Hall Capital “Market Views” Newsletter April 2012

This is the 8th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Stocks Due for a Pullback
- before recovering late in the year

When the S&P 500 has returned over 12% in the first quarter of the year, it has never given up all those gains in the remaining three quarters. Never. That's a strong precedent and we do not think this year will be the exception.

Contributing to a strong Q1 for stocks were 1) No melt down in Europe, 2) An acceleration in economic growth indicators in the US, especially employment growth, 3) Low expectations for such economic growth and stock prices and 4) Favorable seasonal factors.

A pullback over the next few months seems reasonable to expect because of the negative side of the very list above that contributed to the stellar Q1, namely: 1) The Europe problem is NOT solved, 2) Expectations have grown more ebullient among professional investors along with the rise in stock prices, 3) A continued de-leveraging in our economy will likely inhibit further GDP acceleration, especially with the dampening influence of higher oil prices, and 4) Seasonal factors turn unfavorable following April and don't improve until after October.

This year is also an election year which contributes an extra dimension to the outlook as the rhetoric heats up over how to manage our budget deficits.

Taking the Long View, Stocks Appear to Offer Value
- especially compared to US Treasury Bonds

Below is how we assess the risk and opportunity across major asset classes over the short term (next six months) and over the long term (next five years). A poor opportunity is defined as less than 2% per annum, medium 3% to 5%; good 6% to 10%; and very good over 10%.

* Possesses attractive hedging characteristics. Note in this framework, though some assets like emerging markets equities are high risk, the risk is offset by good potential long term returns and hedging characteristics. Whereas, long government bonds have the lousy combination of high risk and poor opportunity for return.

We still prefer hedges by holding some cash and inflation beneficiaries.

All Stocks on Our List Outperformed
- even a very strong market in Q1

The availability of strongly competitive companies at reasonable prices continues to undergird our confidence in 6% to 10% stock returns over the long term. We have provided the same focus list below in this newsletter for several quarters. Every stock on this list outperformed the strong S&P 500 in the first quarter, with an average return of 21.8%. This follows the 13.4% return for 2011.

Due to the strong balance sheets and enviable competitive positions, the risk of this portfolio does not appear to be as great as the overall market. However, though earnings are up, prices are up more, so we concede the relative opportunity this list offers has lessened.

For individual stocks as well as selection strategies, past performance is not necessarily indicative of the future.

Hall Capital Focus List

Follow Up
- Here are excerpts for our letter one year ago

"Clearly, we will be dependent on fossil fuels for several more decades and the curtailment of nuclear programs only exacerbates the problem. Thus, the rise in fossil fuel prices is likely to continue."
- Indeed. However, the recent jump in oil prices will cause a short term diminishment of demand and accelerate a shift to natural gas and alternatives.

"U.S. Treasury Bonds are at High Risk - not of default but of providing low returns"
- Well we still believe this is the case, but this warning was clearly pre-mature. Last year was one of the best performing years ever for long US Treasuries vs other asset classes.

"The adverse impact of natural disasters and the threatened shut down of the U.S. Government tend to be short-lived and would not be a reason to sell stocks in our view. If anything, over reactions to such events would be a buying opportunity."
- The impact of the nuclear disaster in Japan on our market was indeed short-lived. The real buying opportunity last year was in August during yet another Congressional squabble and the resulting downgrade of US debt.

NOTE: Now in addition to ALL our quarterly letters, on our website is a tab with just the Follow Ups.

About HALL CAPITAL

HALL CAPITAL, LLC is a registered investment advisor and was formed by Principals from Arcturus Capital in 2010.
For more information, contact Donald Hall 626 578 5700 x101 dhall@hallcapitalmanagement.com