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PV Strategies LLC Investor Update for July 2010

Equities posted their best one-month performance of the year in July, regaining some of the
ground lost in the May-June retreat. The S&P 500 Index was up 6.9% in July and finished the
month down (1.2%) year to date. PV Strategies gained 6.6% in July and finished the month up
3.0% year to date net of fees and expenses.

Figure 1

Strong reported second quarter corporate


earnings drove improved investor confidence
during July. The CBOE Volatility Index
declined in July as investors put macro fears
Figure 2 - CBOE Volatility Index
aside for now, but it remains elevated
relative to March levels. I continue to expect
a weak and slowing recovery, which will likely
produce news that may yet again challenge
investor confidence and produce more
periods of volatility. I intend to continue to
hold a significant allocation of cash for use in
options trading operations, writing puts on a
target basket of equities and ETFs during any
periods of higher volatility.
Contact: Bill Miller, Managing Partner, Email: billm@pvstrat.com, Phone: (719) 473-6876
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PV Strategies LLC Investor Update for July 2010

I predicted in my June letter that, “… July’s second quarter earnings reports will show strong
business performance and perhaps fuel a market bounce; which may provide better entry
points for building planned hedges.” As equities prices have surged higher, and moved closer
to forecast next-twelve-month (NTM) price targets, our net long position (65.6% of the value of
the Fund at month-end) begins to look less favorable in terms of the balance between risk
versus potential gain; and so I have begun adding to hedges, using both covered calls and
paired short positions. I also implemented a “tail risk” insurance strategy in July, which is
designed to provide a level of portfolio insurance against any unexpected “black swan” event
causing the markets to crash, and I added to our holdings of foreign currency denominated
bonds, which now account for 6% of the total value of our Fund. The increased use of hedges,
larger cash reserves for options trading, and allocations to foreign currency denominated bonds
will likely cause us to underperform the S&P500 Index in future measurement periods where
the Index posts large gains, but I expect that better risk management versus all-equities
portfolios combined with better returns versus all-bond portfolios will allow us to produce
better returns than either when measured over longer periods. A further discussion of my
current outlook and strategies appears in the “Outlook” section below.

July Fund Performance Metrics


The value of the Fund - net of capital contributions, fees, and expenses – gained $520,295 or
6.6% during July versus a 6.9% increase in the S&P 500 Index. The Fund’s average net
contributed capital during July was $6,779,704; producing a net return on contributed capital of
7.6%. The total value of the Fund at month end was to $8,439,589 with total net contributed
capital of $6,779,704 and total gains net of fees, expenses, and distributions of $1,659,886.

We closed the month with $5,540,580 of net long equities and ETFs (65.6% of the Fund’s
capital), $559,715 of foreign currency denominated bonds, and $2,340,067 of cash and
equivalents. The ratio of long to short positions was 14:1. $1,138,777 of our cash was
employed to back options contracts and short exposure. The net value at risk in our investment
operations at month-end was $7,239,072 (85.8% of the Fund’s capital) with unallocated cash
reserves of $1,200,516 (14.2% of the Fund’s capital).

Our options trading operations produced income of $47,997 on positions closed during July
with net exposure of $1,660,200 for a nominal return of 2.9%. The average exposed period on
closed positions was 36 days for an IRR of 29.1%.

Contact: Bill Miller, Managing Partner, Email: billm@pvstrat.com, Phone: (719) 473-6876
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PV Strategies LLC Investor Update for July 2010

Fund Performance History

Contact: Bill Miller, Managing Partner, Email: billm@pvstrat.com, Phone: (719) 473-6876
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PV Strategies LLC Investor Update for July 2010

Fund Allocation History

Options Trading Operations Performance History

Contact: Bill Miller, Managing Partner, Email: billm@pvstrat.com, Phone: (719) 473-6876
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PV Strategies LLC Investor Update for July 2010

