Hall Capital “Market Views” Newsletter January 2025

This is the 59th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

What A Trump Administration Will Mean for Investors
- uncertainty for sure

As noted in the October letter, Trump policies welcomed by investors include continued low corporate income taxes and de-regulation. Three big policy initiatives that are concerning and that could bear directly on the economy are tariffs/trade, immigration, and the Federal budget. Errant policy on any one of these could put the economy in peril.  Fed Chairman Powell alluded to the potential impact of tariffs on inflation in his remarks on 12.18, which caused a sharp selloff in both bonds and stocks.

While there are many moving parts and the downside scenarios if fulfilled would be significant, I am going out on a limb to say I don’t see them all moving far in the wrong direction. My base case is that tariffs, immigration, and the budget will be handled like “the wall”. That is, Trump will execute just enough to take credit for fulfilling his promises. Anything that will make him look good.  Here is an elaboration on each.

Tariffs/Trade

Tariffs are inflationary, regressive, and can lead to trade wars. Trade wars can jeopardize global growth, potentially leading to a recession or worse.

Worst case scenario: Trump aggressively raises tariffs on more than just China leading to a retaliation by other countries and recession due to a reduction of global trade.

Likely scenario: Like “the wall”, the tariff campaign promise will only partially be fulfilled and not to a degree that will damage world trade materially. Trump said recently he plans to levy a 25% tariff on goods from Mexico and Canada unless they mitigate border crossings of illegal migrants and fentanyl. His threat for China, however, was just a 10% increase, not a 60% increase, which is what he said during the campaign. Howard Lutnick, Trump’s Secretary of Commerce, and VP JD Vance are pro-tariff. Thus, there WILL be more tariffs. But other advisors will weigh in and, I believe, limit the extent of tariff implementation. Scott Bessent, Trump’s Treasury Secretary pick, is not opposed to tariffs as a tool, but he is a very experienced and astute investor who is perceived as moderate.  Trump is not an idealogue. If the strategy is not working and is therefore making him look bad, he will back off.

Immigration

Worst case scenario: Trump fulfills his promise and deports most of the estimated 11 million undocumented immigrants in this country. Some 9 million are employed, representing almost 1 out of every 20 workers in the US. This would trigger disruption and higher costs for certain sectors, such as construction.

Likely scenario: Most of the illegals who have criminal records will be deported immediately. Many of these were in line to be deported anyway and are already in jail and don’t have to be rounded up. But deportation will go well beyond criminals. However, the logistics and cost will limit the pace and extent of deportation. It would take building 24x as many detention facilities as we have now to round up just one million undocumented immigrants. This does not consider the cost of 30,000 more ICE officers and the disruption to the economy resulting from these workers being pulled out of the workforce when we are effectively at full employment. Tom Homan, Trump’s pick for “Border Czar”, is the former head of ICE and understands this.  So, again, as with “the wall”, there WILL be deportations and much fanfare on the progress of ridding the country of “criminals, rapists, and drug dealers”. This exodus will not be large enough or fast enough to set the economy back materially. After all, 2 million immigrants “self-deported” and 3 million were forcibly deported over Obama’s two terms without significant economic impact.  At the same time, measures on increasing border security and improving the asylum policy will be passed, like what was proposed during the Biden/Harris administration.

Taxes/Deficits

Of the long-term risks, the strained Federal budget is the most significant. First some numbers: Over the last fiscal year the US Federal government spent $6.8 Trillion. We took in $4.9 Trillion in taxes leaving a deficit of $1.9 Trillion. ($5T -$7T = - $2T may be easier to remember). Our GDP was $29 Trillion, and our debt grew to $35 Trillion which means that our debt/GDP ratio is 121%. The annual deficit to GDP is running over 6%.

Worst case scenario: Government revenue falls short of plans due partly to the extension of the Trump tax cuts for individuals that were scheduled to expire in 2025 and to the new proposed elimination of tax on social security income. The “Department of Government Efficiency” fails to deliver on meaningful cost savings.  All this balloons the deficit yet further.

Likely scenario:  Again, a partial fulfillment of promises likely, the most important of which would be the extension of the Trump tax cuts, which lowered income tax rates for individuals and raised the exemption substantially for estate taxes.  Highly unlikely will be exempting tips and SS from taxes. And also unlikely, though Trump floated this as well, is the restoration of the full SALT deduction. Elon Musk’s DOGE effort will no doubt identify some savings, but it will be hard to cut spending much without a change of law on mandates or breaking campaign promises to leave intact some of the largest slices of the budget, such as Medicare and Social Security. While Trump may care less about the deficit, at least Treasury Secretary Scott Bessent is keen on addressing it. Bessent has stated a goal of reducing the deficit to 3% of the GDP, down from 6%. This is extremely unlikely but at least there is an acknowledgement that the deficit is a problem.

Conclusion

Since the election, investors have bid up equity prices some 3%, shrugging off the worst-case risks. While the worst-case scenarios may not play out, new issues and scenarios will develop, especially under this president. The recent ploy that almost shut down the government is one example. No one can forecast these issues nor Trump’s reaction to them. He is so mercurial, any position he might take today could very well change materially by the time the issue arises later. Investors seem to have become inured to provocative proclamations, perhaps thinking, as I do, they don’t mean much until the proclamations are backed up by action other than a watered-down version of what was threatened.

Bitcoin
- wealth opportunity or investors' kryptonite?

I know how much bitcoin has shot up since the election. But hear me out.

