MARKET COMMENTARY

4thQuarterCommentary
January2017

MARKET COMMENTARY
4th Quarter 2016

January 2017

WhatWeDoWhenWeCometotheOffice
Sometimes due diligence teams from other
investmentfirmsforwhichwemanageclientfunds
come to our offices. There are the audit types of
questions about internal controls, and trade and
execution protocols. To these, there is, properly,
onlyoneoftwoanswers,yesorno.Doyoutime
stamp each trade, maintain a permanent
accessible trade record, or observe a random
ization protocol for the order in which purchases
areallocatedtoclientaccounts?

Preface:Whywedontknowwhattodowhenwecometo
theofficeeverymorning.
PartI: Indexations supply/demandimbalancehasinflated
valuations to dangerous levels weve been told weve
beaten this topic to death. Favorably reinterpreted: weve
establishedafirmbasisfromwhichtodepart,andcannow
addresstheimportantfollowonquestions.

PartII:Sohoworwhendoesitstop,andwhathappensthen?
Thentherearethequestionsclosertowhatthey
PartIII:Whatrateofreturntoexpectfromstocks?Accepted
reallywanttoknow.Howdoweselectsecurities;
reality is based on 100 years of history, the famous 10%
whatisourprocess?Now,theirprocessintryingto
expectedreturn.Butwhatifitsthewrong100years?Now
elicit our process is still based on the checklist
theresadifferent100years.Itsayssomethingelse.
approach. What market capitalization range
defines a given strategy; what valuation para
PartIV:Andhowwilloneearnanacceptablereturn?
metersqualifyabuy,hold,orsell;ifitisearnings
multiplebased,whatistheaverageweightedP/Eoftheportfolio;whatisthemaximumweightingofaposition;
whatisthemaximumcashposition;whatpreciselydeterminesthemaximumcashweight;whatmaximumtime
limittoinvestanewportfolio;whatistheminimumnumberofpositions;whatisthemaximumnumberoftrading
daystoexitanyposition?Theywanttoconfirmthattheprocessisdefined,consistent,repeatableinasense,a
scientificmethodologyreducibletoaspreadsheetthatisanefficienttoolforcomparingtoothermanagersinthe
present,andcomparingtothesamemanagerovertime.Thisisjustthewarmup.
Therearethebroaderquestionsabouthowthephilosophyisimplementedinaconsistentquantitativefashion.
Anappropriateformofanswermightbe:weemployasearchabledatabaseofthe1,000largestcompaniesinthe
U.S.;wescreenthemonsuchandsuchparameters,suchasaminimummarketcapof$1billion,aminimum5
yeardividendgrowthrateofX%,amaximumP/EofY,maximumdebttoequityratioofZ.Wethenendupwith
200candidatestowhichwethenapplyfurtherscreenstoarriveatourprioritylistof100,andsoon.Andwe
applythatconsistently,sothatwhateverthemarketconditions,wedontstrayfromourprocessandwealways
selectthetop10percentileofcompaniesfromthatuniverseof1,000.Theywanttomakesureamanagerwho
buys smaller companies one year doesnt buy larger companies the next. If a manager hasnt held cyclical
companiesinthepast,itwouldbeamethodologicaldangersignaltobuycyclicalcompaniesinthefuture,because
thatisnotadocumentableorrepeatableprocess.Dothatandyoureonthewatchlist,ifnotdismissedoutright.
Andwhilethisistheapproachthat,obviously,indexationepitomizeswithperfection,itisalsotheruleamongst
activemanagerswhopracticeparticularstrategies.Theycomeintotheofficeandworkhardtobeconsistentto
theirmethodology.Evenasthemarketchanges.Ifhighqualitystocksbecomemoreexpensive,itisimportantto
continuetoownthebestofthem.Theyknowwhattheyregoingtodoeveryday.Wedont.Wedontknowwhat
weregoingtodo,becausewedonotstruggleagainstthemarket.Weacceptthemarket.Or,rather,wetake
whatthemarketgivesus,notwhatitdoesnt.
Onceuponatime,HorizonKineticswasntknownatall.Wehadnoduediligenceteamsvisitingus.Andthere
cameatime,1999orso,whenthemarketbecameenamoredoftechnologyandinternetandunregulatedutility
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stocks.Theywentupandupandup.Thatdidntgiveusanythingbutrisk.Sowecontinuedtoholdwhatthe
markethadgivenusafewyearsearlier:reallyhighqualitybluechipcompaniesthatwereextremelyprofitable,
likebigdrugcompaniesandAmericanExpressandAIG.Each,intheirturn,haddisappointedandbecomecheap.
Andastheinternetstockswentup,thesebluechipswentnowhereandthen,astheinternetstockswentupsome
more,nowhereagain.Andthenasthebubblebegantocollapse,theflighttoqualitymadethosehaplessblue
chipsweheldsoar,andtheybecametheirownbubble,at30xearnings.Sowegavethembacktothemarket.
Whichmeantweraisedalotofcash,Andwekeptthatcash,becausethemarketdidntgiveusanythingelsethat
wewanted.Somemoretimepassed,andbyearly2003,whenthedustoftheinternetbubblesettled,therewere
themostextraordinarygiftslyingthere,discardedbythemarket:bondsofcertaindistressed/recoveringutilities
andothercorporatevictimsofthatparty,tradingat50onthedollar,even20.Wetookit.ThenHorizonKinetics
becamejustabitbetterknown.
Iftherehadbeenanyduediligenceteamsevaluatingusatthattime,eachofthoseactionsviolatedanyacceptable
processthatwouldhavebeendocumented.First,withourhighqualityvaluenames,weunderperformedour
peerswhodippedatoeortwointhefrothywatersofthebubblesectors;thenwechangedourassetallocation,
never before having had anything like plenty of cash; then we violated our asset class
categorybypurchasingfixedincomesecuritiesinequityaccounts.Wewouldnthavebeen
allowed to do any of it. Nevertheless, in the aftermath, we now had due diligence teams
visitingus,becausewedidntcollapseduringthebubble;infact,wehadpositivereturns.

Bearclimbingatree.
Antipodalview.

So,wedontknowwhattodoorbuywhenwecomeintotheofficewecanonlytakewhat
themarketgivesus.Thescientificmethodappliedtothesecuritiesmarketsisadangerously
fallaciousapproach.Itpresumesalineartypeofrepeatability;whereas,themarketplaceis
fluid,reflectingtheendlesscapacityofhumanstointeractandrespond.Anyfixedruleor
processisreactedtoandgamedand,ultimately,doomed.Youdontfightthat,youuseit.To
expressitvisually,heresawarmupexerciseakidspuzzle,reallyhavingtodowith
adaptiveversuscategoricalthinking.Itsthepictureontheright.Whatisthisapicture
of?
Thatwasthewarmup.Here,below,istheonewereinterestedin.Whatsthis?

