Hall Capital “Market Views” Newsletter January 2011

This is the 3rd 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
- Though still undervalued long term

As mentioned in our last update, favorable seasonal tailwinds will exist for stocks through April. However, the sustained rise in stocks, doubling from the nadir almost two years ago, has made investors overconfident. In a survey, bulls out-numbered bears 38%, which is above the "danger" level of 35%, and not far from the all time high of 42% registered at the market top in October 2007. Since we believe the stock market's "job" is to confound the most number of investors at any single point in time, this sentiment reading gives us reason for pause near term. There are enough flies in the ointment from a macro perspective that a pullback, of perhaps 5%, is likely within the next couple of months.

Munis Due for a Rebound
- at least relative to taxable bonds

While we highlighted the risk in the bond market in last quarter's update, we did not discuss the tax exempt market. Sentiment for municipal bonds is the opposite of stocks, distinctly negative. Budget problems among cities and states are now well appreciated. However, even considering worsening credit worthiness, there is value in tax exempt bonds at these levels. Muni yields at over 5% exceed the yield of taxable US T-bonds of like maturities. Municipal credit defaults were .1% of the outstanding muni market in 2009 and 2010. If the default rate were to increase five fold, which is indeed possible, a NATIONALLY diversified quality muni portfolio would still net over 4.5%.

Quality Large Cap Global Stocks
- remain attractive despite recent rally

We have updated our list with the higher prices. The average dividend yield of this group is still 2.5%; the average Earnings Yield is 9%. This is a high quality list, with stronger competitive positions and balance sheets than the average company. The 9% earnings yield could provide a somewhat greater total return than 9% over the long term if these companies are able to reinvest their earnings for growth, which seems likely.

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

Hall Capital Focus List

Emerging Markets Have a Place in Portfolios
- despite political risk

The case for emerging markets is simple — emerging markets offer a hedge against a weaker US dollar, are faster growing and have less debt than developed markets. Emerging markets such as Brazil, Russia, India and China, can be volatile, however. We prefer to add to them during a periodic sharp sell off. China's stocks, though not sharply down, barely advanced in 2010 even as China's GDP expanded 10%.

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