3q2017 portfolio updatehorizonkinetics.com/wp-content/uploads/3q2017... · a valuation sobriety...

© 2017 Horizon Kinetics LLC.™

October 18, 2017

3Q2017 portfolio updateSteven Bregman


An Overview

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Part 1: What our clients know that the investment profession doesn’t.

Part 2: What I Said at a Conference.

Part 3: An Answer to “So What’s Next and What Can be Done?”A disruption from outside the indexation system is on its way.

Part 4: What JPMorgan Chase, Fidelity and CME Group DON’T have in common.

Part 5: New Asset Class #1: An index disruptor that is a new store of value.

Part 6: What central banks are doing….not what you think.

Part 7: New Asset Class #2: A disruptor that is a new industry and non-volatile incomeinstrument.

Part 8: Have We Lost Our Way?Re-framing the definition of risk: Volatility or Purchasing Power Erosion

Part 9: Company review: Howard Hughes Corp., AMC Networks


Not that many new exhibits, this time, so here’s a different form of market commentary fromThe New Yorker behavioral analyst Bob Mankoff, who apparently understood the ETF industry before it even existed.

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© 2017 Horizon Kinetics LLC ®. All rights reserved.

Benchmark Yield YTM Sobriety Test Yield YTMU.S. Treasury 10-Year Note 2.3% Russian Federation, BB+, 13-year bond 2.3%

IBM Bond, AA-, 10-Year Note 3.3% Petrobras, BB-, 4-year note 4.5%

Wendy’s Bond, B, 9-Year Note 6.3% Lebanese Republic, B-, 4-year note 5.1%

iShares High Yield Corp. Bond ETF (HYG) 5.0%iShares Emerging Mkts High Yield Bond ETF(EMHY)

5.3%

Would anyone seriously argue that these yields are adequate compensation for therisk assumed? (That is, you buy a Lebanese Republic bond at 5.1% in EMHY, but couldyou sell it in the open market at 5.1%?) If not, do the prices result from some otherfactor, such as artificial supply-and-demand pressures?

In EMHY, new money is allocated based on float. In other words, the more debt anation issues, the greater the allocation to its bonds because it has a greatercapitalization. That is the mathematical model, and that is entirely logical – to a point.

There is, really, no price discovery. And if there’s no price discovery, is there really amarket? In which case, what is EMHY really worth?

A Valuation Sobriety TestWhy Wendy’s should reincorporate and refinance in Lebanon

Data as of 5/1/2017, except ETF data (30-Day SEC yield) as of 4/24/2017Source: Bloomberg, iShares


IShares US. Energy ETF (IYE) MV%

EXXON MOBIL CORP 24.8CHEVRON CORP 15.4SCHLUMBERGER NV 6.7CONOCOPHILLIPS 4.0Total Weight of Largest 4 Holdings 51.0

Formulaic investing creates new forms of idiosyncratic risk.

Do investors in the iShares U.S. Energy ETF, who presume to be buying a diversified portfolio – who were fleeing idiosyncratic risk – know that more than 50% of the fund is held in 4 holdings, that they are actually buying idiosyncratic risk?

*As of 8/21/2017. Source: iShares

IShares MSCI Spain Index ETF (EWP) MV%BANCO SANTANDER SA 19.3BANCO BILBAO VIZCAYA ARGENTARIA OR 10.3TELEFONICA SA 8.6INDUSTRIA DE DISENO TEXTIL INDITEX 7.5IBERDROLA SA 4.8AMADEUS IT GROUP SA 4.7CAIXABANK SA 4.7REPSOL SA 4.5ABERTIS INFRAESTRUCTURAS SA 3.8AENA SA 3.5Weight of Largest 10 Holdings 71.8%

The same top-heaviness problem exists in the iShares MSCI Spain Index ETF (EWP). The top 10 companies are a 72% weight.

Semantic Mis-Investing #1: Security Diversification. (Not.)

Market-cap weighted indexes ‘undiversify’ pretty quickly


Attainment of the stated 5.44% Yield to Maturity (YTM):

• 2.4% of the portfolio has a 22.8% average YTM. The Fund willnot get a 22% YTM from these, since that is the rate on bondsexpected to default. They are temporarily paying until then.They enhance the stated YTM by 0.55%. Without this, the YTM is4.9%.

• If one-third of the CCC-class bonds lose only 1/3 of their value,the YTM is reduced by 1.3% to 4.1%. Less Federal tax, the aftertax YTM is under 2.7%. And this assumes zero defaults in the BBB-class bonds, no local taxes, no fees.

Really, a near-zero or negative real yield.*CCC: Extremely SpeculativeCCC-: Default imminent, with little prospect for recoveryAs of 8/21/2017Source: iShares

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)AUM $18.4 billionNumber of Bonds 1,032Weighted Average Yield 5.44%Weighted Average Maturity 4.19 yrsCredit Quality MV%

Below BBB 98.0%CCC* and Below 12.2%

Attainment of a Higher Return than the 5.44% YTM:

• There must be zero defaults.

• Average bond price of the entire fund is above par, at $101.2,and the bonds must mature at 100 in an average of 4 years.Moreover, the 79% of the bonds that trade above par have anaverage price of $104.7.

Semantic Mis-Investing #2: High Yield

Not High Yield, Just Low Credit Quality


Does an asset allocation program or robo-advisorseeking foreign market exposure know that 7 of thetop 10 holdings of the iShares MSCI Italy Index get anaverage of 68% of their revenues from outside ofItaly? That they’re essentially investing outside Italy?

The same holds true for the iShares Spain ETF. 7 of thetop 10 holdings get an average of 76% of theirrevenues from outside Spain!

Then there’s valuation. There is great demand for thefew companies of sufficient market cap, simply asraw material for index inclusion. Might these mega-cap global stocks out-perform truly local Spanishstocks just due to their automatic bid? Do globalmulti-nationals pose their own particular systemicrisk?

So what does manager relative performancemeasure? What does country allocation measure?

