Hall Capital “Market Views” Newsletter April 2020

This is the 40th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Unprecedented Uncertainty
- warrants caution

One quarter ago seems like another era. When we suggested a reaping of profits and the reduction of risk in our last letter, we had no idea that a pandemic was about to shut down the global economy. Indeed, the US stock market had its worst Q1 decline in history.

Key unknowns remain: 1. when will we get back to work? 2. how long can we stay at work? and 3. what are the long term implications of $2 Trillion ++ in additional government debt? We should (better!) have the answer for the first question before our next letter. As important as that answer is, there are still significant other uncertainties. Stock market bottoms frequently occur during the depths of bad news. With the case curves rolling over in Europe and maybe in NY, there seems to be light at the end of the tunnel. But the road out of the tunnel is not like the road going in. There is a old saying in the investment business: "The four most dangerous words are 'This time is different.'" IMHO, this time IS different. The scope of the damage of Covid 19 to the global economy is beyond anything we have seen in a lifetime.

We WILL recover but the path and timing are extremely murky. The optimistic case is reasonable but still challenging. Until we discover a vaccine - at least a year out - a series of practical measures could allow most of the country to resume productivity. This would involve masks, better testing and monitoring and, hopefully, some therapeutics to help save most of the sickest.

In summary, despite lower stock prices, we do not think now is good time to become more aggressive. Isn't this market timing which is counterproductive? I call it capital preservation. If the market has indeed bottomed and we get back to work soon with an effective therapy, then I am fine with missing some of the upside. The notion that the stock market will recover all its losses this year seems remote. If we were to recover quickly after suffering a bruising recession, it would have to be due to the impact of trillions and trillions of Federal aid. More aid may be on the way and this could be the tonic that is needed.

What About Bonds?
- the safer but low return asset

We have belittled bonds but they have done their job in balancing out the risk in portfolios. And currently, with the economy in sharp contraction, deflationary forces are pushing the trend in interest rates down. However, taking a long term view I would venture that equities will trounce long bonds. The 10 year T-note is now yielding just .7%. Long bonds offer a sure return but that return will be in dollars down the road which may not be worth as much of the Federal debt is monetized. We recommend holding some short to intermediate high quality bonds only, despite the meager yields. These funds should be considered more like "reserves" than long term investments.

Focus List Long Term Return is 14.3%
- despite a -18.8% drop in Q1

The Focus List provided a return of -18.8% in Q1 which compares to a -19.6% drop in the S&P 500. The broader market lost significantly more. The almost 10 year annualized performance for the Focus List is 14.3% compared to 12.4% for the S&P 500.

The Focus List is not just a theoretical list. I own these stocks personally and so do Hall Capital clients. We made one adjustment early in the quarter to the FL selling Carnival on February 10, down just -1.6% since the beginning of the year.

We are long term investors as you can see from the rare turnover in the FL. But this quarter was extraordinary to say the least. This is the first time we have eliminated a stock from the list intra-quarter. We also sold Footlocker and Exxon, but these sells were after half way through the period. Both of these stocks were down over 40% for the period and the Focus List performance reflects this. Our rule is if a stock is sold after halfway through the period it has to stay in the list for performance calculations.

In the place of Carnival, Footlocker and Exxon we are adding Verizon and two ETFS: the iShares Gold Trust and the IShares S&P 100. Verizon is not an exciting investment but provides a "must have" service and is blessed with an enviable competitive position with over 90 million customers. The IShares Gold is like GLD, and holds physical gold, but has a lower expense ratio. We are using the gold as a hedge. The S&P 100 is the 100 largest market values in the US. The S&P 100 is simply a strong group of companies to add to the diversification of the list during this very unusual period. Remember the goal of the FL is to provide competitive returns as the S&P 500 without the same downside.

As noted last quarter, we changed the format of the FL table to show some key qualitative comments rather than the quantitative data which can be gleaned from other sources. Since competitive position is a key driver in our selection, our short comment will frequently address this factor. Though the case for a stock is more complicated than what two or three lines can capture, we hope to impart the most salient comments that are relevant as to timing or competitive position.

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

Hall Capital Focus List

Verizon - largest cell phone service provider in the US. Some debt but safe 4.3% dividend yield.
S&P 100 - largest 100 companies by cap. Large scale in their industries provides strong competitive position.
China Mobile - largest cell phone operator in the world with 942 million subscribers. 5G adoption should edge up growth. 4.71% yield.
NovoNordisk - Danish company has 50% of the global market for insulin. Strong balance sheet.
Alphabet - Google is the "oxygen of the internet." Leader in AI and other forward technologies. Net cash >$100bil to use for add on acquisitions.
CVS Health - with Aetna insurance and growing in store clinics the chance to become the most integrated health care company.
Apple - brand with 1.4 billion users providing new growth opportunities in service revenue and wearables.
Corning - leader in glass for fiber optics and displays.
iShares Gold Trust - hedge vehicle against uncertainty and potential lower US $ down the road.

Follow Up – from our letter one year ago

"Meanwhile, slowing global growth, continued trade worries and fully priced stock values give us reason to be less than ebullient notwithstanding our belief that the bull market could still have more innings."

"Old age doesn't kill bull markets - euphoria does."
- And pandemics.  Did not see this coming.

"So low inflation may be with us until the government moves to monetize the debt some years in the future"
- This is even more evident today.

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