Thisisaroadpaintedbyasoberpainteraccordingtotheengineersblueprints,butpavedbyadrunkenpaver.
Youcanbesoberandpreciseandprocessconsistent,anditcanworkforquiteawhile.Buttheroad,themarket,
eventuallyturns,andastraightlinewilltakeyourightofftheroad.
Thenextcoupleofsectionsaresimplytoconfirmthatthemarketaspeoplegenerallyunderstanditprobablyisnt
givingyoumuchanymore,atleastnotsustainably.Itsimportanttorealizethat,becauseonceyoudo,youcan
figureoutwhenandhowtotakewhatthemarketisofferingorwilloffer.

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PartI:TheDeparturePoint
Thispastyearwasinterestingonsomanymorefrontsthan2015.Andthiscomingyearcouldbemoreinteresting
still.In2016,thefinancialmarketssawallsortsofrecordsandprecedentsandnotinagoodway.

Recordlowyieldsintheinvestmentgradebondmarket,witha2.2%yieldforan8yearaveragematurity.1

$8.1trillionofglobalsovereigndebttradedatanegativeyield2,equaltoabout20%oftotalsovereigndebt.

TotalsovereigndebttoGDP,onaglobalbasis,reachedarecord89.5%3asof2014.

TheU.S.debt/GDPratioreached105%4,notarecord.Butwhenthelastrecordwassetin1946,afterthe
massivespendingforWorldWarII,thenationwasprimedtounleashallthewartimecapitalandtechnology
investmentupon17yearsofpentupdemand.Forthoseunaware,asof1942,foodandothergoodswere
rationed;withoutarationbooklet,youcouldntbuymeat,milkorsugar.Therefollowedastunninglevelof
growth.5

Bycontrast,in2016,revenuesofthelargestpubliclytradedcompanieswereessentiallyflat,astheyhave
beenforseveralyears.Theyarematureandhavelargelysaturatedtheirmarkets.Simultaneously,arecord
$280billionflowedintoindexfundsin2016.Inturn,indexdemandforthoseshareshaspricedthematthe
bullmarketvaluationsordinarilyreservedforgrowthcompanies.

ThetrueemergenceofsemanticinvestingETFswithfalseexposures.Beingrestrictedtoalimitedsupply
ofcompaniessufficientlylargetoaccommodatethenewmoney,andwithnomechanismtoassessvaluation
andunderlyingeconomics,wenowhaveETFpackagelabellingthathaslittletodowiththecontents:
o
o
o

AmajorvalueETF6comprisedofcompanieswithnorevenuegrowthyetwhichtradeshigherthanthe
longtermaverageP/EoftheentireS&P500.
AU.K.ETF7filledwithglobalmultinationalsthatderive64%oftheirrevenuesfromoutsidetheU.K.;a
SpainETF8withcompaniesthatget53%oftheirrevenuesfromoutsideSpain.
AFrontierMarketsETF9withlargepositionsinArgentina,KuwaitandNigeria(homeofBokoHaram),
labelledlessriskythantheS&P500!Statisticallytrue,duetoa0.66eta.Alsostatisticallytrue:witha
littleexcitementinoneortwoofthosenations,thenewetawillquicklybegreaterthan1.
AnemergingmarketsbondETF10(meaningRussia,Brazil,LebanonandTurkey)withyieldslowerthana
U.S.HighYieldBondETF.Couldtherearisealittleexcitementinanyofthoseplaces?

TheiSharesCoreU.S.AggregateBondETF(AGG),$41.6billionAUM.DataasofDecember31,2016.
https://www.bloomberg.com/news/articles/20161115/negativeyieldingbondsplummetto87trillionaftertrumpwin
3
http://wdi.worldbank.org/table/4.12
4
Source:FederalReserveBankofSt.LouisasofQ32016.
5
In1947,GNPwas13%abovetherecordpeacetimepeakof1946,andindustrialproductionwas23%higher.
TheU.S.aloneturnedoutwellover50%oftheworldsknownindustrialproductioncomparedwith30%beforethewar.
6
TheVanguardU.S.ValueFund(VUVLX),$1.5billionAUM,19xP/Eratio
7
iSharesMSCIUnitedKingdomETF.PercentageofrevenuesfromoutsidetheU.K.isforthetop10positionsasof
12/31/2016.
8
iSharesMSCISpainCappedETF.PercentageofrevenuesfromoutsideSpainisforthetop10positionsasof12/31/2016.
9
iSharesMSCIFrontier100ETF(FM),$0.5billionAUM.
10
TheiSharesEmergingMarketsBondETF(EMB),hada30DaySECYield,asofDecember31,2016,of5.28%;theiShares
HighYieldCorpBondETF(HYG)hadanSECYieldof5.46%.
2

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ThesamemajorU.S.HighYieldBondETF11witha5.46%yield.Whichisnothighyield.Norwillthatyield
everberealized,sincetheaveragebondpriceisabove100andthatyieldpresumesthattherewillbeno
defaults.Therearealwaysdefaults.
AninternationalgovernmentbondETFwitha0.38%SECyield,analmost10yearaveragematurity,and
36%ofwhichisinnegativeyieldingsovereigndebt.12Thisisconsideredprudentwithintheassetalloca
tionmodelofinvesting.
Wecouldgoon.Butwevebeatenthattopictodeath.Nowwegettothenextpart.

PartII,a:SoWhatMakesitStop?
Whyisthe9yearflowoffundschartthatwevepresentedbeforesoimportant?Notonlytoshowhowthemoney
flowsintoindexfundspushedupthepricesoftheindexcentricsecurities.Simultaneously,theoutflowfromac
tivelymanagedfundswhichhasbeenthebankfortheinflowshasforcedactivemanagerstosellandpush
downthepricesofthatwhichtheyown.Bothareartificialwhichmeansbothdangerandopportunity.

Weknowthattheflowofassetsoutofactivemanagementmusteventuallycease.Theresafinitesupplyofac
tivelymanagedassets.Therefore,theoutflowswilleventuallyexhaustactivemanagementassets.Accordingly,
themarketisnotinastateofequilibrium.Heresawaytogetahandleonwhatthelimitmightbe.