Top 10 Holdings as of 8/21/2017 Source: iShares, Bloomberg, Company reports

IShares Italy ETF (EWI) % Weight % of Revenue NOT in Italy

ENEL 12.5 46INTESA SANPAOLO 10.9 24UNICREDIT 10.5 53ENI 10.1 62FERRARI NV 5.0 88ASSICURAZIONI GENERALI 4.8 62ATLANTIA 4.7 13FIAT CHRYSLER AUTOMOBILES NV 4.5 80SNAM 4.1 n.m.CNH INDUSTRIAL NV 4.0 88

Top 10 Total 71.0

IShares Spain ETF (EWP) % Weight% of

Revenue NOT in Spain

BANCO SANTANDER SA 19.3 87BANCO BILBAO VIZCAYA ARGENTARIA OR 10.3 74TELEFONICA SA 8.6 75INDUSTRIA DE DISENO TEXTIL INDITEX 7.5 82IBERDROLA SA 4.8 50AMADEUS IT GROUP SA 4.7 93CAIXABANK SA 4.7 10REPSOL SA 4.5 9ABERTIS INFRAESTRUCTURAS SA 3.8 69AENA SA 3.5 6

Top 10 Total 71.8%

Semantic Mis-Investing #3: Foreign Equity Exposure

How to Avoid Investing in a Foreign Market? Through Your Foreign Markets ETF


ExxonMobil is one of the most liquid stocks. Ergo, it will be found almost anywhere one canimagine that it can be placed. It is a member of 206 ETFs.It’s Momentum, It’s Value, Its’ a Bird, It’s a Plane…

It’s Exxon, a Stock for Every Strategy:QUAL iShares Edge MSCI USA Quality Factor ETFHDV iShares Core High Dividend ETFIWD iShares Russell 1000 Value ETFMMTM SPDR S&P 1500 Momentum Tilt ETFPBP PowerShares S&P 500 BuyWrite ETFTILT FlexShares Morningstar US Market Factors Tilt ETFFTLB First Trust Low Beta Income ETFQWLD SPDR MSCI World Strategic Factors ETFTOK iShares MSCI Kokusai ETFACWI iShares MSCI ACWI ETFSPLV Powershares S&P 500 Low Volatility PortfolioVIXH First Trust CBOE S&P 500 VIX Tail Hedge Fund

ExxonMobil: An Exercise in Levitation2013 2016 Change

Revenue $99.18 $54.13 -45%EPS $7.37 $1.88 -74%

Payout Ratio 33% 159% 376%

BV/Share $40.85 $41.62 1.89%

(Net Expenditures on Stock buybacks/share) $3.62 $0.23 -94%

Total Debt ($ bill) $22.70 $42.76 88%

12/31/12 12/31/16Share price $86.55 $90.26 +4.3%

As of 8/21/17. Source: Morningstar.As of 12/31/2016. Source: Company reports.

Indexation is NOT Dependent on Individual Securities. Really?

The Exxon Levitation Conundrum – Or, The Problem of the Automatic Bid


Have a Hunch, Buy a Bunch!

The popular side of the ETF Divide, witnessed in theExxonMobil phenomenon, can be seen in almostany large S&P 500 constituent. Money has beenstructurally channeled into the most liquid securities.

It alters correlation statistics, risk statistics.

The correlation of the largest members of the S&P500 with the index has about doubled from 20 yearsago.

Even Mexico and Japan are now more correlatedwith the S&P 500 than the top S&P 500 companieswere 20 years ago!

The same holds true for Procter & Gamble, CocaCola and most of the rest.

Where’s the price discovery?

Correlation with S&P 500* (1/1/2008-6/30/2017)IYW iShares US Technology 0.63BJK Market Vectors Gaming 0.79IYH iShares US Health Care 0.75IYE iShares US Energy 0.71ITB iShares US Home Construction 0.71IYT iShares Transportation Avg 0.70EWW iShares Mexico Capped ETF 0.67EWJ iShares MSCI Japan ETF 0.72

Correlation with S&P 500*Security 1995 2016 ChangeApple Inc 0.161 0.567 253%Chevron 0.295 0.639 117%General Electric 0.522 0.759 45%Johnson & Johnson 0.314 0.536 71%Microsoft 0.455 0.711 56%Pfizer 0.191 0.495 159%Procter & Gamble 0.370 0.513 39%AT&T 0.425 0.431 2%Verizon 0.436 0.471 8%ExxonMobil 0.351 0.581 66%

Source: Bloomberg, daily returns, Horizon Kinetics Research*Selected to show the correlation of certain non-financial S&P 500 Index constituents that have existed for more than 20 years. For illustrative purposes only. Using Bloomberg

correlation matrix.

Semantic Mis-Investing #5: Correlation Diversification

Self-defeating paradox: The failed search for diversification in ETFs


A reality: A new ETF cannot be launched withouta low Beta.

A result: These largest-in-class ETFs canlegitimately be characterized as low volatility,since the financial sector has not been volatilelately. And the high sector weighting enables theETF to attain its advertised low beta.

A rhetorical question: Is low volatility an inherentattribute of the financial sector? Or is it perhapssimply that the central banks of the world havemaintained an artificially low-rate environmentfor a very long time?

Would anyone legitimately assert that these ETFswill remain non-volatile if rates rise? The ETFs can’ttrade out of a low-Beta security; but they canonce the Beta rises.

Another rhetorical question: Would an activemanager of a low-risk strategy be permitted therisk of a one-third or near-50% weighting infinancials?

Beta

What is This

Column?Sample Low Volatility, Low Beta, and Factor ETFs

EEMV iShares MSCI Emerging Markets Min Vol ETF -0.08 21.8%

CNYAiShares MSCI China A ETF 0.28 27.3%KSA iShares MSCI Saudi Arabia Capped ETF 0.30 38.6%INDA iShares MSCI India ETF -0.01 23.6%EIDO iShares MSCI Indonesia ETF -1.13 32.7%FM iShares MSCI Frontier 100 ETF 0.07 44.1%

Sample Value Factor ETFsIWD iShares Russell 1000 Value ETF 1.08 25.6%IWN iShares Russell 2000 Value ETF 1.48 30.5%IVE iShares S&P 500 Value ETF 1.16 27.4%

IVV Reference: iShares Core S&P 500 ETF 1.00 14.4%As of 7/31/2017

Answer: Percentage Weight in FinancialsSource: Various ETF Factsheets, Morningstar.

Source: iShares. iShares calculates Beta vs. the S&P 500

The Pursuit and Myth of Low Beta (and the accumulation of systemic risk)

The misuse & abuse of historical statistics in the ETF creation process


To translate that bewildering language into the 3-step recipe via which an egregiouslyhigh P/E ratio is cleansed into a harmless middling sort of group average, observe thefollowing hypothetical portfolio consisting of a range of low, somewhat high andegregiously high-valuations. Ponder Stock D’s treatment, and you see that the higher thetrue P/E, the less and less it counts in the average.

