Hall Capital “Market Views” Newsletter April 2013
This is the 12th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.
Short Term vs Long Term
- views can confuse
Two market gurus recently took the podium at a conference. Both were brilliant analysts with ample supporting data for their views. One was very positive on the outlook for stocks. The other very negative. It is possible that both speakers were correct. How can this be?
The reason they could be both right is that they were talking about different time horizons, one short term, the other long term. Pundits are often unclear on the time horizon. If the consumer of such information is not clear, it would be easy to draw the wrong conclusion from the intended advice.
Our focus tends to be long term, say five years or even longer. While it is true the imponderables increase with the time line, the variances of annual returns decrease. That is, reality is likely to be closer to our estimate of annualized returns over five years than our estimate for one year or one quarter. The variables influencing returns over the short term are also numerous and the market's reaction is highly uncertain, making short term forecasts almost folly. While one could say ANY forecast is folly, at least the long term generally reflects fundamentals, as opposed to mood swings. Within fundamentals, such as earnings growth and general interest rate levels, there are long term forces that tend to prevail.
Having said that, Market Views is a quarterly letter, not a five year letter, so we will go out on a limb and opine on the short term outlook from time to time. Even then our views are likely to be driven by long term observed market behaviors -- trend tendencies countered by regression to the mean tendencies, seasonality, the tension between greed and fear -- which have demonstrated a pattern historically that is likely to be repeated.
Currently forecasters have an advantage looking out over the next several quarters that they do not normally have: it is known that short term interest rates in the US, thanks to Ben Bernanke, will remain low. Our expectation based on historical patterns, taking into account that there are always new factors to be added to the equation, is that stocks will continue their rise topping out this spring, sag in the summer and regain their footing in the fall, ending with a teen's return for the year. One factor that has improved broadly over the last year is the rise in home prices. The notion that home prices have not only stopped going down, but are rising, will do wonders for consumer confidence.
Longer term, for reasons we have mentioned several times, namely deleveraging, we expect economic growth to remain well below a more normal 4% growth. As a result corporate earnings growth will also remain subpar. Stock prices will rise FASTER than earnings growth, however, UNTIL interest rates start to rise.
Why will stock prices rise faster than earnings? With expected long term returns in the 6% to 9% range, equities at today's prices still expect to provide a superior RELATIVE return to the rather lousy other choices among major asset classes. This will drive up stock prices faster than earnings growth until the relative return advantage is narrower.
Within junior asset classes, there are some niche alternatives that are attractive, including distressed real estate and emerging market equities. Within emerging markets, Chinese stocks are particularly interesting. If you haven't heard of Alibaba, you will.
Apple Computer Subtracts Short Term
- but looks additive long term
Even though AAPL was already down 25% when we added it to our list, the timing was a mistake. It was a mistake because we added ahead of an important earnings report of an overly popular stock. The earnings were ok, but that was not good enough for investors who had grown accustom to better than expected results. While this is only one quarter, because the stock's popularity had grown for several years, the unwinding of that popularity could take more than a few months.
Our thesis is not changed. Apple is attractive due to its enviable competitive position, unparalleled balance sheet, and low valuation. However, if the competitive position begins to wane, we would be forced to re-examine our thesis, regardless of valuation. A slipping competitive position for a technology company can be treacherous. Just ask the shareholders of RIMM and HP.
Following two years of excellent results, our conservative Focus List was held back by the decline in AAPL. In the first quarter the list was up just 3.3%, compared to some 10% for the S&P 500.
For individual stocks as well as selection strategies, past performance is not necessarily indicative of the future.
Hall Capital Focus List
Follow Up – from our letter one year ago
"When the S&P 500 has returned 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 an exception ...(However) A pullback over the next few months seems reasonable to expect . . ."
- Stocks declined 10% from early April to early June before going on to new highs and eclipsing the 12% Q1 gain.
"Taking the long view, stocks appear to offer value, especially compared to US Treasuries."
- Stocks trounced US T-bonds last year. Our long term view is unchanged.
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
HALL CAPITAL | 199 S. Los Robles Ave | Suite 535 | Pasadena | CA | 91101