Therewere$4.26trillionofactivelymanagedeq FiveLargestIndexManagersandTheirEquityIndexAssets13
uitymutualfundsatyearend2015.Thiscompares
($inbillions)
with$1.79trillionofindexedequitymutualfunds. BlackRockInc.
$2,217
Addthatlatterfiguretothe$1.23trillionofdomes VanguardGroup
2,019
ticequityETFassetsandtogetherthats$3.02tril StateStreetGlobalAdvisors
1,293
lion of publicly indexed domestic equities versus NorthernTrustAssetManagement
347
the$4.26trillionofactivelymanagedequityfunds. Legal&GeneralInvestmentManagement
272
2016 figures were published after this writing, Total
$6,148
whichwillbeinterestingtosee.Thatisaverylarge
Source:Pension&Investments(November2,2016).DataasofJune30,2016
shareofpubliclymeasurableequitythatisindexed,
and it does not include privately indexed equity,
suchasinhousepensionfundmoney.
Andheresanotherway.Justthefivelargestindexmanagershaveatotalof$6.1trillionofequityAUM.Although
themarketcapitalizationoftheS&P500is$18.9trillion,SiblisResearchstatesthatthefloatoftheS&P500that
is,excludingsharesheldbyinsidersandwhichareunavailablefortradingis$18.377trillion,whichmeansthat
thetop5indexersaloneequal33%oftheS&P500float.Andobviouslytherearemanymoreindexers,bothwith
publiclyavailabledataandthosewithout;everylargeinstitutionandpensionplanhasanindexdivision.Viewed
throughthiswindow,itisclearwhyafewobserversbelievethatthepresentdirectionofinvestingisunsustainable
andthatthereisasupply/demandissueevenwithanindexaslargeastheS&P500.Thatsanewphenomenon.

11

TheiSharesHighYieldCorpBondETF(HYG),$18.9billionAUM
TheiSharesInternationalTreasuryBondETF(IGOV),$0.7billionAUM
13
Source:Pensions&Investments(November2,2016),http://researchcenter.pionline.com/rankings/indexman
ager/datatable.DataasofJune30,2016.
12

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Thosewerestandstillfigures.Herearedynamicfigures.In2016,ETFnetinflowssetarecord,atover$280billion.
Althoughmuchofthatwasallocatedtobonds,indexedmutualfundsreceivenearlyasmuchflowasETFs.Using
figuresthroughNovember,about$225billion14willhavebeenwithdrawnfromequitymutualfundsin2016.You
mightthink,wellthatsstillquiteanumberofyearsuntiltheactiveequitybankrunsdry.

ButlongbeforesuchexhaustionofthepoolofactivelymanagedequitymutualfundAUM,thoseoutflowsmust
declinesignificantly. They dontjustcontinueatasteadyrate,thenstopon adime. Moreover,there issome
significantnumberofinvestorswhopreferandwillmaintaintheiractivelymanagedassets.Isit10%,30%,40%,
of the total equity? So the limit is even closer. And its even closer than that, because to keep the perceived
equilibriumgoing,theindexfundorganizersneedtogobeyondmerelycontinuednetinflow;theyneedpropor
tionatelyincreasedflow,becausethemarketvalueofeverythingtheyarebuyingisgoingup;itsalawoflarge
numbersdynamic.Theyneedmoreandmoremoneytoholdthepriceswheretheyare,buttheinflowisbeing
drainedfromashrinkingpoolofnonindexedAUM.Thatshowallbubbleswork.

Wedonotknowwherethetippingpointis.Buttheminutetheinflowsslowmeaningfully,whetherthattakes
threeyearsorten,theindexwillnolongersettheprice,theETFswillnolongerbesettingthepricesofthewinners.
Atthatpoint,thebatonpassestotheactivemanagers,andtheywillsetthemarginalprice.Theremainingactive
managers,theMarioGabellisandDavidEinhornsoftheworld,donotpay22xearningsformaturecompanieslike
Procter&Gamble,nor128xestimatedearningsforgrowthcompanieslikeNetflixor37xforaretailer,likeUnder
Armour.Atthatpoint,theequitymarketmightsuddenlybecomequiteefficient.

PartII,b:WhatHappensThen?CanIndexationExistOnitsOwn?
Asanaside,onecouldtaketheextremepositionthatallmoneymanagementwillbedonethroughaquantitative,
automatedsecurityselectionframework.Thisisnotevenassertedbythemajorproponentsofindexation,such
astheesteemedJohnBoglewhocreatedVanguard,whounderstandthefreeriderprinciple.Butevenifthat
couldcometopass,itwouldmeananentiremarketwithnomechanismforpricediscovery,whichiswhatactive
investorstrydo,whethertheydoitwellornot.Itsdifficulttoimaginewhatthatwouldimplyforvaluations,
knowing the extremes that have been reached even in markets with the participation of active management.
RemembertheNiftyFifty?Andifnot,surelytheInternetBubble?Inaprofoundsense,indexationrequiresthe
existenceofactivemanagementsothatifoneisanindexer,thefreerider,youcanbereasonablycertainthat
youregettingfairvalue.Ifinvestorssuspectnot,thenwhatwouldbethepointofowningtheindex?

Butitisnotevenpossibletohaveascenarioof100%indexation.Belowthehighliquiditythresholdrequiredby
indexationtheETFDividethereisaverylargeuniverseoflessliquidsecuritiesthataresimplynotfit,ona
practical basis, for index inclusion. They are already priced at historically low valuations. They might become
cheaper,still.Butthatsimplymeanstheywilleventuallyoutperform,ifonlybecauseextramarketparticipants,
likethecompanymanagementsthemselvesorLBOfirms,willultimatelybeenticedtotakethemprivateandown
thehighfinancialreturnsdirectly.Ultimately,asufficientlylowpricebecomesitsownvaluationcatalyst.Paradox
ically,thatwouldmakethenonindexedcompaniestheoutperformers,reversingthepostFinancialCrisistrend.

Thisisnotanargumentagainstindexbasedinvesting.Innormalcircumstances,theseareinstrumentsthatbelong
inaportfolio.Wellevenreviewsomelaterthatwouldbenefitaportfolionow.Weresimplyatanextremeat

14

Source:www.ici.orgTrendsinMutualInvestingNovember2016

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whichindexationhasinterferedwith,evenoverwhelmed,marketefficiency,theefficiencythatcomesaboutfrom
thecontestbetweendifferentactiveinvestorsoverthepropervaluationofsecurities.
Yet,IsthePublicTrappedInsidetheIndexationBoxWithNoExitDoor?
Athoughtchallengeforthefuture.Forthefuture,becausethepublichasyettoconfrontit.Historically,howdid
investorsknowtheyshouldwithdrawcapitalfromanactivemanagerormutualfund?Theonlyreasonmoney
would be withdrawn is if the return was unsatisfactory: either because it was negative, or it was positive yet
inadequaterelativetosomebenchmark.So,themoneyiswithdrawnandtransferredintoanindexfund.