Incidentally, a simple average of the P/E ratios of the 91 profitable companies in theNASDAQ 100, results in a valuation of 43.6x earnings. The market-cap weighted average(giving proportionately greater weight to the larger companies) is 41.0x. No activemanager would be permitted to manage a concentrated, high-P/E portfolio for aninstitutional client. Only an index enjoys this privilege.

P/ERatio

Step 1: Reciprocal of the P/E Ratios

Step 3: Reciprocal of the Step 2 average

Stock A 10 1/10 = 0.10Stock B 20 1/20 = 0.05Stock C 30 1/30 = 0.033Stock D 300 1/300 = 0.0030_

Average P/E: 90x Sum = 0.1867Step 2: Average of the reciprocals: 0.1867/4 =

0.04651/.0465 = 21.5x

Harmonic mean (From Wikipedia, the free encyclopedia)In mathematics, the harmonic mean…is one of several kinds of average…Theharmonic mean can be expressed as the reciprocal of the arithmetic mean of thereciprocals of the given set of observations.

Semantic Mis-Investing #6: Indexes as Fact-Based Investing.

When Is A Fact Not a Fact? Or How an ETF Can Turn a 90 into 22 in Three Easy Steps


Were these active managers theanomaly for underperforming?And is it reasonable to believe thatthey all lost their touch at the sametime?

Or was it the S&P 500 that was theanomaly for outperforming? Thatalways sounds nonsensical untilafter the fact.All one can say is that if a schoolconsistently gave exams that 98%of the students would fail, at leastsome attention would be paid tothe teachers.

The Alpha Producers

Are Active Managers the Anomaly, or is the Market?

Fund or Holding Company

2016Underper-formance

in % Points (net)


in % Points (net)


in % Points (net)

Fairholme1 13.72% -12.88% -16.39%

Gabelli Value1 -0.36% -10.88% -12.09%

Wintergreen1 -5.29% -8.32% -15.37%

Longleaf Partners1 8.76% -20.18% -8.77%

Berkshire Hathaway2 11.44% -13.88% 13.31%

Pershing Square Hldgs3 -25.46% -21.88% 26.71%

Icahn Enterprises3 -23.59% -26.01% -21.87%

Greenlight Reinsurance3 -4.76% -21.58% -4.99%

Royce Micro-Cap1 -0.70% -8.10% -7.70%

1 Fairholme (FAIRX), Gabelli Value 25 A (GABVX), Wintergreen (WGRNX), LongLeaf Partners (LLPFX ), Royce Micro-Cap (RMT)

2 Share price return3 NAV per share change

Benchmark is S&P 500 Index except for Royce Micro-Cap which is relative to the Russell MicroCap IndexSource: Company Reports, Manager websites, Horizon Kinetics Research


How can a free enterprise system function ifprice discovery is influenced by agencies ofgovernment with infinite supplies of money?

An equity portfolio manager no longercompetes in the market auction process withother buyers with limited capital. Thegovernment, with unlimited capital, is notmotivated by ordinary considerations of fairvalue. One is entitled to presume, in theabsence of evidence to the contrary, that theaim of the Central Bank is to elevate prices. Ifthis is the case, what does the benchmarkmean?

Without price discovery unimpeded byintervention, there can be no rationalallocation of capital. And without rationalallocation of capital, it is impossible to properlyevaluate the skill of the managers.

Q2 2015 Q2 2016 Q2 2017Market value of holdings $38.6 B $61.8 B $85.0 B

Number of positions 2,581 2,581 2,643

Top 10% by weight, # of positions 258 258 264

Largest 10% as share of portfolio 74% 76% 76.5%

Average market cap of position oflargest 10% (billions)

$60.4 $62.7 $70.0

Some Unexpected HoldingsName Headquarters Name HeadquartersB Communications Ltd Ramat Gan Kornit Digital Ltd Rosh Ha'ayin

Caesarstone Ltd Haifa Mellanox Tech Ltd Yokneam

Cellcom Israel Ltd Netanya Neuroderm Ltd RehovotCheck Point Software Tech Tel A.-Yafo Orbotech Ltd YavneCyberark Software Ltd Petah Tikva Radware Ltd Tel A.-YafoElbit Sys Ltd Haifa Taro Pharma Inds HaifaGazit Globe Ltd Tel A.-Yafo Tower Semicond. Migdal Ha'emekIsrael Chemicals Ltd Tel A.-Yafo Wix Com Ltd Tel A.-YafoIturan Location & Control Azour

Q: Which Index Fund Would Be the 3rd Largest ETF in the U.S.?*

Source: sec.gov 13F Filings, Bloomberg* From the Swiss National Bank: “The SNB does not engage in equity selection; it only invests passively. It first decides in which

markets it wants to invest, and then replicates appropriate broad equity indices. If the equity portfolio were managed actively, this could send undesirable signals to the market, and might also lead to the politicization of investment decisions.”

Central Banks, Equities and, Of Course, Indexation

Still believe in price discovery?


CRSP U.S. Total Market Index, as of 3/31/17, comprising over 3,500 companies and $26.9 trillion.

Small-capitalization stocks (less than $2 billion), atraditional alternative to over-valued large-capstocks, are no longer a practical option.

At only 4.6% of the total market, they cannotabsorb a sufficient portion of the equity pool;they cannot be a functional alternative.

Real estate, perhaps the largest industry in theU.S., should be an alternative. Yet, publiclytraded real estate is only 4.1% of the stockmarket, so is not a practical option either.Moreover, publicly traded real estate likewisetrades near all-time high valuations.

Accordingly, investing must now take placeoutside of the indexation sphere of focus. Whilethat can’t take place for the majority of investors,it can for a small minority.

80%

4.6% 4.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Large Cap Small Cap REIT

% of Overall Market

The Trap: Nowhere to Go

The Unavailability of Alternative Asset Classes/Sectors

What I Said at a Conference

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Some of the audience-favored slides

Valuation Sobriety Test

Semantic Mis-Investing #1: Security Diversification


Semantic Mis-Investing #3: High Yield (or maybe just

Low Quality)

Indexation is NOT Dependent on Individual Securities.

Really?


