Hall Capital “Market Views” Newsletter January 2021

This is the 43rd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Look To April
- for life to feel more normal

This is based on considering the number of people who have already developed anti-bodies, vaccine roll outs (if delayed some) and normal seasonality of the virus. We will still have another wave in the fall, but it should be manageable. Expect half the country to be vaccinated by summer.

Pent up demand should propel the economy forward. Consider the surprising impact on the personal wealth of Americans for the six months after March when deaths reached 9/11 levels DAILY and 800,000 a week were filing for unemployment. For the six months through November wages fell $43 billion compared to the same time the year before.

HOWEVER, all other disposable personal income INCREASED by $1 Trillion, made up of $500 billion in expanded unemployment benefits, $276 billion in stimulus checks, $29 billion in PPP, and $265 billion in all other income. At the same time spending dropped by $535 billion which meant that savings shot through the roof, to 33.7% or the highest level on record.

So far the economic recovery has been described as "K" shaped. That is, bifurcated. Many white collar workers are enjoying increasing wealth while service workers in hard hit areas like restaurants and travel are experiencing hard times, not to mention those who were health victims of the pandemic.

So once life starts to return back to normal, the economy should enjoy a double whammy of pent up spending of savings and service workers returning to earning wages.

So, ironically, Americans became flush with cash during the pandemic. While this was impossible to predict, the combination of this high savings rate, low interest rates, and boredom, prompted many new investors to enter the stock market. As a result, several stocks, such as Zoom, Pinterest and Snowflake soared to astronomical levels. There are no less than 70 companies worth over $5 billion selling for over 20x revenues!. While high growth is very valuable, stock prices that require super high growth for decades seem destined to disappoint.

The Outlook for the Stock Market
- is bright but complicated

In the long run the stock market follows the path of the economy – that is mostly up. However, there can large disconnects. 2020 was a good example: the economy tanked but stocks hit new highs.

Congress just passed another relief package. Though this was long in coming, it was not a surprise. This relief package will help bolster the economy for a couple more months. However, it is not a panacea and we have to ultimately deal with the considerable debt these programs created.

As usual, it will be surprises that will move the market the most. The emergence of a pandemic in March was a surprise. The massive and quick aid provided by the US government in May was a surprise in the other direction. By definition surprises can’t be anticipated.

What are some possible surprises for 2021? The virus could mutate into a form that requires a new vaccine for one. A sharp rise in inflation could prompt the Federal Reserve to raise interest rates which would be a serious challenge for asset prices. Another surprise would be that the recent cyber-attack that breached security in government agencies and thousands of corporation, including even some firms selling cyber-security capability themselves (FireEye), turned into something more nefarious than simply spying.

Of course, the most surprising surprise would be one that is not even on the radar. While one always wants to have some protection against nasty surprises, there is no reason to believe that we will have more of negative surprises than positive ones.

Focus List Returns "Just" 5.7% Last Qtr
- lagging an ebullient market

The conservative Focus List only outperformed one quarter in 2020, which was during the big downdraft in Q1. However, despite the lagging for the following three quarters, the long term record remains intact, averaging 16% per annum vs $14.5% for the S&P 500 since inception over 10 years ago.

Dragging down the performance recently was China Mobile which is doing just fine fundamentally. However, the Trump administration, in its mercurial fashion, issued an order that Chinese telecom stocks can't trade on the NYSE anymore due to "national security" concerns. The PRC army uses China Mobile in China. This political move did nothing to increase our security but it did hurt US investors.

We are adding two financial stocks to the FL: Goldman Sachs and Unum. Unum is a small, but established insurance company focusing on disability coverage. GS has recovered but still trades near 1.2x book value. Unum trades at merely 5x earnings. Out of 11 analyst who follow it, only one is recommending. Seems like there is only one way to go from here.

We are removing the gold hedge given the clearer pandemic picture as well as a more predictable political environment. It was a hedge against uncertainty and higher inflation. If we do see higher inflation then interest rates will rise. The two financial stocks we added are sufficient hedge against higher interest rates.

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. 6.1% 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.
Goldman Sachs - Wall Street's premier investment banking firm.
OraSure - small, but established life science test company which expects to have a COVID-19 saliva test Q4 2020. No debt and large cash position to fund growth.
Unum - established life and disability insurance provider whose depressed stock price should benefit from higher interest rates.

Follow Up – from our letter one year ago

"Now is a good time to start to do some reaping."
- True, but not that we had any idea that we were on the verge of a global pandemic.

"It appears that the Fed will do whatever it takes to support the market"
- The Fed showed that in spades during the collapse of the economy following the outbreak.

"Consensus expectations for the New Year are usually not full filled."
- 2020 proved that again.

"The threat of military conflict is usually overblown."
- The skirmish with Iran was short lived.

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

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