Nowitsintheindexfund.Sometimepasses,andletssaytheindexisdown1%.Theinvestorexclaims,Ihave
beenwithyouthreeyears,butmymoneyisdown1%.Now,though,therejoinderisdifferent:Well,whatdo
youwantfromme?Idonotmaketheindexreturns.Yougottheexposureyouwanted,andyougot,withcomputer
precisionandhardlyanyfee,thereturnthatyoushouldhavegotten,whichisnegative1.Sowhatstheproblem?

Indexinvestorsandassetallocatorsarecaughtinalogictrap.Theyhavenomechanismbywhichtodecidewhen
orhowtowithdraw.Onceoneacceptsindexationasthemethodologyforinvesting,itislikeatrapdoor,because
whateverthereturnshappentobe,theS&P500orsomeotherindex,isthebenchmark.Anyreturntheindexgets
is,bydefinition,thereturnyoushouldget.Thereisnodefinitionofaninadequateindexreturn.

Anaturalresponsemightbe,ThenIneedtotakemoneyoutofequitiesandallocateittosomeotherassetclass.
Butintodaysenvironment,whatwouldthatpossiblybe?Bonds?Moneymarketfunds,withtheirzeroyields?By
theway,bondinvestorswouldsaytheirreturnsdontlookthatrobusteither.Whataretheygoingtodo?There
isnoplacetogobecausetheonlytwoassetclasseslargeenoughtoaccommodatethebulkoftheenormous
quantityofindexedfinancialassetsareequitiesandbonds.Everythingelseisofmarginalmarketcapitalization.

Afurtherresponsewedidntmakethesequestionsup,bytheway,theyrerealquestionsfromrealclientsis
iftheindexesdostartbecomingnegative,isntcashthealternative?Whycantwejustbuymoneymarketfunds?

That,unfortunately,isimpossible.Saythereare$4trillionincashequivalentinstruments,andthattheaggregate
marketvalueoftheS&P500is$18trillion.Whatifhalfofthosewhoownequityindexfundssaid,Youknow,
theseguysatHorizonKinetics,theysaidthesethings.Atfirst,Ithoughtitwascrazy,butnowitactuallymakes
somesense.Imgoingtotakemymoneyoutoftheindex.AndItoldmyfriends,wewantout,wewantthecash.
Addthemallup,andifits50%,thatwouldbe$9trillion.Howareyougoingtogetthecash?Somebodyhasto
giveittoyou,theyhavetobewillingtobuyyour$9trillionofstocks,andwhyshouldthey?

Firstofall,theydonothave$9trillion.Infact,themereactofaskingforitguaranteesyouaregoingtoloseyour
money.TheseordinarytaxpayingAmericanswouldsaytotheassetallocators:Wewouldlikeourmoneyout.
Isntthisaliquidinvestment?Absolutely,Iunderstandthatyouwantyourmoneyout.Iwouldstronglyrecom
mendyoudontdothat,though,becauseifyoutrytotake$9trillionout,IwillhavetocalluptheSEC,andIwill
getthemtoclosetheequitymarket.Ifyouactuallytrydothat,yourenotgoinganywhere.Becausethatamount
ofmoneyistoolargeforthemarkettohandle.Thatiswhathappenswhenthefreeriderpopulationexceedsits
naturalthreshold.Nomorefreeride.

The problem was never the stock selection. The problem was that the index fund and ETF organizers are not
investors,theyareassetgatherers.Therefore,theyvecorralledalltheseassetsthroughaonewaytrapdoor,with
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nowayout.Theremightbegoodnews,though,ofasort.Sincetheresnowayout,itislesslikelythatequity
valuationscollapse.Alas,itdoesntmeantheycangouponasustainablebasis.Letscontinuewiththatthought.
PartIII:WhatRateofReturntoExpectFromStocks,
orTheOther100Years
Agroundbreakingsetofresearchwasjustcompleted.
Itisprobablymoreimportantthananyothersingleset
ofdatathatcanaffectyourfuturefinancialdecisions.
Thisisthe2016editionoftheStocks,Bonds,Bills,and
Inflation(SBBI)Yearbook15.Theoriginal1979publica
tion marked a seminal moment in modern financial
management.InDecemberofthatyear,theDowJones
Industrial Average was trading between 2,600 and
2,700, more or less the same level it had reached in
December 1952, 27 years earlier. There was great
doubtastotheviabilityoflargecapitalizationstocks
asanassetclass.

Itwasthusagreatshocktoreadthatlargecapitaliza
tionstockshadreturnedanannualized9.0%fromthe
endof1925totheendof1979.Thiswasdespitetheir
26.9%annualizedlossfromtheendof1929totheend
of1932.Itisarguablethatindexationasconceptually
understoodtodayisinconceivablewithoutthisIbbot
sonstudy.Thatstudy,updatedyearbyyear,istheba
sisforalltheacademicandinvestmentstrategiesand
modelling that involve assumed rates of return from
largecapstocks,smallcapstocks,Treasuriesandcor
poratebonds.Itsbakedintoyourprivateadvisorand
roboadvisor recommended asset allocation pie
charts, your universal life insurance presentations of
expectedreturnsandyourpensionfundcalculations.

Toseejustwhytheroughly10%expectedreturnfrom
largecapstocksissopowerfullyingrainedinthepsy
che,justskimtheaccompanyingtable.Itshowsrates
ofreturnoflargecapitalizationstocksfor62different
periodsofincreasinglength,startingfrom19261954,
then19261955,andsoon,allthewaytotheperiod
19262015.Andthedataspansomanyenvironments,
includingtwoworldwars,inflationsandrecessions.