The Pursuit and Myth of Low Beta (and accumulation

of systemic risk)

Semantic Mis-Investing #6: Indexes as Fact-Based

Investing


Central Banks Buying Stocks, and the Destruction of

Price Discovery



Benchmark Yield YTM Sobriety Test Yield YTMU.S. Treasury 10-Year Note 2.3% Russian Federation, BB+, 13-year bond 2.3%

IBM Bond, AA-, 10-Year Note 3.3% Petrobras, BB-, 4-year note 4.5%

Wendy’s Bond, B, 9-Year Note 6.3% Lebanese Republic, B-, 4-year note 5.1%

iShares High Yield Corp. Bond ETF (HYG) 5.0% iShares Emerging Mkts High Yield Bond ETF (EMHY) 5.3%

Would anyone seriously argue that these yields are adequate compensation for therisk assumed? (That is, you buy a Lebanese Republic bond at 5.1% in EMHY, but couldyou sell it in the open market at 5.1%?) If not, do the prices result from some otherfactor, such as artificial supply-and-demand pressures?

In EMHY, new money is allocated based on float. In other words, the more debt anation issues, the greater the allocation to its bonds because it has a greatercapitalization. That is the mathematical model, and that is entirely logical – to a point.

There is, really, no price discovery. And if there’s no price discovery, is there really amarket? In which case, what is EMHY really worth?

A Valuation Sobriety TestWhy Wendy’s should reincorporate and refinance in Lebanon

Data as of 5/1/2017, except ETF data (30-Day SEC yield) as of 4/24/2017Source: Bloomberg, iShares

*Excerpts and updated presentation to the Grant’s Fall 2016 Conference. Replay to the presentation is available at: https://vimeo.com/209940152/f2154e4d3d


IShares US. Energy ETF (IYE) MV%

EXXON MOBIL CORP 24.8CHEVRON CORP 15.4SCHLUMBERGER NV 6.7CONOCOPHILLIPS 4.0Total Weight of Largest 4 Holdings 51.0

Formulaic investing creates new forms of idiosyncratic risk.

Do investors in the iShares U.S. Energy ETF, who presume to be buying a diversified portfolio – who were fleeing idiosyncratic risk – know that more than 50% of the fund is held in 4 holdings, that they are actually buying idiosyncratic risk?

*As of 8/21/2017. Source: iShares

IShares MSCI Spain Index ETF (EWP) MV%BANCO SANTANDER SA 19.3BANCO BILBAO VIZCAYA ARGENTARIA OR 10.3TELEFONICA SA 8.6INDUSTRIA DE DISENO TEXTIL INDITEX 7.5IBERDROLA SA 4.8AMADEUS IT GROUP SA 4.7CAIXABANK SA 4.7REPSOL SA 4.5ABERTIS INFRAESTRUCTURAS SA 3.8AENA SA 3.5Weight of Largest 10 Holdings 71.8%

The same top-heaviness problem exists in the iShares MSCI Spain Index ETF (EWP). The top 10 companies are a 72% weight.

Semantic Mis-Investing #1: Security Diversification. (Not.)

Market-cap weighted indexes ‘undiversify’ pretty quickly



Does an asset allocation program or robo-advisorseeking foreign market exposure know that 7 of thetop 10 holdings of the iShares MSCI Italy Index getan average of 68% of their revenues from outside ofItaly? That they’re essentially investing outside Italy?

The same holds true for the iShares Spain ETF. 7 of thetop 10 holdings get an average of 76% of theirrevenues from outside Spain!

Then there’s valuation. There is great demand forthe few companies of sufficient market cap, simplyas raw material for index inclusion. Might thesemega-cap global stocks out-perform truly localSpanish stocks just due to their automatic bid? Doglobal multi-nationals pose their own particularsystemic risk?

So what does manager relative performancemeasure? What does country allocation measure?

Top 10 Holdings as of 8/21/2017 Source: iShares, Bloomberg, Company reports

IShares Italy ETF (EWI) % Weight% of

Revenue NOT in Italy

ENEL 12.5 46INTESA SANPAOLO 10.9 24UNICREDIT 10.5 53ENI 10.1 62FERRARI NV 5.0 88ASSICURAZIONI GENERALI 4.8 62ATLANTIA 4.7 13FIAT CHRYSLER AUTOMOBILES NV 4.5 80SNAM 4.1 n.m.CNH INDUSTRIAL NV 4.0 88

Top 10 Total 71.0

IShares Spain ETF (EWP) % Weight% of

Revenue NOT in Spain

BANCO SANTANDER SA 19.3 87BANCO BILBAO VIZCAYA ARGENTARIA OR 10.3 74

TELEFONICA SA 8.6 75INDUSTRIA DE DISENO TEXTIL INDITEX 7.5 82IBERDROLA SA 4.8 50AMADEUS IT GROUP SA 4.7 93CAIXABANK SA 4.7 10REPSOL SA 4.5 9ABERTIS INFRAESTRUCTURAS SA 3.8 69AENA SA 3.5 6

Top 10 Total 71.8%


How to Avoid Investing in a Foreign Market? Through Your Foreign Markets ETF



Attainment of the stated 5.44% Yield to Maturity (YTM):

• 2.4% of the portfolio has a 22.8% average YTM. The Fund willnot get a 22% YTM from these, since that is the rate on bondsexpected to default. They are temporarily paying until then.They enhance the stated YTM by 0.55%. Without this, the YTM is4.9%.

• If one-third of the CCC-class bonds lose only 1/3 of their value,the YTM is reduced by 1.3% to 4.1%. Less Federal tax, the aftertax YTM is under 2.7%. And this assumes zero defaults in theBBB-class bonds, no local taxes, no fees.

Really, a near-zero or negative real yield.*CCC: Extremely SpeculativeCCC-: Default imminent, with little prospect for recoveryAs of 8/21/2017Source: iShares

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)AUM $18.4 billionNumber of Bonds 1,032Weighted Average Yield 5.44%Weighted Average Maturity 4.19 yrsCredit Quality MV%

Below BBB 98.0%CCC* and Below 12.2%

Attainment of a Higher Return than the 5.44% YTM:

• There must be zero defaults.

• Average bond price of the entire fund is above par, at $101.2,and the bonds must mature at 100 in an average of 4 years.Moreover, the 79% of the bonds that trade above par have anaverage price of $104.7.

