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Week of November 30, 2015

Activity in the equity markets was subdued during the holiday-shortened week as good economic data offset heightening geopolitical tension between Turkey and Russia. The S&P 500 held basically flat, up just 0.04%.

The Dow Jones Industrial average fell by a similar picayune amount (down 0.14%), posting its first decline during a Thanksgiving week in four years. The Nasdaq Composite inched 0.44% higher. There are just six trading weeks left in the year, and many investors are hopeful given the historically bullish month of December. The S&P 500 has gained an average of 1.8% during the last month of the year since World War II. Will it happen again this year? We note this year could be different given an already healthy rise after the August correction, and the fact that we will probably witness a Federal Reserve rate hike during the month of December for the first time ever. The equity markets usually become more volatile and weaken immediately following a rate hike.

FANGs and Five Other Market Leaders

The woes of active management in 2014 were well chronicled when a lack of dispersion made beating the benchmark extremely difficult. Dispersion has returned for 2015, but in an extreme form that has made besting the benchmark just as difficult. Much of the performance of the S&P 500 so far this year is attributable to a select few stocks. Jim Cramer has popularized the acronym FANGs to refer to Facebook, Amazon, Netflix and Google. Ned Davis research expands this to “The Nifty Nine,” a tribute to the must own, high-flying stocks of the early 1970’s known as the Nifty Fifty. In addition to the FANGs, the Nifty Nine includes Priceline, Ebay, Starbucks, Microsoft and Salesforce. These nine names have gained on average 60% in 2015, and given their hefty market caps, they make up an oversized chunk of the market’s ~1% return year-to-date since the S&P 500 is a market-cap weighted index. By comparison, an equal-weighted version of the S&P 500 is actually down year-to-date. This is has made it especially hard for active managers in 2015 with any kind of value bias. According to Ned Davis Research, the price-to-earnings ratio of the Nifty Nine is 45x, double that of the S&P 500.

Buyback Boom Continues

Through the first three quarters of 2015, more than $515 billion has been spent by U.S. companies repurchasing their own shares. This is the highest pace through the first nine months of the year since prior to the financial crisis. Additionally, the announced plans for future buybacks is the highest in history. And, unlike performance for the S&P 500 this year where gains have been concentrated into a few names, the usage of buybacks has been widespread. More than 20% of all companies in the S&P 500 have reduced their share count by at least 4% over a trailing twelve-month period. This is the seventh quarter in a row with activity levels this high. The amount of buybacks is creating the illusion of earnings growth. According to Factset, earnings were down 1.3% for the third quarter, but earnings per share rose 3.1% because of fewer shares outstanding. 

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Buyout Boom Too, At Least in Tech

Companies are not only buying back their own shares, they are buying other companies at a record pace too, at least in the tech space. So far in 2015, the value of tech deals has exceeded $570 billion. This is more than double the value of transactions in 2014 and surpasses any full-year level on record with more than a month remaining, according to Dealogic. Two large deals are skewing this figure higher (Avago’s acquisition of Broadcom for $37 billion and Dell’s purchase of EMC for $67 billion), but there has been good breadth in the tech buyout space. There have been 79 transactions valued at $1 billion or more, which is also an annual record high.

Fun Story of the Week

It won’t be long before the end-of-year “Best of” lists of books, music, movies, etc. begin appearing as pundits and critics attempt to chronicle and label 2015. No matter what they say, 2015 may go down as the year of the runaway dirigible. This year witnessed an unusually high number of large inflatable balloons that snapped their tie lines and floated away. The most notable of these occurred in late October when a $185 million Defense Department blimp used to for missile surveillance broke free from its moorings in Maryland and drifted north. Two F-16s were called in to chase it down. But this wasn’t the only incident. In Illinois, a few days before, Mickey the Molar broke free from All Smiles Dental and was last seen heading toward Wisconsin. On Halloween, a 25-foot tall pumpkin balloon broke free in Arizona. And, in August, a 40-foot tall Minion from the Despicable Me movie franchise stopped traffic after it broke loose and landed on a roadway. 113015 Chart 2

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