LargeCapitalizationStocks'TotalReturns
MultiYear
Periods

Annualized
ROR

19261954
19261955
19261956
19261957
19261958
19261959
19261960
19261961
19261962
19261963
19261964
19261965
19261966
19261967
19261968
19261969
19261970
19261971
19261972
19261973
19261974
19261975
19261976
19261977
19261978
19261979
19261980
19261981
19261982
19261983
19261984

9.6%
10.2%
10.1%
9.4%
10.3%
10.3%
10.0%
10.5%
9.9%
10.2%
10.4%
10.4%
9.9%
10.2%
10.2%
9.8%
9.6%
9.7%
9.9%
9.3%
8.4%
9.0%
9.2%
8.9%
8.9%
9.0%
9.4%
9.1%
9.3%
9.6%
9.5%

MultiYear
Periods

Annualized
ROR

19261985
19261986
19261987
19261988
19261989
19261990
19261991
19261992
19261993
19261994
19261995
19261996
19261997
19261998
19261999
19262000
19262001
19262002
19262003
19262004
19262005
19262006
19262007
19262008
19262009
19262010
19262011
19262012
19262013
19262014
19262015

9.8%
10.0%
9.9%
10.0%
10.3%
10.1%
10.4%
10.3%
10.3%
10.2%
10.5%
10.7%
11.0%
11.2%
11.3%
11.0%
10.7%
10.2%
10.4%
10.4%
10.4%
10.4%
10.4%
9.6%
9.8%
9.9%
9.8%
9.8%
10.1%
10.1%
10.0%

Source:2016Stocks,Bonds,Bills,andInflation(SBBI)Yearbook
(AppendixC1(1)

15

2016Stocks,Bonds,Bill,andInflationYearbook,byRogerG.Ibbotson,RogerJ.Grabowski,JamesP.Harrington,andCarla
Nunes.
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Youcanseehowstablethenumberis,basicallybetween9%and10%.Also,howincludingoneorevenseveral
fewmoreyearsofdatathatareoutsidethehistoricalnorm,evendisastrousyearslike2008,wouldntalterthe
overallresultsofsuchalongtimeseries.Decadesofdatawouldbeneededtochangetheviewtoonethatthe
S&P500largecapitalizationstocksdoesnotgeneratea10%annualizedrateofreturn.Thatswhyitisaccepted
asareliablemodelofreality.Itsalmostacenturyofproof.Infact,usingtheadditionaldatafromthe2016Year
book,wecangetafull100years,andhereitis:the100yearlargecapitalizationstockRORfor19152015was
9.9%annualized.

Nowsomeoneelsemightcomealong,liketheseguysatHorizonKinetics,forinstance,andtheysaytheyhave
reasontobelievethatmaybelargecapstockswontevenreturn5%inthenext10yearsoreven20or50years.
Stocksmightnotevenreturn3%.Infact,theymightnotproduceanycapitalappreciationatall,andtheonly
substantivereturnwillbefromthedividendyieldwhich,ifwereusingtheS&P500,isonly2.07%.Now,the
capitalallocatorswouldsaythatsludicrous,sincethereis100yearsofdataandacademicreviewthatcollectively
sayitsludicrous.Onwhatgroundscanaclaimlikethatbemade?

Andthatsomeoneelsemightrespond,Wegrantyouthat100yearsofexperience,particularlyencompassingall
thetraumasofinterveninghistoricalevents,isanalmostoverwhelmingstatisticalproofoftheexpectedrateof
return.Weconcedethat.Justonequestion,though.Which100years?

Towhich,Whatdoyoumean,which100?Towhich,BecausetheresthisnewIbbotsonstudythatcollected
thedatafortheprior100years,from1824to1924.Itcouldntbeproperlydonebefore,butnowwithtechnology
thatcanscanandreadandcrossreferenceagreatvarietyofsources,fromnewspapersandmagazinesandbooks,
thoseolderhistoricalsecuritiespricescouldbecollectedandconsolidated.That100years.

Heres how that CapitalAppreciationofLargeCapStocks,WithoutIncome,FromSelectedPeriodsinUSHistory

100yearslooked. MultiYear
Annualized
The return from Periods
#Years
Event
ROR
stocks was 7.3%.
18241876
52
0.06%
PostCivilWarReconstructioncosts
BUT,only1.1%of
18651920
55
0.48%
EndofCivilWarto1920:emergenceofUSasagreatpower
that was capital
20
(0.86)%
Earlydecadesof20thcentury,includingWWI
appreciation; the 19001920
19001941
41
0.07%
TurnofthecenturytoU.S.declarationofwarinWWII
rest was from
dividends. If only Source:2016Stocks,Bonds,Bills,andInflation(SBBI)Yearbook,(pp.118)
2 years are ex
cluded,1862and1863,inwhichstockpricesdoubledduetotheCivilWarstimulus,the98yearannualizedap
preciationwasonly0.56%.

Or,extendthewholetimeframe,withoutanyexceptions,from1824to1941,theannualappreciationoverthose
117yearswasonly0.8%peryear.Thatsalmosttwofulllifetimes.Thereweretwoseparateperiodsexceeding50
years,onethroughtheendoftheCivilWar,theotherfromtheendoftheCivilWarthroughtheemergenceofthe

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U.S.asgreatpowerin1920,whichsawvirtuallynocapitalappreciationwhatever.The41yearsfromtheturnof
thecenturytothebeginningoftheU.S.involvementinWorldWarII,sawnocapitalappreciationinstocks.

Itwasntquiteasbleakasthatthoughitwasprettybleakbecausestocksdidprovideareturnduringthose
periods.Butitcamealmostentirelyfromdividends.Andthestartingpointtodayisnota6%or7%yield,but2%.
So,ifoneisbuyinggeneralmarketsecurities,suchasviaETFs,onehastoprepareforthepossibilityofanextended
periodofinsufficientgeneralmarketyields.And,forreasonswedonthavetimetoaddresstoday,itmightbea
verylongtimebeforegovernmentsarewillingtoraisethelevelofinterestratessubstantially.

Accordingly,inthecontemporaryera,wehavethehistoricallyunprecedentedphenomenonoflowinflationand
lowyieldsonstocks.Sinceitlackshistoricalprecedence,perhapstheacceptedhistoricaldatawillnotbeagood
predictorofthefuture.Andonehastoprepareforthepossibility,ifoneisinvestedinthebroad,indexcentric
market,thatareasonablelevelofincomereturnmightendupbeingthemostimportantcomponentofthetotality
ofonesreturns.

PartIV:HowWillOneEarnAnAcceptableRateofReturn

1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Fortunately,oneneedntberestrictedtothebroadmarket.Itsnotgivingyouanything.Buttheindexationflows
didcreateanartificialdowndraftamongthethousandsofnonindexationsecurities.Thatiswherethecompanies
withlesssystemicriskwillbefound.Therewillbemoreinthewayofidiosyncraticinvestmentswiththeoppor
tunityfortrueoptionality.BasedontheOther100Yearsexperience,onereallydoeswantsecuritieswiththe
potentialfortrueoptionality,notmerelyexposure.Perhapsportfolioswillhavetohavefewer,butmoreselec
tivesecurities.