Semantic Mis-Investing #3: High Yield

Not High Yield, Just Low Credit Quality



ExxonMobil is one of the most liquid stocks. Ergo, it will be found almost anywhere one canimagine that it can be placed. It is a member of 206 ETFs.It’s Momentum, It’s Value, Its’ a Bird, It’s a Plane…

It’s Exxon, a Stock for Every Strategy:QUAL iShares Edge MSCI USA Quality Factor ETFHDV iShares Core High Dividend ETFIWD iShares Russell 1000 Value ETFMMTM SPDR S&P 1500 Momentum Tilt ETFPBP PowerShares S&P 500 BuyWrite ETFTILT FlexShares Morningstar US Market Factors Tilt ETFFTLB First Trust Low Beta Income ETFQWLD SPDR MSCI World Strategic Factors ETFTOK iShares MSCI Kokusai ETFACWI iShares MSCI ACWI ETFSPLV Powershares S&P 500 Low Volatility PortfolioVIXH First Trust CBOE S&P 500 VIX Tail Hedge Fund

ExxonMobil: An Exercise in Levitation2013 2016 Change

Revenue $99.18 $54.13 -45%EPS $7.37 $1.88 -74%

Payout Ratio 33% 159% 376%

BV/Share $40.85 $41.62 1.89%

(Net Expenditures on Stock buybacks/share) $3.62 $0.23 -94%

Total Debt ($ bill) $22.70 $42.76 88%

12/31/12 12/31/16Share price $86.55 $90.26 +4.3%

As of 8/21/17. Source: Morningstar.As of 12/31/2016. Source: Company reports.

Indexation is NOT Dependent on Individual Securities. Really?

The Exxon Levitation Conundrum – Or, The Problem of the Automatic Bid



Have a Hunch, Buy a Bunch!

The popular side of the ETF Divide, witnessed in theExxonMobil phenomenon, can be seen in almostany large S&P 500 constituent. Money has beenstructurally channeled into the most liquid securities.

It alters correlation statistics, risk statistics.

The correlation of the largest members of the S&P500 with the index has about doubled from 20 yearsago.

Even Mexico and Japan are now more correlatedwith the S&P 500 than the top S&P 500 companieswere 20 years ago!

The same holds true for Procter & Gamble, CocaCola and most of the rest.

Where’s the price discovery?

Correlation with S&P 500* (1/1/2008-6/30/2017)IYW iShares US Technology 0.63BJK Market Vectors Gaming 0.79IYH iShares US Health Care 0.75IYE iShares US Energy 0.71ITB iShares US Home Construction 0.71IYT iShares Transportation Avg 0.70EWW iShares Mexico Capped ETF 0.67EWJ iShares MSCI Japan ETF 0.72

Correlation with S&P 500*Security 1995 2016 ChangeApple Inc 0.161 0.567 253%Chevron 0.295 0.639 117%General Electric 0.522 0.759 45%Johnson & Johnson 0.314 0.536 71%Microsoft 0.455 0.711 56%Pfizer 0.191 0.495 159%Procter & Gamble 0.370 0.513 39%AT&T 0.425 0.431 2%Verizon 0.436 0.471 8%ExxonMobil 0.351 0.581 66%

Source: Bloomberg, daily returns, Horizon Kinetics Research*Selected to show the correlation of certain non-financial S&P 500 Index constituents that have existed for more than 20 years. For illustrative purposes only. Using Bloomberg

correlation matrix.


Self-defeating paradox: The failed search for diversification in ETFs



A reality: A new ETF cannot be launched withouta low Beta.

A result: These largest-in-class ETFs canlegitimately be characterized as low volatility,since the financial sector has not been volatilelately. And the high sector weighting enables theETF to attain its advertised low beta.

A rhetorical question: Is low volatility an inherentattribute of the financial sector? Or is it perhapssimply that the central banks of the world havemaintained an artificially low-rate environmentfor a very long time?

Would anyone legitimately assert that these ETFswill remain non-volatile if rates rise? The ETFs can’ttrade out of a low-Beta security; but they canonce the Beta rises.

Another rhetorical question: Would an activemanager of a low-risk strategy be permitted therisk of a one-third or near-50% weighting infinancials?

Beta

What is This

Column?Sample Low Volatility, Low Beta, and Factor ETFs

EEMV iShares MSCI Emerging Markets Min Vol ETF -0.08 21.8%

CNYA iShares MSCI China A ETF 0.28 27.3%

KSA iShares MSCI Saudi Arabia Capped ETF 0.30 38.6%INDA iShares MSCI India ETF -0.01 23.6%EIDO iShares MSCI Indonesia ETF -1.13 32.7%FM iShares MSCI Frontier 100 ETF 0.07 44.1%

Sample Value Factor ETFsIWD iShares Russell 1000 Value ETF 1.08 25.6%IWN iShares Russell 2000 Value ETF 1.48 30.5%IVE iShares S&P 500 Value ETF 1.16 27.4%

IVV Reference: iShares Core S&P 500 ETF 1.00 14.4%

As of 7/31/2017Answer: Percentage Weight in Financials

Source: Various ETF Factsheets, Morningstar. Source: iShares. iShares calculates Beta vs. the S&P 500

The Pursuit and Myth of Low Beta (and the accumulation of systemic risk)

The misuse & abuse of historical statistics in the ETF creation process



To translate that bewildering language into the 3-step recipe via which an egregiouslyhigh P/E ratio is cleansed into a harmless middling sort of group average, observe thefollowing hypothetical portfolio consisting of a range of low, somewhat high andegregiously high-valuations. Ponder Stock D’s treatment, and you see that the higher thetrue P/E, the less and less it counts in the average.

Incidentally, a simple average of the P/E ratios of the 91 profitable companies in theNASDAQ 100, results in a valuation of 43.6x earnings. The market-cap weighted average(giving proportionately greater weight to the larger companies) is 41.0x. No activemanager would be permitted to manage a concentrated, high-P/E portfolio for aninstitutional client. Only an index enjoys this privilege.

P/ERatio

Step 1: Reciprocal of the P/E Ratios

Step 3: Reciprocal of the Step 2 average

Stock A 10 1/10 = 0.10Stock B 20 1/20 = 0.05Stock C 30 1/30 = 0.033Stock D 300 1/300 = 0.0030_

Average P/E: 90x Sum = 0.1867Step 2: Average of the reciprocals: 0.1867/4 =

0.04651/.0465 = 21.5x

Harmonic mean (From Wikipedia, the free encyclopedia)In mathematics, the harmonic mean…is one of several kinds of average…Theharmonic mean can be expressed as the reciprocal of the arithmetic mean of thereciprocals of the given set of observations.

Semantic Mis-Investing #6: Indexes as Fact-Based Investing.

When Is A Fact Not a Fact? Or How an ETF Can Turn a 90 into 22 in Three Easy Steps



Were these active managers theanomaly for underperforming?And is it reasonable to believe thatthey all lost their touch at the sametime?

