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December 2, 2008

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Bruce Berkowitz of the Fairholme Fund recently held another conference call, and again, Sears Holdings was mentioned many times. For those who don't know Bruce, he, through the Fairholme Fund own 9.9% of Sears shares. He also, similar to Eddie Lampert, has a substantial amount of his liquid net worth in his own fund.

Here is the basic idea of what was said. Some responses are abbreviated, as I simply couldn't write fast enough.

Question: Please speak about the funds concentrated positions that have high short interests.

Response: I don't have a problem with shorts, I don't short, the fund does not short, but in terms of positions in the fund with a high short interest, Sears represents about 6% of the fund.

Why people are shorting sears at this price, i haven't the slightest idea. When I look at the assets, I can't see any benefit in shorting it, but then again, I could not see any benefit in shorting it at $100. At these prices, with the few remaining shares outstanding, all Eddie Lampert has to do is keep buying back the stock and its game over. Time will tell if we were right.... And I like the guy, I think his strategy is right. I believe his strategy isn't much different than Berkshire Hathaway during the textile days, and I'm excited about Sears, next question.

Question: With the very severe recession, how will Sears continue to create shareholder value in the next couple of years?

Response: I believe I already answered that earlier. All he has to do is keep buying back the stock. Next question.

Question: How is it that Eddie Lampert and Bruce Berkowitz are the only two people in the world that think Sears is a good company. How can everybody else be wrong?

Response: You know I once read a book about Winston Churchill, and he seemed to be the only person in an entire country that understood what was happening with Nazi Germany..... How can an entire country not know what was happening? The herd mentality is intense, and the psychology is perverse. Whether or not there are only two people who believe something doesn't mean it is wrong or right. The final results will tell whether we are wrong or right.

Question: With Eddie Lampert having such a large position in Sears, are you concerned that Sears stock price could get cheap enough that Eddie Lampert will try and take the company private?

Response: It's possible, but I don't think it's probable. On purpose I have not talked to him, but sometime after the earnings come in I want to meet with him. I have not yet set a time or date though.
My reading of the man, and who his heroes are, I believe he is not going to try and steal the company from the shareholders, and I could even see him retrenching into Sears. But I believe he's of a level of integrity that he would not do that...and I don't believe I'm being delusional on this issue.

Question: How much of your investment thesis with Sears is based on a liquidation scenario, vs. how much is based on the retailer? And how much is based on Eddie Lampert?

Response: It's based on assets and liabilities, with the assumption that Eddie Lampert will be a great capital allocator, but to make money right now, all you have to do is liquidate. That's it. It's no more difficult than that. I believe the man is trying to save a lot of jobs. Sears and K-Mart have a lot of employees, and I believe he's giving his best shot to try and resuscitate the retailer. But frankly, the U.S is over retailed and it's over stored. The whole world is over retailed and over stored. So we went into this with a liquidation analysis.

Follow up question from same caller: Has this liquidation scenario changed with the drop in commercial real estate prices?

Response: Yes. Sure. I don't think it's gone down as much as people think, and one day it goes up. We spent a tremendous amount of time with the tax assessors offices this summer. A lot of people and a lot of time, trying to get the tax value of sears. The number we came up with for the real estate was $80-90 a share.... How much has that changed since this summer versus how much has the stock price changed? And how much is the largest servicer of appliances worth, and the $10 billion of inventory, and the brands they have, and Sears Canada...It doesn't take a lot to add up these days...Did we show great brilliance buying at $100? No. Did we believe we were buying below liquidation value when we bought at $100? Yes...I think that every price Eddie Lampert paid is below liquidation value. You're proven right or wrong by the results at the end of the day. We have suffered great volatility, but not suffered permanent loss.