Thiswillrequireadifferentprocessthanthehabitualonesthatbroughtushere.Takewhatthemarketgivesyou.
Butthatrequiresflexibility.Heresanexampleoftheconflictthatcanarisewhenexercisingflexibility.Someof
ourstrategiesholdTexasPacificLandTrust,whichhasappreciatedmightilysincethelastupdatewewrote12
yearsago.Itisnowwellinexcessofa15%,even20%positionin
Texas Pacific Revenue v. Share Price
some individual account strategies and in a number of fund for
30.0X
mats.Wehaveelectedtonotreduceiteachtimeitrises,counter
totheacceptedprocess.
25.0X

Someinstitutionshaverequestedthatwereducetheposition,not 20.0X
ingthatitisimprudenttonottakeprofitswhenacompanysshares
havetripledinthreeyears.Thatsaninterestingstatement,since 15.0X
doesnotmentionvaluation.Howdoesonejudgeifsomethinghas
risentoomuchifyoudontknowitsvaluation?Youcant;soyou 10.0X
automatically reference general experience. General experience
saysthattheundervaluedcyclicalthatfellby50%,likeasteelor 5.0X
automaker,canexperienceacyclicalrecoveryandbecomepopular
0.0X
againitdoubles,butoneknowsitissimplyrisingtoarelatively
knownvaluationlimit.Consequently,ifittriplesitisprobablyover
Revenue Growth
Share Price
valued. But what if the value itself has become higher as well?
Thatstheroleofanalysis.
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Inthethreecalendaryearsthrough2015,whileoilpricesfell50%,TexasPacificLandTrustsrevenuesfromoil
royaltiesandoilrelatedlandleasesandsalesroseby140%.Anditsrepurchased10%ofitssharessincethen.
Comparethesetwosetsoffigures:1)inthelastseveralyears,theTrusthassoldnonstrategiclandatroughly
$1,000peracre;basedonthecurrentshareprice,anditstotalmarketvalueisequivalenttoroughly$2,900per
acre.2)Inthepastyearorsooilexplorationcompanieshavepaidinexcessof$50,000peracreand$100,000per
acreforlandsimilarlysituatedtotheTrustproperties.Aproviso:thatlastitemisanentirelyinaccuratemodeof
comparison,becauseitdoesnotdistinguishacreagewithroyaltyrightsfromthosewithout.

Butknowingjustthesefewfacts,wouldonestillfeelcomfortableconcludingthatthetriplingoftheTPLshare
priceinthelastfewyearsisanindicationofovervaluation?Thatrequiresanalysis.Anexampleoftruefundamen
talanalysiswillbefoundonthelastpageofthisreview.ItisthefrontpageofanannualreportfromaTPLrelated
company61yearsago,andwhichhasparticularbearingonthevaluationtoday.ThemereactoftracingtheTrusts
historytounderstandthatthisdocumentcouldbeimportantisanotableactofcreativeanalyticalthinkingbya
HorizonKineticsanalyst.Thefurtheractoflocatingthisdocumentrequiredmorethanalittlecreativityandrugged
persistence.Itmaywellbetheworldstheonlycopyofthisdocumentinactivecirculation.

Whatevertheoutcomefromhereforward,though,itisentirelyfairtosaythatTPLthebusinessandTPLtheshare
areveryunlikethebroadmarketandnotapparentlydrivenby,limitedbyorthreatenedbythesamefactors.That
isdiversificationandthatisoptionality.Andthatisbecomingevermorevaluableinanyportfolio.

Herearesomethumbnailreviewsofarangeofholdingsinourequitystrategies.Theywillgenerallybefoundto
bedistinctiveinsomeimportantfashionastovaluation,optionality,anddisengagementfromtheprimarysys
temicrisksthemarketfaces.Theyarediversifyingelements.

APMollarMaersk,foundedin1904,isaDanishconglomeratewitha$33billionstockmarketcapitalization.Both
ofitstwolargestbusinesseshavebeeninseverecyclicaldecline:containershipping,Maerskbeingtheworlds
largestpubliclytradedline,witha14%worldmarketshare;andoildrillingandexploration.ThefoundingMaersk
family,representedbyViceChairwomanAneMaerskMcKinneyUggla,owns53%ofthecompany.

Remarkably,intwoindustriesthatareaboutaschallengedastheycanget,thecompanyisprofitableandhasa
strongbalancesheet:$1.7billionofnetcurrentassetsand$43billionofpropertyandequipment,asagainst$13
billionofdebt.Ittradesbelowbookvalue.Itrepurchased$1.25billionofsharessinceyearend2014.

Moreover,lastmonth,followingthecontainershippingindustrysfirstmajorbankruptcyinmid2016,Maersk
announced the acquisition of the worlds seventh largest container liner, Hamburg Sd. This will add about 3
percentagepointstoMaersksmarketshare.Asinpastcycles,thecompanyshouldemergefromthisoneina
strongercompetitiveposition.Whenshippingratesrise,wheneverthatmightbe,itcanbequitefastandsharp.
Aswell,afterdecadesofoperatingunderaholdingcompanystructure,inJunethecompanyannounceditsinten
tiontoseparatetheenergyandshippingoperations.Thetworesultantbusinesseswouldthen,asindustryspecific
offerings,bemuchmoresuitablematerialforindexinclusion,whichwouldbeasignificantvaluationcatalyst.We
cantknowifMaerskwillbesuccessful,timewilltell.But,tellusthatthisisntaneconomicallyandoperationally
idiosyncraticcompanywithhighoptionality.

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AMCNetworksisacablenetworkproviderthatownsavaluablecontentlibrary;titlesincludeMadMen,Walking
Dead,andBreakingBad.AMCisinaperiodbetweenblockbusterprograms,soearningsarenotgrowing,ergoit
tradesataP/Eof10xthecurrentyearearningsestimate.However,ifthecompanycandevelopthenextcom
merciallysuccessfulprogram,earningsshouldrisesubstantially.Importantly,in2014,itacquiredacollectionof
internationalcablenetworksfromLibertyMedia,asaplatformtodistributeitsUSprogramstoaglobalaudience.

Currently,thisinternationaldivisionisonlymarginallyprofitable,soitisanunproductiveasset.Ifitwereeverto
achievetheprofitabilityofitsU.S.operations,totalearningspersharecouldbecloserto$7(versusthecurrent
$5.60).Asonescenario,ifthosepotentialearningswerepricedataP/Eof15x,AMCwouldbeworth$109per
share,nearlydouble.Asforsomanyofthesecompanies,themarketcapitalizationisfairlymodest,at$4billion.
AssociatedCapitalwasspunoutofGabelliAssetManagement(GAMCO)nearyearend2016.Ithastwolines
ofbusiness:institutionalresearch(amature,lowgrowthbusinessdependentonbrokeragecommissions);and
GAMCOsalternativeinvestmentsbusiness,focusingonmergerarbitrageandeventdrivenvaluestrategies.