Or was it the S&P 500 that was theanomaly for outperforming? Thatalways sounds nonsensical untilafter the fact.All one can say is that if a schoolconsistently gave exams that 98%of the students would fail, at leastsome attention would be paid tothe teachers.

The Alpha Producers


Fund or Holding Company


in % Points (net)


in % Points (net)


in % Points (net)

Fairholme1 13.72% -12.88% -16.39%Gabelli Value1 -0.36% -10.88% -12.09%Wintergreen1 -5.29% -8.32% -15.37%Longleaf Partners1 8.76% -20.18% -8.77%Berkshire Hathaway2 11.44% -13.88% 13.31%Pershing Square Hldgs3 -25.46% -21.88% 26.71%Icahn Enterprises3 -23.59% -26.01% -21.87%Greenlight Reinsurance3 -4.76% -21.58% -4.99%Royce Micro-Cap1 -0.70% -8.10% -7.70%

1 Fairholme (FAIRX), Gabelli Value 25 A (GABVX), Wintergreen (WGRNX), LongLeaf Partners (LLPFX ), Royce Micro-Cap (RMT)

2 Share price return3 NAV per share change

Benchmark is S&P 500 Index except for Royce Micro-Cap which is relative to the Russell MicroCap IndexSource: Company Reports, Manager websites, Horizon Kinetics Research



How can a free enterprise system function ifprice discovery is influenced by agencies ofgovernment with infinite supplies of money?

An equity portfolio manager no longercompetes in the market auction process withother buyers with limited capital. Thegovernment, with unlimited capital, is notmotivated by ordinary considerations of fairvalue. One is entitled to presume, in theabsence of evidence to the contrary, that theaim of the Central Bank is to elevate prices. Ifthis is the case, what does the benchmarkmean?

Without price discovery unimpeded byintervention, there can be no rationalallocation of capital. And without rationalallocation of capital, it is impossible to properlyevaluate the skill of the managers.

Q2 2015 Q2 2016 Q2 2017Market value of holdings $38.6 B $61.8 B $85.0 B

Number of positions 2,581 2,581 2,643

Top 10% by weight, # of positions 258 258 264

Largest 10% as share of portfolio 74% 76% 76.5%

Average market cap of position oflargest 10% (billions)

$60.4 $62.7 $70.0

Some Unexpected HoldingsName Headquarters Name HeadquartersB Communications Ltd Ramat Gan Kornit Digital Ltd Rosh Ha'ayin

Caesarstone Ltd HaifaMellanox Tech Ltd

Yokneam

Cellcom Israel Ltd Netanya Neuroderm Ltd RehovotCheck Point Software Tech Tel A.-Yafo Orbotech Ltd YavneCyberark Software Ltd Petah Tikva Radware Ltd Tel A.-YafoElbit Sys Ltd Haifa Taro Pharma Inds HaifaGazit Globe Ltd Tel A.-Yafo Tower Semicond. Migdal Ha'emekIsrael Chemicals Ltd Tel A.-Yafo Wix Com Ltd Tel A.-YafoIturan Location & Control Azour

Q: Which Index Fund Would Be the 3rd Largest ETF in the U.S.?*

Source: sec.gov 13F Filings, Bloomberg* From the Swiss National Bank: “The SNB does not engage in equity selection; it only invests passively. It first decides in which

markets it wants to invest, and then replicates appropriate broad equity indices. If the equity portfolio were managed actively, this could send undesirable signals to the market, and might also lead to the politicization of investment decisions.”

Central Banks, Equities and, Of Course, Indexation

Still believe in price discovery?



CRSP U.S. Total Market Index, as of 3/31/17, comprising over 3,500 companies and $26.9 trillion.

Small-capitalization stocks (less than $2 billion), atraditional alternative to over-valued large-capstocks, are no longer a practical option.

At only 4.6% of the total market, they cannotabsorb a sufficient portion of the equity pool;they cannot be a functional alternative.

Real estate, perhaps the largest industry in theU.S., should be an alternative. Yet, publiclytraded real estate is only 4.1% of the stockmarket, so is not a practical option either.Moreover, publicly traded real estate likewisetrades near all-time high valuations.

Accordingly, investing must now take placeoutside of the indexation sphere of focus. Whilethat can’t take place for the majority of investors,it can for a small minority.

80%

4.6% 4.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Large Cap Small Cap REIT

% of Overall Market


The Unavailability of Alternative Asset Classes/Sectors



An example of in-system risk at work: Amazon

16

Amazon: clearly a disruptive force. It has destroyed the profitability of entire industry sectors:

• It wiped out all the bookstore chains but one (although this year it has already opened a half-dozen

physical bookstores of its own in New York and other cities).

• Destroying profit margins in the retailing industry and, by extension,

• Threatening the profitability of the real estate that houses those retailers, and by further extension,

• The profitability of the REITs that own that real estate.

• With the Whole Foods, Amazon is threatening the grocery store chains.

• And it’s not done yet.

Nevertheless, the loss of earnings and market value in these industry sectors, which will detract from the

value of various indexes, can be counterbalanced by an increase in the earnings and market value of

Amazon.

There is resilience within the broad indexes because the system, the index, embraces both the ultimate

winner as well as the loser.

That’s the norm.

The Norm


Disrupting an Out-of-System Industry

17

• Ford Motor Company developed the assembly line technique for producing the Model T automobile inmass market volume in 1913.

• That, obviously, was the beginning of the end for the so-called horse and buggy industry. Really, it wasmany industries, along with their vast workforces: wheelwrights, horse farms, harness makers, blacksmiths,stables, no doubt the landlords who housed those businesses, feed growers, et al.

• The difference versus the Amazon example was that these industries were not publicly tradedconstituents of the Dow Jones Industrial Average.

• Ford’s ascendance was not a counterbalance to the loss of these other industries’ earnings and businessvalue from the index. Ford’s appreciation was purely additive, and all that history knows is that the DowJones went up, and that is the result that is included in the historical returns. A freebie for the index.

A Freebie for Historical Index Returns


What About Disruption From Outside the Index?

18

• How about the reverse of the Ford Motor example: a company or technology from outside the index

system disrupts an industry or industries inside the system?

• In that scenario, an increase in profits and value at the disruptor could not provide a counterbalance to

the decline of the index-based victims of the disruptor. (An exception will be from in-system companies

that adopt or benefit from the disruptive behavior, but these might be very small or emerging companies

with little impact on the index.)

