flying by! A lot can happen in the fourth quarter, especially with all the attention being paid to the election (rightfully so) and to Fed monetary policy. As you can see in your enclosed statement, we are having an exceptionally strong year. The S&P 500 is up 7.8% year to date through September 30, and our portfolios far exceed that amount.

Old West Investment Management

Old West Investment Management

During the third quarter the S&P 500 spent more than two months trading in a range of plus or minus 1% of its all time high. This is only the fifth time since 1928 that the index has spent that long in such close proximity to its all time high. What does this mean? The Federal Reserve Bank Board has been actively focused on keeping the stock market pumped up, which is clearly not their mandate. At Old West we are invested very defensively, with no expectation that the Fed will be able to continue priming the pump indefinitely.

The biggest issue facing the markets going forward is anemic worldwide growth. I believe growth here and abroad is being stifled by excessive debt. Global debt is at an all time high of over $150 trillion, which is 225 % of global GDP. This debt figure includes households, companies and governments, and it excludes banks and other financial institutions. You would hope this debt total would have come down following the 2007-2008 recession, but it has actually exploded higher. This huge amount of worldwide debt is retarding growth at every level. Central banks have been successful at keeping interest rates low, but all of this debt may cause a gravitational pull that may be unstoppable, and rates could begin to rise.

One of my favorite economists is Jim Grant, author of the well known newsletter “The Interest Rate Observer”, which I have read religiously for twenty years. In his recent letter Grant discusses interest rate cycles, and how they tend to be long cycles of twenty to forty years. This October marks the 35th anniversary of the current bond bull market. In October of 1981 interest rates peaked, and you could have bought a 30 year US Treasury bond yielding 15%. Imagine that! Grant has speculated that rates may have bottomed recently, as has newly crowned “bond king” Jeffrey Gundlach.

I have no idea when interest rates will rise, but everything cycles, and at some point they certainly will. We are constantly monitoring our holdings and looking for new opportunities, with all the aforementioned information in mind. On a macro scale, I’m worried about the lack of economic growth, and the market seems fully valued or overvalued. However, our investment process keeps us in the names we own, and we continue to find new opportunities that have little or no correlation to the overall market. One such idea is IDW Media, a company discovered by Old West cofounder Joe Boskovich Jr. Joe writes the following:

IDW Media is one of our newer investments, and we are very excited about the company’s future. As you know, a primary tenet of Old West’s investment process is that we seek to invest your capital in owner-operator led companies. This means that we want to invest in companies where management teams are among the largest shareholders and are incentivized more from their stock ownership than from their compensation. This is absolutely the case with IDW Media as its Chairman, Howard Jonas, CEO, Ted Adams, and the rest of company management own over 60% of the shares outstanding.

As with all of our investments, once we have determined that management incentives are aligned with ours, we spend a lot of time studying their historical actions, capital allocation decisions and track records. IDW’s Chairman, Howard Jonas, is a life-long entrepreneur, and a very successful one at that. In 1990 Jonas founded IDT Corporation, which is today one of the world’s largest telecom providers offering service to customers in over 225 countries. Over the past 25 years Jonas has mastered the art of capital allocation, transforming IDT into a diversified media and telecom conglomerate. He has opportunistically grown IDT organically and through acquisition, and when appropriate, he has monetized various unrelated business assets through sales and spinoffs. Below are just a few of Jonas’ more notable capital allocation decisions that have resulted in value creation for him and his shareholders;

  • In August 2000, at the peak of the telecom boom, IDT sold a stake in its Net2Phone subsidiary, which provided cheap long distance service through the internet, to AT&T for approximately $1.1 billion in cash. One year later, in October 2001, IDT bought back its stake for just $92 million.
  • In 2001, realizing that the telecommunications industry was highly commoditized, Jonas made his first foray into the media business. IDT made several small acquisitions such as POW! Entertainment with the goal of controlling content and formed a new company called IDT Entertainment. In May 2006, IDT Entertainment was sold to John Malone’s Liberty Media for roughly $500 million, merging its animation and live action production business with Liberty Media’s controlled Starz Entertainment Group.
  • In November 2004, IDT launched its retail energy business, IDT Energy. IDT energy grew into one of the largest independent suppliers of electricity and natural gas to those who live in the Eastern United States. On October 31, 2011, IDT spun off its energy related businesses to its shareholders as Genie Energy, which today trades on the NYSE with a $160 Million market cap.

As you can see, Howard Jonas has an amazing track record of success, and has time and time again made value creative decisions for IDT shareholders. His actions clearly warrant close attention.

Another value added corporate action occurred on September 14, 2009, when IDT Corporation spun off IDW Media (IDWM) to its shareholders. We first learned of IDW Media earlier this year, and after several months of studying the company, we have built a significant position across many of our portfolios.

IDW Media is made up of two core business segments, CTM Media Group and IDW Publishing. The first segment, CTM Media, is primarily involved in the travel brochure and publishing business. CTM distributes over 100 million brochures, visitor guides and publications annually and their digital platform recorded 19.3 million digital engagements last year. The company has over 14,000 distribution points throughout the eastern half of the United States and Canada. CTM Media does roughly $20 million in revenue per year and has 10% operating margins. It is a steady and predictable business that is growing about 8% per year.

The second business, IDW Publishing, is the fourth largest comic book publisher in the United States, publishing over 500 unique comic book titles and 250 graphic novels in 2015. The

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