Hall Capital “Market Views” Newsletter April 2014

This is the 16th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Slow Growth and a Steady Fed
- the status quo

Arguably the Federal Reserve's QE program has done its job. Disaster was averted. We are in a recovery (though to a less degree than hoped). Furthermore, the dire scenario of inflation as a result of easy money has been a ghost unseen. Though the Fed TRIPLED its securities holdings since 2008 to over $3 trillion, and therefore pumped that amount of money into the economy, the broad money supply grew only 6% last year. This is because many of the proceeds from assets sold to the Fed were merely recycled back to the Fed in the form of bank reserves. Banks chose to boost reserves ( in part due to new regulation) rather than loans.

Interestingly, banks, with so much excess reserves, may now have more control over growth in the economy than the Fed. At any time banks could boost lending increasing the velocity of money and the broad money supply. Though this would help with the lagging employment growth, it would also fuel inflation expectations enough for the Fed to begin tightening. The ensuing rising interest rates would punish the currently high bond prices. Stocks would feel the impact indirectly, but their swoon would be more temporary.

Risk and Reward
- always a balancing act

With the slow growth, steady Fed backdrop, we remain in "clear sailing" mode for now. But given the ultimate interest rate hike risk over the horizon and the low yields on bonds, we wish to remain particularly conservative on the bond side of the portfolio. Except for a hedge against some risk (we put at 30% odds) that the anemic recovery could roll over, we would have no reason to own any bonds. Stocks are more volatile but at least offer respectable return expectations longer term.

Regarding the short term, note after April we move into the traditionally seasonally weak period for stocks going through October. In Q2 and Q3 reality starts to rein in the usually too optimistic earnings forecasts by analysts. Nevertheless, our long term (5 year+) expected returns for stocks is 7%. This is down from 8% due to price.

Focus List
- no surprises

These stocks were little changed in Q1, mostly in line with the 2% market gain. We would expect our list to hold up better in a soft market, hold its own in a stable market and lag in an ebullient atmosphere.

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

"Our expectation... 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."
- The stock market barely sagged in the summer and worked its way much higher for the remainder of the year with return over 30%.

"... 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..."
- The annualized real US GDP growth actually rose to 4.1% in Q3 last year but receded back to 2.6% by Q4. Stock prices did indeed rise faster than earnings growth.

"Within emerging markets, Chinese stocks are particularly interesting."
- Returns from emerging markets generally were negative last year. However, an index of the some 180 Chinese companies listed in the US bounced up 60% in 2013.

"If you haven't heard of Alibaba, you will."
- Alibaba, China's internet giant, announced in March of this year plans for issuing its IPO in the US. Alibaba is looking to raise $15 billion, which is just behind Facebook's $16 billion raise, the third largest in US history.

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