Hall Capital “Market Views” Newsletter April 2022

This is the 48th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Enemy Number 1 is Not Russia
- it is inflation

The Ukraine invasion is a humanitarian crisis and a geopolitical crisis not seen since WWII. Whether it becomes an economic crisis will depend on its longevity, if only due to the impact on food and energy inflation which was problematic even before the war.

While we will hope for a resolution of the war in Ukraine soon, our investment focus is on the war against inflation back home. The Fed admits it has been behind the curve in trying to mitigate higher inflation.

Our view is that inflation will remain stubbornly high (rent and wage increases are not transitory) and interest rates will move higher. Thus, as noted a year ago, we wish to hedge against higher inflation/interest rates. We will continue to do this by 1. avoiding long term bonds 2. holding equities that benefit from higher interest rates, such as our insurance stock holdings, 3. avoiding high p/e "long duration" stocks 4. holding some equities that benefit from the drivers of inflation, such as energy and mining stocks, 5. considering inflation advantaged private alternatives and 6. holding some reserves.

As to #4, clearly the energy sector has been strong recently and if peace comes to Ukraine the price of oil will could swoon and this hedge would underperform. This is exactly why it is considered a hedge. I don't want it to pay off. If oil and energy stocks drop due to a resolution of a conflict, then the rest of the portfolio will see a bounce.

Avoiding Common Mistakes
- could be the secret to long term returns

Money attracts brains, and nowhere is there more money than on Wall Street. Thus, the competition to beat the market is impressive, which is why many investors wisely choose to invest passively in index funds.

I have found that those who want to try to beat the index fail for many reasons, including lack of knowledge, lack of discipline, and emotional decisions. But in many cases underperformance is due to plain ole mistakes. While one could write a book on this topic, below are a few of what I see as specific mistakes being made in the current environment:

  1. Buying story stocks without regard to valuation. Yes, Peloton makes a great product; but the company has yet to make a profit. Enthusiastic investors pushed the value up to $22 billion, about the same as Delta Airlines. Peloton is down 75% in the last year.

  2. SPACs. Those who are close to the SPAC world can do well, but investing in these suspect vehicles - which the IRS calls "blank check companies" - is generally a mistake by the less connected.

  3. Trading rather than investing. Of course, you can make money trading. You can make money on a slot machine. But over time? When was the last time you drove by a mansion purchased by the profits from day trading?

  4. Crypto. My problem with the case for crypto is that investors seem to confuse the use with the value. Blockchain technology is elegant and will no doubt grow in use, as will some of the related currencies. To use bitcoin is one thing, but to buy it as an investment is another. One has to have a sense of what an asset is worth to know if it is undervalued. Since there is no way to value crypto currencies I think it is a mistake to buy them for investment.

  5. Buying very long term bonds with paltry yields in the face of clearly rising inflation.

  6. Meme stocks. Blatantly foolish.

Our Buoyant Focus List Returned 5.6% in Q1
- despite a down market

This positive 5.6% return vs. the S&P 500 index's negative -4.6% brings the FL's 5 year annualized return up to 18.1% vs. 16.0% for the S&P 500. Since inception over 10 years ago, the Focus List has outperformed 17.3% vs.15.7% for the S&P 500.

As Warren Buffett pointed out, "When the tide goes out, you can see who was swimming naked." We had a tough stock market in Q1 which recovered greatly just to get to the - 4.6% loss. The bond market suffered its worst quarter in over 40 years. (See comment below in Follow Up re the tide changing after 40 years.)

Those who made the mistakes mentioned above were seen to be swimming naked in Q1. Simply avoiding these common mistakes helped buoy the Focus List. Ten out of the eleven stocks on our list outperformed the S&P 500 in Q1. Avoiding basic mistakes year in and year out guarantees nothing, but it does increase the odds of success.

We are adding three new positions to our FL. Meta Platforms, fka Facebook, is down over 30% this year. Though Facebook is skewed toward an older demographic, Meta's Instagram service enjoys the highest engagement from teens. The ETF of energy stocks we are adding is up strongly this year due to the current supply demand imbalance of oil and nat gas. This position is added in addition to our position in Shell as a hedge against further energy price increases since energy is an important component to general inflation. And finally Anglo-American is a large miner of a broad range of commodities which are also significant components to inflation.

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

Hall Capital Focus List

Allstate - strong brand. Strong balance sheet. Hedge against higher interest rates. Steadily higher dividends.
Verizon - largest cell phone service provider in the US. Some debt but safe 5% dividend yield.
Royal Dutch Shell - lowest multiple of the global energy giants. Leader in LNG. 3% secure dividend 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 many other forward technologies. Cash on hand >$135 billion.
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 - technological leader in glass for fiber optics and displays.
Goldman Sachs - Wall Street's premier investment banking firm. Stock trading near book value.
Medtronic - world's largest medical device company. Sales should recover when hospitals inevitably return to normal.
Unum - established life and disability insurance provider whose depressed stock price should benefit from higher interest rates.
Meta Platforms - controversial dominant social platform which 60% of US use daily. Trades now at less than a market multiple due to sharp decline in stock price.
Anglo American - large miner across multiple continents and many commodities such as platinum, copper and diamonds. Commodity inflation will increase revenues. 5.4% current dividend.
Energy Select SPDR - hedge against energy driven inflation.

Follow Up – from our letter one year ago

"The health outlook is much better which means the economic outlook is much better"
- Notwithstanding the Omicron wave, the virus is now on the run and the economy and the stock market grew well above average in the last year.

"The tide has been going out with rates falling for 40 years. While the wave may reverse for a awhile, we believe the dominate tide has changed and will be pushing rates higher for at least a decade."
- Interest rates have been rising since last August with more increases expected.

"Thus, the recommended portfolio strategy is to underweight long bonds, overweight equities and alternatives that can be hurt less, or even benefit, from higher interest rates and inflation."
- The S&P 500 is up over 15% over the last year. The aggregate US bond market was DOWN -4%.

"The nature of politicians is to not to reduce debt but to issue more debt to pay off previous debt in lowered valued dollars."
- Politicians have not changed their stripes in the last year.

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