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Market Commentary


From year-end 1994 through year-end 2013, the Russell 2000 outperformed the S&P 500 by only 23 basis points per annum. Extend the time period by only eight months to August 29, 2014, and the Russell 2000 underperforms the S&P 500 by 20 basis points over an almost 20-year period. We discuss the relative valuations of the two indexes, and the flows into and out of the exchange-traded funds that track them.
Understanding the basic presumptions of asset allocation can hardly be more critical, since we all invest based on these foundational assumptions.  This quarter, we examine the historical returns from investing in private equity, revisit the topic of slowing revenue expansion at the largest companies, identify some common attributes of companies that do not appear to be suffering from a lack of growth opportunities, and discuss the potential diversification and inflation hedge benefits of land.
This month, we discuss large capitalization companies. In the past, large capitalization companies tended to be stable, established firms. Recently, however, some nascent firms have rapidly expanded their business such that a large market capitalization is warranted, and are investing in their business at a rate that may justify a high price to earnings ratio. We consider the implications of this shift on investment decisions.
This quarter, we question some widely held views on investing, focusing on the nearly universally accepted assumption that emerging markets investing provides higher returns than investing in the developed markets.  In addition, we review two positions in the Core Value strategy: The Wendy’s Company and Platform Specialty Products Corp.
As investor biases increasingly emphasize liquidity needs over investment, the largest companies continue to prioritize cash balances at the expense of long-term value creation.  Along with other headwinds, the unwillingness to deploy cash reserves seems likely to adversely impact earnings for the largest companies and indexes going forward, such that the companies and sectors with the most attractive predictive attributes will be found outside of the major stock indexes.
With tax season fast approaching, K-1-generating securities come up frequently in client discussions. It is timely, then, to review why we hold publicly-traded private equity companies, a number of which are structured as LPs, in some of the portfolios.  You might find some of the reasons surprising.
As we enter the 20th year since the founding of Horizon Kinetics, we take a look back at recent commentary themes, revisit the sway of the media on investment decisions, and discuss selected current positions.  
This month, we discuss the discrepancy in valuations between Canadian-listed companies and their US-listed peers, highlighting real estate investment trusts and real estate developers.
This quarter, we review the important and often surprising ways in which indexation is impacting security valuations, risk, and returns, and point out the merits of the antithesis of indexation: active management and individual security selection.
Liquidations are an extremely interesting type of investment, but they are incredibly rare, and require an extended investment horizon. Therefore, they are of little interest to the majority of investors. The timing of the payout, if any, is unpredictable. However, if and when it comes, it may handsomely reward the investor’s patience. This month’s commentary reviews some of the idiosyncrasies of investments in companies in liquidation, as well as provides an overview of a past liquidation investment made by the Firm.
While the S&P 500 Index level has appreciated significantly over the past year, revenues at the 20 largest constituents of the Index have increased only modestly. This quarter’s commentary considers the impact of indexation methodology on the representation of entrepreneurial companies that are likely to generate expanding revenues, many of which have significant insider ownership, by looking at the historical insider holdings and performance of two famous owner-operators: Wal-Mart and Microsoft.
Continuing our series on predictive attributes for outperformance, this month’s commentary highlights companies based on products with long lifecycles. Companies whose products have short lifecycles face pressure to regularly reinvent themselves; otherwise, they are likely to experience decreasing market share or profitability as demand for their products wanes. In general, companies whose products have long product lifecycles enjoy more consistent demand, leading to more predictable long-term results.
This quarter’s commentary addresses some tax reduction techniques utilized by owner-operators, continues our review of owner-operator actions, and discusses master limited partnerships as part of our series on the challenges faced by investors seeking yield in the current low-interest rate environment.
We discuss scalability as a predictive attribute for outperformance, highlighting publicly-traded private equity firms as example of companies with operating leverage in their business models.