AlthoughAssociatedhasprogressivelyincreaseditsAUM,itstilllackssufficientscaletogenerateanymeaningful
netincome.Thisiswhyitwasspunoffdebtfreeandwithasubstantialamountofliquidity:about$1.0billionof
capital,roughly40%cash,40%investmentsand10%inaGAMCOnotereceivable.Thecompanysmarketcapital
izationisonlyabout$875million,soittradesatabouta12%discounttoNAV.Inthesimplestsense,thisisan
investmentvehicleoftheesteemedinvestorandcontrollingshareholderMarioGabelli,whohasrepeatedlyused
spinoffstoisolateundervaluedassetsthatcanbeexpandedsignificantly.

Asaninvestmentmanagerwithonly$1.2billionofAUM,thescaleatwhichAssociatedcanoperate,ifsuccessful
ingatheringassets,canbeenormouslyhigher.Asamanagerofalternativestrategies,itiswellpositioned,since
thesearebecomingmoreattractivetoassetallocatorsasprospectivereturnsinconventionalinvestmentsdimin
isharbitragestrategiesareinherentlylowvolatility,whichisanattractiveattribute.Further,merger/arbitrage
spreadsare widerwheninterestratesarehigher theyve beensuppressedinrecentyearsduetonearzero
interestratessoAssociatedshouldbeanearningsbeneficiaryofariseininterestrates.Moreover,itsstrategies
areeligibletoearnperformancefees.Inessence,webelieveAssociatedrepresentsalowrisk,longtermcallop
tiononanassetallocationshifttowardalternativestrategies,andithastherespectedGAMCOvaluereputation
behindit.

DISHNetworkisthesatellitetelevisionprovider.Ithas13+millionPayTVsubscribers.Thestockmarketcapitali
zationis$29billion,and48%ofthatisownedbyfounderandCEOCharlesErgenandhisfamily.DISHisanother
exampleoftheexpensive/cheapdichotomy,thekeytowhichisfundamentalanalysis;indexesdontanalyze.

Thecompanyhaslost1.9%ofitssubscribersoverthepastyear,yetthesharestradeat23xestimatedearnings
for2017.Thatsexpensive.However,anasyetdormantassetistheover$15billionthecompanyspentsince2008
onwirelessspectrumlicenses,someatauction,somebyacquiringcompaniesinbankruptcythatownedsuch
licenses.Thereisinformationcontentinthefactmuchofthewirelessspectrumavailableforpurchaseinthepast
decadehasbeenacquiredbyowneroperatorcompanies,includingSiriusXMHoldings(JohnMalone).Themotive
isthepresumptionthattherapidgrowthinmobiledatausagewillnotstop,thatcurrentusagetodayisbuta
fractionofwhatitwilleventuallybe.Owneroperatorsarewillingtoholdthesewithoutanycurrentreturn.

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Iftheyprovecorrect,thenthoselicenses,wheninoperatingmode,willbeveryprofitable.Eventhoughtheyare
notbeingusednow,theirmarketvalue,reflectedinauctionpricesfornewspectrum,hasrisenmarkedly.Esti
matesofthevalueofspectrumarehighlytechnicalandvariable,butonemiddleoftheroadmultiplesuggests
thatDISHsspectrum,netofDISHsdebt,isworthroughly$46billion.Whichismorethanthemarketcapitalization
oftheentirecompany.

GaumontSAisaFrenchproduceranddistributoroffilmsandtelevisionshows.Itservesthe270millionFrench
speakersworldwide.Italsoownsalibraryofover1,000filmsand17,000documentaries. The catalogueitself
couldbeworthwellmorethanthecompanyscurrentmarketvalue.ItrecentlyestablishedaU.S.subsidiarythat
hascreatedanumberoforiginalseriesforstreamingandtelevisionforNetflixandNBC.Thisisaqualitatively
significantenhancementtoitsbusiness.

Thesharestradeat13.3x2015earnings,whichwasaparticularlybadyearforthefilmsegment.Inthefirsthalf
of2016earningsareroughly3xhigher;itcouldbetradingatasingledigitP/Eof2016earnings.Wellknowshortly.
Thecompanyalsotradesat0.87xbookvalue,anditisunlikelythatbookvalueincludesthepropervalueofthe
realestatehousingitstheateronAvenuedesChampslysesinParis.Tothedegreethisisproperlycomparable,
NBCUniversalpaid3.25xbookvalueforDreamWorksAnimation.Gaumonthasonlya$225millionmarketvalue.

Howard Hughes is an excellent example of the equity yield curve in action: valuable dormant and developing
balancesheetassetsnotyetvisibleasearningsontheincomestatement,ergo,notvaluedbytimeandrelative
returnsensitiveinvestors.Thesharepricewasunchangedlastyear,despitethecompanymakingsubstantialpro
gressondevelopmentsinNewYorkCity,Houston,HonoluluandColumbia(Maryland).Webelievethecompany
isnearinganinflectionpointwhereincomegeneratingpropertieswillbegintodominatetheportfolioforthefirst
time,whileitslargeundevelopedlandbankandtransitionalstrategicassetswillcontinuetoprovideopportunities
forcapitaldeployment.

Eventually,sinceitwillsoonhavetocontendwithsubstantialtaxableincome,HowardHugheswillbeincentivized
toseparateitsincomegeneratingassetsintoataxefficientstructure.Theopening,thissummer,oftheSouth
StreetSeaportinlowerManhattanmaymarkthestartofthatpressure.Webelievethatthemarketvastlyun
derappreciatesthepotentialofthisproject,andassignsvirtuallyzerovaluetothedevelopmentrightsinadjacent
parcels.Ultimately,ifinvestorsvaluethestabilizedoperatingassetsinlinewithpeers(whichisconservative,given
assetquality)andtheremainingpropertiesatatypicalmultipleofbookvalue,thesharesshouldtradesubstan
tiallyhigher.Additionalopportunitiesincludereducingthecompanyscostofcapitalbyreplacingcorporatelevel
debtwithpropertylevelfinancingaftertheSeaportopens.

StoltNielsenLtd.aNorwegianshippingcompanyoperatedbytheStoltNielsenfamily,whoownjustover50%.It
providestransportation,storageandlogisticsservicesrelatedtoitsparticularsegmentofshipping:bulkliquid
chemicals,rangingfromedibleoilsto industrialacids,aswellas cleanpetroleum products likelubricationoil.
Accordingly,itoperatesspecializedcontainertankersandstorageterminals.