• How often does that happen? (Hardly ever.)

• If it hardly ever happens, and it’s not ‘in the database’, does the investment profession and academia

incorporate this risk into their models? Do they have a backup plan?

• This has a very good chance of happening in the foreseeable future, due to two emerging asset classes.

• New Asset Class #1: A disruptor and new store of value.

• New Asset Class #2: A disruptor and new industry and non-volatile profit instrument.

An emerging, historically and sociologically unique asset class


Asset Class #1: Cryptocurrencies

19

Jamie Dimon, is CEO of JP Morgan Chase and therefore one of the nation’s premier bankers. He

commented briefly upon bitcoin, the first and by far the most popular cryptocurrency, several weeks ago

at an investment conference. The most often repeated quotes from that interview were that bitcoin is “a

fraud”, and that if any JPMorgan trader were to transact in bitcoin, he would “fire them in a second”.

Three Interested Parties, Three Opinions

Abigail Johnson, is CEO of Fidelity Investments and therefore one of the nation’s premier asset managers.

She commented extensively about bitcoin and cryptocurrencies at a conference in May. It was hardly

publicized at all in the mainstream press. She revealed that Fidelity had set up its own cryptocurrency

mining operation, was going to make cryptocurrency custody and trading services available on Fidelity’s

website, and that Fidelity employees use bitcoin to pay for lunch at their Boston headquarters cafeteria.

A third set of interested parties – very interested, actually – don’t exactly care who wins and who loses this

argument, so long as the trading activity persists. In November 2016, CME Group, the largest derivatives

and futures exchange, launched two bitcoin price indexes as a first step to enable futures contracts. In

August 2017, competitor Chicago Board Options Exchange announced it would establish a bitcoin futures

contract within the coming year. If they are successful, it will move bitcoin into the realm of institutional

asset class. The impact of that transition can hardly be exaggerated.



20

Bitcoin, the first and largest cryptocurrency:

Is digital currency. That is not exactly unique. Buy a Treasury Bill at www.treasurydirect.gov, and what doyou own: a digital entry on a digital ledger on a U.S. Treasury computer. No certificate, no letter.

Is not fiat or government issued currency. Not unique, either. Before the National Bank Act, banks issuedtheir own currency, and there were hundreds of them. It didn’t work so well.

Is fixed-supply and non-inflatable. This is defined by its software code: only 21 million units will ever beissued1. That makes it humankind’s first currency to escape the government’s power to dilute and debasethe holder’s purchasing power.

It can neither be counterfeited nor confiscated, a universal challenge of physical money, because eachowner possesses a unique cryptographic password to their own account, like a Swiss bank account. Whichis also why it can’t be confiscated. This security frees the holder from bank safekeeping. It is borderless andcan be transferred anywhere, instantaneously and in any amount.

Nor is the desire for a form of money not hostage to government dilution or confiscation in any way unique.It has been the subject of previous scholarly work.2 Bitcoin appears now only because advances intechnology have finally made it feasible. In this sense, it is a very old idea, the desire for which is 5,000 yearsold, whose time has, perhaps, finally come.

So, what is cryptocurrency? In some ways, not unique. Put it all together, unique in human history.

1 That number will be reached in the year 2140, versus 16.6 million as of 10/14/2017.2 The Denationalization of Money by F.A. Hayek Nobel Laureate, 1974

http://www.treasurydirect.gov/



21

Academics and mainstream investment businesses do not accept cryptocurrency as a legitimateinvestment largely because modern portfolio theory defines risk as price volatility. Clearly, cryptocurrencyhas been far more volatile than even the most volatile equity class.

Yet, in a historical, rather than day to day or year to year context, the great investment issue has neverbeen control of volatility. It has been retention of purchasing power or, stated differently, defense againsterosion of purchasing power.

Pent-up demand for a stable currency pre-dates the Roman Empire. Over anyone’s lifetime, this can bedevastating to a society’s savers and the solvent.

• The Roman Empire was a serial debaser of its coinage for 2,000 years. As one example, during the 73years between Marcus Aurelius’s reign ended in 180 CE and the beginning of the reign of EmperorGallienus, the denarius silver coin was debased from 75% silver to only 5%, by which time it was just asurface coating that would wear off. That is 93% depreciation, or about 3.6% per year.

• Interestingly, during the 73 years from 1943 to 2016, the U.S. dollar also lost 93% of its purchasing power,based on an annualized inflation rate of just over 3.6%. For most of that period, though, U.S. citizens couldearn a comparable yield on their bank deposits or treasury bills, so that purchasing power could bemaintained. That has not been the case over the past ten years, though, since short-term interest rateshave been kept near zero; today, money really does earn a negative return.

Hopefully, if nothing else, a vigorous discussion of the merits of cryptocurrency or lack thereof will restore thefocus of the investment debate from a study of volatility to a study of purchasing power.

Let’s Re-frame Your Definition of Retirement and Estate Risk. Would You Prefer: Near-term Volatility or Long-term Money Debasement?


What Makes You (Horizon Kinetics) Think Cryptocurrency

has any intrinsic value? (Facts.)

22

Just as for debasement, monetary history reveals plenty of examples of how certain items of fixed supply –that is, which were reliably scarce – have provided a remarkable degree of investment return.

• The Liberty Dime, not been minted since 1945, is worth about $72. That’s a 72-year rate ofreturn of 9.7%. If silver coins were an asset class, they would compare quite favorably withany type of fixed income instrument and most forms of equity. And this is despite the factthat the supply of silver is constantly increasing and is now priced at $17 an ounce1, whereasit traded at almost $50 in 1980.

• Or, there is the 1909-S Indian Head penny. Rare coin website CoinTrackers.com estimates itsvalue, even if only in average condition, at $600. That represents a compound annual rateof return of 11.6%. In any case, it is far superior to $1 from 1909. It is astonishing that anaverage-condition 1909-S Indian Head penny, collecting no interest, could dramaticallyoutperform every bond index or fixed income index within reason, as well as the S&P 500.

These coins only escaped the debasement power of government because they stopped being issued. Inan operation of Gresham’s Law – that bad money drives out good – individuals withdrew these coins fromcirculation and saved them for their scarcity value.

One can see that the investment return of the Liberty Dime or the Indian Head Penny was not only a matterof appreciation per se, but also a matter of retaining value relative to the depreciating currency in whichthose fixed-supply items were denominated.

