Hall Capital “Market Views” Newsletter January 2013

This is the 11th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

The Pie is Still Growing
- albeit modestly

Our base case scenario for the U.S. looking out over the next several years is that we will see meaningful spending cuts on top of the tax increases agreed to already. This will mean: low GDP growth, 2% at best, but no financial crisis.

This is based on the notion that the we can't grow our way out of our national debt problem, nor can we tax our way out. It is obvious that significant spending cuts are also required. So we are assuming that our elected officials will (eventually) act on the obvious.

Stock prices reflect a low growth outlook, but not a financial crisis. Stocks should outperform bonds and cash over the next five years, and probably even this year. Going forward bonds are not likely to do as well as they have for the last few years relative to cash. In fact, we do not find the risk/reward relationship in LONG bonds attractive at all.

Hedges are still in order and investors should always be open minded about seeking opportunity elsewhere. Chinese stocks are down 40% from their 2007 peak. P/E multiples are lower than here. Growth continues at over 3x the rate of the US, if lower than the double digit rates that China once enjoyed. "State capitalism" has its risks, but it has demonstrated some advantages.

Stock Selection Should Remain Conservative
- with a bias toward dividend payers

We wish to remain tilted to equities to have any chance of a return above 4%. Within equities we prefer large, strongly competitive companies for several reasons: 1. higher taxes and continued deleveraging will keep macro growth to modest levels 2. We expect better times to become more aggressive -- perhaps after the market sells off in apprehension of debt ceiling negotiations or similar and 3. Our assumption of the mitigation of our budget and debt problem is not a sure thing.

So far in this sub par economic recovery our good defense has continued to be a better offense. Our Focus List returned 22.6% in 2012. This compares to 16.0% for the S&P 500. We do NOT expect a similar absolute or relative performance going forward.

We made no changes during 2012, which means that all these gains were long term. We do wish to make some changes going into 2013. We are adding Apple Computer in lieu of Microsoft. Microsoft will be fine, but with a focus list, we wish to show only the best values. While there are some competitive questions nagging Microsoft, with Apple it is only a question of growth. Apple's growth is indeed slowing, but with at only 10x 2013's estimated earnings and an enviable competitive position, we find the recent 25% decline from its peak an attractive entry point.

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

- Politics Still Driving Markets.
Not much has changed in that regard.

- Looking forward we expect stocks to show better returns than bonds.
2012 was not a bad year for bonds, showing a return just above 4% generally, but the S&P 500 returned 16%.

- Within stock sectors, European pharma companies are interesting at these depressed levels.
A year ago European stocks were at a nadir. Most European drug stocks rebounded. Sanofi, the one we chose for our Focus List, returned over 30% in 2012.

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