Despitethedramaticdeclinesinglobalshippingvolumesandpricing,StoltNielsenhasmaintained,remarkably,
stablerevenuesandrisingearnings.Ithasbeenprofitableineachofthepast10years.Thesharestradeat6.5x
2016runrateearningsandat57%ofbookvalue.Aswell,sinceithaspaida$1/sharedividendsince2006,it
yields7%.Onegetsmorethanadequatepaymenttoawaitarecoveryinitsindustry.
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Wendys,studyinwhateitherisorisnotexpensive.
Wendyswasfirstboughtinaccountsin2012,ataninitialpriceofabout$6,versus$13.8now.Ittradedatabout
37xearnings,butwascheapattheprice.ThepurchasewasnotbasedonWendyssalesgrowthorprofitability;
rather,onthelackofit,sinceitwastheleastprofitableofthelargefastfoodchains.Allthatwasrequiredfor
investmentsuccesswasforWendystoachieveaverageprofitability.Earlier,in2011/2012,activistinvestorsNel
sonPeltzandPeterMayestablishedacontrolpositionandputforthalongtermtransformationplancenteredon
threeinitiatives:1)upgradingtherestaurantstoaslightlymoreupscale,fastcasuallayoutanexpensiveun
dertaking,withfullremodelingcostingupto$750,000perstore;2)sellingasignificantportionofcompanyowned
restaurantstofranchisees;thereby,swappingcapitalintensive,lowmarginpropertyfortheassetlightroyalty
streamofthefranchisemodel;and3)withnopresenceoutsideNorthAmerica(versusovertwothirdsofrevenues
forMcDonaldsandYum!Brands),expandinginternationally.

Fiveyearsintothistransformationstrategy,Wendyshascompleteditsprogramtoreducethenumberofcom
panyownedstorestoitstargetof5%attheendof2016vs22%in2012.Netprofitmarginforthefirstninemonths
of2016increasedto8.9%comparedto5.4%theprioryearand2.1%in2011.Yet,Wendysoperationaltransfor
mationisstillaworkinprogress,withonly28%ofitsNorthAmericarestaurantsupgraded,versusatargetof60%
bytheendof2020.Itisnowatanimportantinflectionpoint:thesubstantialexpendituresforstoreupgrades
maskmuchoftheprofitabilityimprovementintheremodeledstores,buttheseexpendituresarepeakingand
shoulddeclinerapidlystartingnextyear.Freecashflowshouldincreasesubstantiallythereafter.
Anticipatingtheupcomingcashflowgeneration,thecompanyhasrepurchasedover30%ofitssharesoverthe
pastyearandahalf,usingcashfromthesaleofownedrestaurantstofranchiseesaswellasproceedsfroma
$2.275billionsecuritizedfinancingfacility.Theadditionalinterestexpenseisnegativelyaffectingearningsand
freecashflowduetohigherinterestexpense,buttherepurchaseprogramwillbeaccretiveonapersharebasis
inthefuture.Therefore,whileWendyscontinuestoappearexpensive,withaP/Eof30xthisyearsexpected
earnings,itsprice/freeforwardfreecashflowislowerthanthatofthetypicalcompany.

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WhatDoYouGetFromResearch?
Thisisthefrontpageofa1955annualRe
port of TXL Oil Corp. Chevron recently es
tablishedamassivedrillingprogramonland
very near Texas Pacific Land Trust (TPL)
land,anditsacreagedistributionlooks re
markablylikethatofTPLs,whichhasanun
usual checkerboard pattern. Horizon ana
lystJamesDavolosdeterminedtotracethe
originofthatacreagethroughhistoricalfi
nancialfilings.

He discovered that it was acquired when

ChevronpurchasedTexaco.Continuingthe
exercise, it appears that Texaco acquired
theacreagewhenitpurchasedacompany
knownasTXLOil.Therefore,itisaTXLOil
annual report that would be expected to
describe,perhapsexplain,variouspertinent
details related to the origin and nature of
thatacreage.Unfortunately,TXLOil,asub
sidiary buried within a subsidiary hasnt
beenpublicinsixdecades.

Thusarmed,Mr.Davoloslocatedtwocop
iesinthepublicrecord:oneatStanfordUni
versityandtheotherattheMidlandCounty
(Texas)PetroleumMuseum.Shortoftravel
ing to either destination, and after persis
tent requests, he was able to have a copy
madeavailableatNewYorkPublicResearch
Library which, with some further urging,
permittedhimtocopyitontheirpremises
withtheappropriatenumberofquarters.

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January 2017

DISCLOSURES:
Pastperformanceisnotindicativeoffuturereturns.Thisinformationshouldnotbeusedasageneralguideto
investingorasasourceofanyspecificinvestmentrecommendations,andmakesnoimpliedorexpressedrecom
mendationsconcerningthemannerinwhichanaccountshouldorwouldbehandled,asappropriateinvestment
strategiesdependuponspecificinvestmentguidelinesandobjectives.Thisisnotanoffertosellorasolicitationto
invest.
Opinionsandestimatesofferedconstituteourjudgmentandaresubjecttochangewithoutnotice,asarestate
mentsoffinancialmarkettrends,whicharebasedoncurrentmarketconditions.Undernocircumstancesdoesthe
informationcontainedwithinrepresentarecommendationtobuy,holdorsellanysecurity,anditshouldnotbe
assumedthatthesecuritiestransactionsorholdingsdiscussedwereorwillprovetobeprofitable.Therearerisks
associatedwithpurchasingandsellingsecuritiesandoptionsthereon,includingtheriskthatyoucouldlosemoney.
TheS&P500Indexrepresentsanunmanaged,broadbasedbasketofstocks.Itistypicallyusedasaproxyfor
overallmarketperformance.Indexreturnsassumethatdividendsarereinvestedanddonotincludetheeffectof
management fees or expenses. You cannot invest directly in an index. This report mentions several exchange
tradedfunds,whichareinvestableproductsownedbytherespectivemanagersmentionedherein.Foradditional
informationaboutsuchproducts,youshouldconsultthespecificexchangetradedfundprospectus.Comparisons
ofexchangetradedfundstoindexesisimperfectinthatexchangetradedfundshavefeesandexpensesandindexes
donot.
HorizonKineticsLLCistheparentcompanytoseveralUSregisteredinvestmentadvisers,includingHorizonAsset
ManagementLLC(Horizon)andKineticsAssetManagementLLC(Kinetics).Horizon,Kineticsandeachoftheir
respectiveemployeesandaffiliates,inadditiontotheaccountsandpooledproductstheymanage,mayholdcer
tainofthesecuritiesmentionedherein.FormoreinformationonHorizonKinetics,youmayvisitourwebsiteat
www.horizonkinetics.com.
NopartofthismaterialmaybeduplicatedorredistributedwithoutHorizonKineticspriorwrittenconsent.
2017HorizonKineticsLLCAllrightsreserved.

2017 Horizon Kinetics LLC