Highlights companies with significant investments in other publicly-traded companies, including Dundee Corporation (DC\A CN), Icahn Enterprises L.P. (IEP), and Brookfield Asset Management (BAM).
This quarter, we examine the pitfalls of using standard valuation metrics as a substitute for thorough analysis.  We consider a different valuation metric: management actions, which we believe is more predictive of future performance than most standard metrics.
This month, we continue our series on predictive attributes by highlighting companies with dormant assets, focusing on the areas of spectrum capacity and land or real estate development.
Following strong performance by several of our larger holdings, we take this opportunity to highlight some of the companies that contributed little to performance for the year.  We also address the many challenges facing equity investors, including the prevailing low interest rate environment.
In the past several months, we have noticed increased spin-off activity in the equity markets.  We have published research reports monitoring spin-offs for many years, including a 1996 study examining the long-term returns provided by tax-free spin-offs as compared to the broader market returns.  This month, we highlight some notable spin-off transactions from the past several quarters, as well as discuss selected pending spin-offs. 
In this month’s commentary, we discuss the recent introduction of high- and low-volatility exchange-traded funds (ETFs).  For a selection of high- and low- volatility ETFs, we review their performance in the year following launch and opine on the inferences, if any, that may be drawn from the valuations reflected in these securities.
We review the current bond market environment and discuss the implications of an extended low-interest rate environment.  We also offer a discussion of the predictive qualitative and quantitative attributes we consider in assessing investment opportunities.
What might happen if, contrary to common expectations, interest rates do not rise? Has that situation ever occurred before? We consider the historical context for the current interest rate environment, as well as the implications for investors should the current low yield levels be sustained over an extended time horizon.
Given the elevated level of the bond market, “the bond market panic” may sound like a preposterous term.  However, given the manifest absence of yield available in the bond market, we believe it is appropriate.  As higher-coupon bonds are due to mature and newer bonds are issued at lower coupons, we estimate the potential loss of income to fixed income investors may be substantial.
We discuss the sector representation in the S&P 500 Index from an individual security and ecosystem perspective, as well as the pitfalls of drawing conclusions from time series modeling.
The current industry sector diversification system used frequently by individuals, professional money managers, and risk managers is based on Securities Industry Classifications (SIC codes), which have very obvious deficiencies. We will advance the proposition that examining portfolios on an ecosystem basis rather than a position basis, using a measure of diversity called the Herfindahl Index, is a better approach to diversification. 
At the close of 2011, Murray Stahl providedan overview of the markets in 2011 and discusses what might occur in 2012.
At the close of 2011, we offer our thoughts on the continued trend toward indexed products, its impact on owner-operator companies, and signs of the beginnings of a reversal.
In this commentary, we address historically elevated volatility levels in the equity markets, and the response by owner-operators to the capital allocation opportunities afforded by such volatility.
We offer our thoughts on recent market conditions as compared to those experienced during the last period of high volatility: the financial crisis of 2008.
We discuss perceived versus actual risk, the profit growth challenge for US Equities, and the margin of safety available when investing in many owner-operator companies
We explore how the rapid proliferation of open architecture, specifically through the development of various application (“app”) stores, is having a profound impact on cellular phone companies, computer manufacturers, video game developers and a host of other businesses.
We examine the standard calculation of the Price to Book Ratio of the S&P 500 Index, address the shortcomings of various methods of computing the metric, and discuss implications for market analysis.
In this commentary we share with you our observations regarding the current equity market, some explanations for these observations, and, perhaps most importantly, investment opportunities we believe have been created by this set of circumstances.
As the financial markets mark the second anniversary of the market lows hit in March 2009, we offer our observations as insight into our current investment thinking.
While many in finance have pronounced that "the era of buy-and-hold is dead," we provide our basis for believing that an extended investment horizon continues to be the more prudent (and profitable) strategy.
We provide a review of 2010 and discuss the "information-advantaged" or "owner-operator" set of businesses.
© Horizon Kinetics LLC 2014