I have changed my view. I still don’t like many of the use cases, but I do think bitcoin is investable as a hedge against a potential long-term decline in the value of the US dollar.

These three new developments in the past year have influenced my thinking: 

1. The launch of bitcoin ETFs which make it easy for average investors to access exposure to bitcoin
2. The growth in the value of bitcoin. It is now large enough that many mainline institutions are considering taking at least a small position.  
3. The coming Trump administration’s embrace of crypto generally; even suggesting that the US Government should invest in it as a strategic reserve, which will only add to its credibility as an asset class.

I have always appreciated the elegance of blockchain technology, but I didn’t like many of the scam-ridden use cases for bitcoin. Another issue was the difficulty in valuing it. I said, “If I can’t tell you if a bitcoin is worth $100k, $1 million or $0, then I can’t recommend it as an investment.” It occurred to me that I can’t value gold either. Gold is a pure hedge, and its value is based on what investors choose to place on it. Gold has little value otherwise. Same with crypto assets. While gold has been a store of value for millennia, and that history is an advantage, bitcoin COULD become “digital gold” for the future. A lot of people think so and, in this sense, the more it goes up the more it will be appreciated as such.

All 20 million bitcoin outstanding is worth some $2 trillion. This compares to $14 trillion for gold and $3.3 trillion for Nvidia.

Bitcoin is not a currency really, nor a reliable hedge against a declining stock market. Bitcoin could well go down 50%+ next year. But it won’t go to zero. All my reservations are still there, but it appears that bitcoin is here to stay.

Focus List Gains 22.3% for 2024
- vs 25.1% for the S&P 500

While the FL benefited from a broadening of the market in Q3, the opposite occured in Q4. The average stock in the S&P 500 was down -2% in the period. The FL was down -.4%, but the S&P 500 Index was UP 2.4% led by a few megacaps such as Tesla and Alphabet.

We are adding Microsoft and Crocs to the FL. One might ask, "With 55 analysts covering MSFT, how can we have any insight?" We can't. However, MSFT not only lagged the Mag 7 last year, but lagged the market substantially. The risk/return in this Stalwart now appears attractive.

Going in the opposite direction in terms of market cap is Fallen Angel, CROX. More speculative, but with more upside if growth continues.

We are swapping Lennar for Toll Brothers, another homebuilder. TOL focuses on more expensive homes bought by buyers with more cash down making them less vulnerable to high mortgage rates.

All of our selections go through the same screening process which is designed to tilt us toward opportunity and away from risk.

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.  Steadily higher dividends.   P/E Foward: 10x.
Verizon - Largest cell phone service provider in the US. Some debt but 6% dividend yield.
Shell - Lowest multiple of the global energy giants. Leader in LNG.
Heidrick and Struggles - A leading global recruiting firm with large cash position and no debt. P/E Forward:15x.
Alphabet - Google is the "oxygen of the internet". Competes in cloud computing, AI and many other forward technologies. Controls 92% of Search. Most Googled word is YouTube. Fortress B/S.
CVS Health - With Aetna insurance, large store footprint, and PBM, CVS has the chance to become the most integrated US health care company. Political risks have clouded outlook, but large potential still exists.
Apple - Most recognized brand in the world, with 1.4 billion users providing new growth opportunities in service revenue and wearables, moving into AI enabled iPhones.
Everest Group - Leading reinsurer with good record of risk control. Concerns over impact of climate change overdone as pricing is adjusted regularly. P/E: 6x.
JP Morgan - Well managed leader in commercial and consumer banking, investment banking and wealth management. Fortress balance sheet. P/E:13x.
Medtronic - Global medical device giant serving 130 countries. Holds over 49,000 patents on life science devices.
Unum - Largest disability insurance provider in US. Benefits if interest rates stay higher for longer. P/E: 8x.
Meta Platforms - Controversial dominant social platform which 60% of US use daily via either Facebook, Instagram or Whatsapp. Successfully exploiting treasure trove of data with AI.
State Street Bank - Being a custodian of scale for $37 trillion provides durable competitive position, but stock is valued like a commercial bank at 10x Fwd P/E.
Energy Select SPDR - Hedge against energy driven inflation. 40% invested in Exxon and Chevron.
Toll Brothers - A leading high end home builder less exposed to the impact of higher mortgage rates. Housing shortage to last for many more years. P/E: 8x
Raymond James Financial - Steady expansion in wealth management/private banking helped grow EPS 15% per year over the last decade. 15x Forward P/E. Strong balance sheet.
Amgen - A leading biotech company with a strong pipeline including a potentially superior obesity treatment drug according to phase I results. 13x Fwd P/E
Cigna - A leader in value based healthcare (payments to providers based on outcomes rather than fee for service). Solid position among large employers and government. 9x Fwd P/E.
IShares Gold Trust - Hedge against weak dollar, long term inflation, mid-east turmoil and other uncertainties.
Microsoft - dominate in Windows operating systems, and leader in higher growth segments such as cloud computing and AI. Fortress B/S. Investing $80 billion a year to maintain competitive position.
Crocs - fashion risk to be sure, but with 60% gross margins, if growth continues, volatile stock should outperform. Strong B/S. P/E of 9x.

Follow Up – from our letter one year ago

"The Artificial Intelligence Revolution - is just beginning"
- Indeed. And the statement still holds.

"Considering the soaring stock prices of the Magnificent Seven, you might be wondering if there is still opportunity. I believe there is."
- Our holdings of the Mag 7, META, GOOGL and AAPL were up 44% on average in 2024 after a strong 2023.

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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