Current Equities Portfolio Sector Allocations as of 7/31/2010

Top Ten Long Equity Holdings as of 7/31/2010 (symbol, % of the Fund’s capital)
Blackstone Group LP BX 5.2%
General Electric Co GE 3.3%
Verizon Communications Inc VZ 2.7%
Enterprise Products Partners LP EPD 2.6%
Halliburton Co HAL 2.6%
Hewlett-Packard Co HPQ 2.5%
AT&T Inc T 2.4%
Analog Devices Inc ADI 2.2%
Pfizer Inc PFE 2.0%
E.I. du Pont de Nemours & Co DD 1.9%

Top Short Equity Positions as of 7/31/2010 (symbol, % of the Fund’s capital)


Sprint Nextel S (0.9%)
Boston Scientific BSX (0.4%)

Contact: Bill Miller, Managing Partner, Email: billm@pvstrat.com, Phone: (719) 473-6876
473
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PV Strategies LLC Investor Update for July 2010

Outlook and Strategies


The recent gains have moved the price of the S&P 500 Index up from 12x to 13x forecast next
twelve months earnings. While the current P/E still appears a bit low relative to its long term
ten-year moving average of about 15x, there is a somewhat less favorable balance of risk versus
potential gain for long equities at this point; especially considering the likelihood of a
decelerating recovery in the second half and the many still present macro risks. It is quite likely
that we’ll see more mixed signals and troubling news, which will again test still fragile investor
confidence.

I am gradually adding hedges to our total return portfolio using a long/short pair strategy. Our
total return portfolio combines a basket of high dividend-yield stocks with selling out of the
money covered calls to boost returns. The long/short hedge strategy adds short stock positions
to balance long stock positions already held in this portfolio. Short positions are targeted for
historically high correlation to the paired long position, pricing that appears relatively
overvalued, and a relatively lower dividend yield so as to provide a favorable dividend yield
spread. Good pairs are hard to find, but properly constructed positions should protect against
market risk while capturing returns from the positive dividend yield spread, premiums from
writing covered options against both sides of the position, and anticipated gains from the
market’s re-pricing the relative value of the stocks.

Given more limited market upside and continued potential for periods of high volatility, I plan
to increase the allocation to our put options strategy. This strategy involves selling near month
expiration out of the money puts on a target basket of higher volatility stocks; which are
screened for relatively favorable price to expected value, availability of attractive options
premiums, and sufficient options trading volume to offer liquidity. The availability of favorable
options trading opportunities improves whenever the market trades lower and volatility
increases. We are obligated to purchase an underlying stock whenever its price declines such
that put contracts expire in the money, presumably at then favorable entry prices. When this
happens, I use the next turn in the stock’s price to write covered calls on the position; which
generates premium while we hold the position with the objective of exiting with a gain. This
strategy produces a favorable combination of returns versus risk given sufficiently frequent
periods of higher volatility. We are currently holding a substantial position in equities acquired
as a result of puts expiring in the money as the markets traded lower in May and June, which
has contributed materially to our gains in July.

I wrote in my June letter that I planned to implement, “strategies that provide tail risk insurance
against unusual market-disrupting events… given that current uncertainty and turbulence likely

6 Contact: Bill Miller Manager PV Strategies, LLC 719.473.6876 billm@pvstrat.com


PV Strategies LLC Investor Update for July 2010

increases the probability of such events.” In his book, The Black Swan, Nassim Taleb describes
events that are highly improbable but have an extremely large impact as “black swans” (read
his book to find out why). The improbability of such events places them in the "tails" of the
Gaussian distribution of all events. It has been observed that prices in markets do not seem to
adhere to normal Gaussian statistics; which tend to predict the probability of occurrences in
nature quite well, but not in markets. It has been observed that the distribution of probabilities
of price movements in markets seems to have "fat tails", meaning that extreme movements
occur much more often than Gaussian statistics would predict. Given the unpredictability of
market crashes and the huge impact a crash can have on an investment portfolio, it is a core
objective of PV Strategies to maintain a "tail risk insurance” program to hedge against “black
swan” events.

