Hall Capital “Market Views” Newsletter January 2012

This is the 7th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Politics Still Driving Markets
- Which makes investors nervous

We said in our October letter that given the deadlines set for the European Union and the Super Committee in our Congress, we would know much more about how both continents would cope with their debt issues. We don't. Unless you call "kicking the can down the road" a form of coping.

This is very frustrating for investors. Perhaps we all should be thankful that the US stock market managed to end the year essentially flat. The market experience in 2011 was like the sailor who sailed across a stormy ocean only to find himself in port back at sea level. The turbulent investment waters proved difficult for active traders and traditional investors alike. The average hedge fund was down near 4%, and the average diversified US equity mutual fund was down 3%.

Though we did not see relief on the global debt question, which we said would cause stocks to soar, we did see many companies turn in respectable profit growth despite a rather puny economy. Profit growth, low interest rates and the fact that stocks are priced on the low side in relation to their earnings, are why the large cap stock indices managed to keep their heads modestly above water despite the macro uncertainties.

Bond prices did better, especially US Treasuries, rising in price while throwing off some income. We were way too cautious on US Treasuries based on price (not credit). We remain cautious for the same reason.

Looking forward we expect stocks to show better returns than bonds. We expect better performance from emerging markets especially China. Within stock sectors, European pharma companies are interesting at these depressed levels. Early stage private companies desperate for funding are also recommended for clients not needing liquidity.

Though we are comfortable taking on the volatility in attractively valued stocks, given that the debt problems in the developed world have not been addressed, some hedge is needed to balance out the equity opportunity side of the portfolio. These hedges would include cash reserves despite the low yields, intermediate term municipal bonds, and some exposure to commodities, such as gold and crude oil. In the muni area, we like to take advantage of closed end funds when the discounts widen well into the teens, as they do from time to time.

Tortoise Strategy Still Preferred Over Fast Money
- Avoiding mistakes made the difference in 2011

While large strongly competitive, mostly dividend paying, blue chips have gained more fans following their relatively good performance last year, we believe that this group remains the most attractive.

Our examples listed below, published each quarter in Market Views, and unchanged from a year ago, returned 13.4% in 2011. The 10 year return through 12/11 of our full 25 stock portfolio, which includes all stocks purchased was 10.7%. The S&P 500 returned 2.1% and 2.9% over the last year and 10 years, respectively. These results are presented to refute the notion that "buy and hold" is dead, commonly espoused these days by many pundits. Obviously, it all depends on what is bought!

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

Hall Capital Focus List

Follow Up
- Can be a humbling exercise

Indeed, one is not an experienced investor if one hasn't been humbled by events unfolding in a completely surprising way. The market's job is to confound the maximum number of investors at any point in time. Thus, frequently our views are formed not by what we think we know about the economy, but our confidence in perceiving the view adopted by a large majority of investors. The view of investors is frequently perceived through security prices themselves. And once we have a handle on a clear consensus, we take the opposite stance. If we are wrong and consensus is correct, little is lost because that scenario was already priced in. However, if the consensus is wrong, the pay off to those of us on other side is far greater.

2011 was a banner year for surprises for most investors. We were surprised too in some cases. However, we were gratified to see more often than not Hall Capital Market Views were reasonably sound. Here are excerpts from our letter one year ago:

"Stocks Due for a Pullback . . . the sustained rise in stocks, doubling from the nadir two years ago has made investors overconfident."
- US stocks proceeded to drop 17% from mid February to early August. This is an example of when the preponderance of investors was too bullish. Therefore, the proper response was to be wary.

"Munis Due for a Rebound"
- Most investors started the year very negative on municipal bonds. Though munis did not keep up with US T-bonds, Meredith Whitney's nightmare default scenario did NOT occur. On the contrary, muni prices DID rebound from their mid January low and moved steadily higher for the rest of the year turning in 10%+ returns.

"Quality Large Cap Global Stocks - remain attractive..."
- Indeed, except for perhaps CVS, all the seven stocks listed in our letter a year ago fit that description. While ours was a particularly well performing list, most US stocks that fit this description out-performed the average stock.

"Emerging Markets Have a Place in Portfolios .. . We prefer to add to them after a sharp sell off"
- Certainly August qualified as a sharp sell off. EMs have yet to fully recover. We think they will. This will be the subject of a future follow up.

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