1 As of 10/18/2017Source http://www.cointrackers.com


Concept or Reality? It’s Happening.

23

The following events are not well publicized in the U.S.:

• April 2017 - the Bank of Japan changed its banking laws to recognize bitcoin as legal tender. On July 1st,as encouragement for its use, Japan removed the 8% excise tax on purchases of goods and servicesmade with bitcoin. There are now retail chain stores and airlines accepting bitcoin in Japan, with ATM-like kiosks to facilitate its purchase via cash or credit card.

• July 1st, 2017 - Australia’s central bank recognized bitcoin as legal tender and exempted purchasesmade with bitcoin from the 10% excise tax.

• July 11th, 2017 - Switzerland’s Financial Market Supervisory Authority approved the first Swiss private bankfor bitcoin asset management. This bank holds $15 billion in client assets. It has offices in Zurich, AbuDhabi, Dubai, and London.

The actions of these central banks make it more difficult to casually dismiss cryptocurrency as a fringe orfanciful notion that is not worthy of serious discussion.

It is difficult to casually dismiss these central bank actions as fringe or fanciful, not worthy of seriousdiscussion. If one sees some merit in their actions, then one might see the potential of cryptocurrency togreatly disrupt the financial and sociological status quo of the world.

Can the Genie be Put Back Into the Bottle?


Asset Class #2: Blockchain

24

Preview:

Asset Class #1, referring to cryptocurrencies, and to Bitcoin in particular, has investment characteristics with enormous potential return, but with enormous volatility.

The precise opposite profile can be found in Asset Class #2, blockchain technology, with its own flavor of disruptive force for the financial sector. It is also a much more investable asset class, with very different risk/reward characteristics than the cryptocurrencies it supports.

Asset Class #2 is actually an asset class that answers another long-sought investment dream: low volatility, coupled with a very high yield.

So, unless there is sufficient active disinterest, that it will be covered next time.

To be Covered Next Time


Howard Hughes Corp.

25

The Howard Hughes Corp., as it exists today, was conceived in 2010 as a spinoff from the bankruptcy ofGeneral Growth Properties, a bankruptcy precipitated by the Credit Crisis of 2008. Although the company hasbeen publicly traded for about seven years, it might still be characterized as misunderstood.

As is frequently the case for companies that lack visibility in terms of conventional financial results, investorsmay react to news flow without placing it in context. Most recently, the share price fell in the period leadingup to and following Hurricane Harvey’s landfall in the Houston area, while the S&P 500 and the Vanguard REITETF rose.

The Houston properties, which sustained only minor damage, comprise only one of several of the company’smajor assets. Even if one removed the Houston assets entirely, one could easily justify the company’s currentmarket value.

Another example of what is termed availability bias, making decisions on the basis of information that is morerecently recalled (available) or memorable.

Assets Fair Value Estimate

South Street Seaport, Manhattan, NY $ 2.5-3.0 billionHouston Assets, Houston, TX $ 4.25 billionSummerlin, Las Vegas, NV $ 2.5 billionColumbia, MD $ 570 millionWard Village, Honolulu, HI $ 2.5 billionOther properties $ 480 million

Recent Market Capitalization for HHC $ 5.3 billion

Source: Company Reports, Horizon Kinetics Contrarian Research Report dated September 20, 2017.


AMC Networks

26

Cord-Cutting Explodes: 22 Million U.S. Adults Will Have Canceled Cable, Satellite TV by End of 2017Variety (September 13, 2017) Cord-Cutters Sap AT&T’s TV BusinessWall Street Journal (October 12, 2017)‘The ravages of cord-cutting’: AT&T’s race against time to save its TV businessWashington Post (October 13, 2017)The Messy, Confusing Future of TV? It’s HereNew York Times (August 13, 2017)

Source: Company Reports

Index Ineligibility Characteristics

• Headline noise on the “ravages of cord cutting”.

• “Illiquid” – market value of only about $3.5B is belowtypical large-index size requirement.

• The owner-operator Dolan family owns nearly 20% ofthe company’s shares, with full voting control.

• Negative earnings from the international division(accounting for 17% of revenue) on a GAAP basis,distorting consolidated results, although that divisionbreaks even on a cash flow basis.

Rationally Desirable Attributes

• Valuation opportunity – shares trade at approximately 8.5xearnings, which is about 35% cheaper than other mediacompanies, and 60% cheaper than the S&P 500. Moreimportantly, they trade at less than 12x free cash flow.

• Operational Strength - revenue at the company’s NationalNetwork division, which accounts for over 80% of sales,increased by 5.6% in the June quarter, and operatingincome rose by 12%.

• Desirable asset with scalability and terms of trade attributes:Content Library.

• Owner-Operator is dedicating a large portion of free cashflow to share repurchases, and has bought back 12% of itsshares since year-end 2015.


Disclosures & DefinitionsPast performance is not indicative of future results. The information contained herein is subject to explanation during a presentation.

Note that indices are unmanaged and the figures shown herein do not reflect any investment management fee or transaction costs.Investors cannot directly invest in an index. References to market or composite indices or other measures of relative market performance(a “Benchmark”) over a specific period are provided for your information only. Reference to a Benchmark may not reflect the manner inwhich a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, correlation, concentrations, volatility ortracking error targets, all of which are subject to change over time.

The S&P 500 Index (“SPX”) is a broad based index widely considered as a proxy for overall market performance. It is the property ofStandard & Poor’s ®.

All ETFs mentioned have fees and expenses. You should read their prospectus before investing. All material presented is compiled fromsources believed to be reliable, but no guarantee is given as to its accuracy.

iShares® and Blackrock® are registered trademarks of BlackRock, Inc.

This is not an offer to sell or a solicitation to invest. Opinions and estimates offered constitute the judgment of Horizon Kinetics LLC (“HorizonKinetics”) and are subject to change without notice, as are statements of financial market trends, which are based on current marketconditions. Under no circumstances does the information contained within represent a recommendation to buy, hold or sell any security,and it should not be assumed that the securities transactions or holdings discussed were or will prove to be profitable.

Subsidiaries of Horizon Kinetics LLC manage separate accounts and pooled products that may hold certain of the individual securitiesmentioned herein. For more information on Horizon Kinetics, you may visit our website at www.horizonkinetics.com. No part of the researchanalysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by theresearch analysts in this report.

No part of this material may be copied, photocopied, or duplicated in any form, by any means, or redistributed without Horizon Kinetics’prior written consent.

©2017 Horizon Kinetics LLC ® All rights reserved.

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