Our current tail risk insurance program takes advantage of options trading on short index ETFs.
I am selling out of the money (OTM) puts to offset the purchase cost of buying OTM calls on
selected short index ETFs. This program carries a very small cost, as well as some risk in the
form of the potential of creating a short exposure to the market should our put positions trade
in the money at an expiration, but any resulting short exposure would be balanced against the
long equities portion of our portfolio and would exist only if the underlying index trades much
higher than I expect; a point at which the addition of short exposure would be welcome. The
long calls in the short index ETFs provide our tail risk insurance. Our current positions have an
annualized net cost of only about 0.2% of the portfolio value and a contingent short exposure
of only about 4% of our current net long equities portfolio value while providing insurance that
would buffer as much as 25% of the Fund’s total value in a market crash similar to the crash of
2008. While it would be nice if we never again experience such a black swan crash, and
therefore our tail risk insurance program turns out to have been wasted effort and cost, it is
more likely that one day we will be very happy that we invested in operating this strategy. As I
wrote in my June letter: “Hedges that provide portfolio insurance come at a cost, no matter
what ingenious and efficient strategies are invented and employed to implement them. These
costs will likely cause us to underperform the S&P 500 Index in periods of strong gains, but
should allow us to suffer far less when markets fall; and I suspect that we will outperform the
markets when measured over longer periods of time...”

I continue to believe that some combination of a weakening US Dollar and higher US interest
rates are necessary outcomes to the rebalancing that must take place between emerging and
developed economies, and to the need for the US to eventually deal with its structural deficit
and growing debt. The recent appreciation in the Dollar is actually a headwind that only delays
this necessary transition. The longer this necessary transition is delayed by fiscal and monetary

7 Contact: Bill Miller Manager PV Strategies, LLC 719.473.6876 billm@pvstrat.com


PV Strategies LLC Investor Update for July 2010

policies, and by market dynamics, the more painful it is likely to be. The US Federal Reserve
seems to have begun signaling that it may purchase US Treasuries with the proceeds of the roll-
off of its portfolio of mortgage securities that were acquired during its crisis operations in early
2009. Doing so would maintain monetary stimulus to counter the risk of deflation taking root,
and contribute to an eventual weakening of the US Dollar. I am continuing to slowly add to
investment positions that I believe will benefit from the eventual course of global rebalancing
while providing current income, including allocations to bonds denominated in a selection of
emerging market and emerging market proxy currencies which now account for about 6% of
the value of our Fund.

There is an archive of these monthly updates on our web site at www.pvstrat.com, as well as a
blog containing some of my day to day thoughts, ideas, and research.

We did some research at the request of an investor into the requirements and mechanisms for
establishing Self-directed IRA accounts that can be invested in our Fund. If interested, contact
us and we’ll get you that information. As always, feel free to call me with any questions or if
you wish to further discuss anything covered.
Bill Miller
719 473-6876 or billm@pvstrat.com

PV Strategies, LLC
PV Strategies, LLC is an open-ended hedge fund that employs a multi-strategy approach intended to
achieve long term capital appreciation and income while limiting the risks of market exposure. In order
to contain risk to capital, the fund does not employ significant leverage. The fund invests globally,
primarily in liquid, exchange traded securities, including long and short equities, options, Exchange
Traded Funds (ETFs), and bonds. The Fund began investment operations in September, 2008. In the
intervening period, during which the S&P 500 index has suffered a (15.3%) loss and fell to a month-
ending low of a (43.5%) loss, the fund’s strategies have achieved a 40.6% gain, for a 21.2% Annual Rate
of Return, while the fund’s month-ending value at no time fell below 93.4% of contributed capital. PVS
is open to new investments from accredited investors.

8 Contact: Bill Miller Manager PV Strategies, LLC 719.473.6876 billm@pvstrat.com