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3 O'Clock High: Third Quarter Letter to Investors

By

"Avert your eyes from the mermaids, we're hitting the high-seas"

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September 30th, 2005

To: The investors of Centurion Responsible Allocation Potency LLC (CRAP)

From: Victor "First Mate Vic" Bligh, Managing Partner, CRAP LLC

Re: Third quarter & Year to Date performance update

Dear Partners,

Ahoy from the good ship OPM. It's been an eventful three months for the fund and we have much to discuss. I'm delighted to bring you up to speed, provided the unpredictable hurricane swells stay muted and the rum holds out.

As I type, the S&P 500 is up about 1% YTD and the NASDAQ is flat. The truth buried under those deceptively calm figures is that the market remains a cruel hag of a mistress; luring the unwitting with her Siren song of passions only to drag them to a horrid watery death.

The sweet, sweet rum understands. Without her embrace our situation could be dire, partners. It's bad, regardless, but rum eases the sting.

Betting on the wrong Zombie

In retrospect, I shoulda just bought a big box o' Spyders (SPY) and coasted on my 1% management fee. But I got bored, the partners got restless and even the fund of fund guys started noticing when I changed CRAP's HQ from an office to a PO Box and stopped showing up for the I-Bank boondoggles (no trading, no commission generation, no Four Seasons, Maui "conference").

Besides, the tape is going nowhere. Ever. The 20% performance fee of the gains on a fund that goes No Where is Nothing. A man has to eat.

In desperate search for a pair trade, I started handicapping the senior citizen corporate raiders. I figured "Kirk Kerkorian used to be a stud but he's gotta be losing his punch. Icahn is relatively young and springy... I'll bet with him!"

I got short a dump truck full of General Motors (GM) calls to soup up my short of the GM common stock. For the hedge I got us long Blockbuster (BBI) and shorted as many of the October 7.50 puts as our clearing agent would let me. The puts were cheap and I wanted to "generate us some income" so I put out a ton of the October paper and added a short of 10,000 of the January '06 $5 strike puts at a nickel per.

Icahn got "board" with Blockbuster and moved on to Time Warner (TWX). Meanwhile, Kerkorian's animatronic engineers started bidding for GM stock $3 over the market value. Don't believe anything you read about Kerkorian's being willing to pay-up just to fill his position. That's just stupid.

Kerkorian advertised his buy to jam up the stock price. His only motive, good partners, was to ram his bony claw of death straight into our chest and rip the heart of CRAP right out of our body. His cackling, jack-o-lantern head started eating CRAP's heart before we even hit the ground. As the darkness seeped in I heard the now taunting and cruel song of the market, celebrating our demise; her betrayal was my last memory of the fund, as we knew it.

As a result of GM's octogenarian ramping that stock a quick 30% while my not-even-septuagenarian let Blockbuster to fall from $9 to below $5 CRAP is currently facing some temporary "liquidity issues", at least according to the sissies who we clear through (who, incidentally were just fine cutting me some slack when I was shorting this many contracts but are all in my FACE now that we've had a temporary set-back.... oh, Captain Morgan, where would I be without your sage wisdom and friendly ear?)

All is Well

Those of you who have made CRAP your first investment in a hedge fund partnership may be wondering "is this normal?"

I say "yes!".

I refer you to the graph which was used in our meeting with CalPERs ("Hi Guys! C'mon down for a pina colada!"):

As was clearly discussed with all of you, we fully expected that there would be some down periods over Time (plotted along the X-axis above).

While I admit that it's somewhat unusual for your fund manager to need to spend time floating in remote international waters to avoid capital calls, the opposite of "challenge" is "opportunity". Or something like that. One of the pirate captors who paid me and the Captain a call last week explained it to me but I was starting to white out, at that point. And, frankly, I'm not sure the guy was even Chinese.

My point is that the good Captain and I are plotting CRAPs grand comeback even as he serves me up shot after shot of his smooth-honey, island-spiced nectar and I write this note.

We had to cover the GM at 36 just before I set sail. The Blockbuster options we shorted are temporarily exerting some downside mark-to-market pressure, moving against us by about 1,400%.

But we've got ages before they expire and I still have every confidence that Mr. Icahn will work his financial magic at Blockbuster before expiration. As he noted, the Blockbuster in his neighborhood is always packed!

Also, the good Captain has made Tampa Bay over Detroit (giving the 6.5) his "Pirate's Booty Lock of the Week", so we're feeling very good about that.

As should be clear by now, we've got things pretty well under control, Captain Morgan and I. We fully expect to be sailing the smooth seas of redemption by the time your two-year lock-ups expire.

In the meantime, be thinking good thoughts about the Buc's this weekend; the game represents our first peg-legged baby-step back to the green!

If you'll excuse me, I've got to go join some pirate friends in the mark-up of Google into the close of the quarter and the Cap't says I'm falling off course and sailing towards the dark ocean of sobriety...

Never argue with a man who has a hook for a hand. Remember that, maties, our next update will be in January!

Yar,

First Mate Vic

No positions in stocks mentioned.

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