Hall Capital “Market Views” Newsletter July 2010

This is the 1st edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Stock Values Improving
- at least relative to bonds

Investment professionals are often asked, what return do you expect from stocks this year? The return from stocks over one year is truly unknowable. The return over the long term, five to ten years, though uncertain, is more predictable. Looking out five years, we believe the total return outlook is now brighter for stocks, than bonds.

A Shortage of Yield
- and an abundance of uncertainty

The combination of a sputtering global economy, fear of a double dip recession, inflation barely 2% and demographic trends in the developing world, conspired to drive investors to dump stocks in favor of bonds. While the yield from short-term money market instruments has been next to nothing for several quarters, yields on long term bonds have sank again, with 10 year US T-Notes now yielding less than 3%. It is a mathematical certainty that the "total return" - income plus growth - will be 3% for these notes. While we find a place for bonds in a balanced portfolio, our current recommended mix of 50% stocks 50% bonds is likely to be moving up in favor of stocks by this fall. Why by the fall? This will be addressed in the next issue.

Quality Stocks
- demonstrate value

Individual stocks valuations are usually compared to that of a broad index, such as the S&P 500. Another approach, which removes much of the statistical noise from the comparison, is to examine the valuation of several large cap quality stocks. These stocks carry much of the weight in the indices, but have less variability to their earnings and dividends than the average stock. The average dividend yield of this group is 3.1%; the average Earnings Yield is 11.1%. This is a high quality list, with stronger competitive positions and balance sheets than the average company. The 11% earnings yield could provide a greater total return than 11% over the long term if these companies are able to reinvest their earnings for growth, which seems likely. Though not as assured as bonds, the higher risk seems warranted. A kicker in equities is some hedge against potential higher inflation down the road.

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

Hall Capital Focus List

The Economy
- is still transitioning to less debt

It must as there is too much debt issued by the developed countries of the world. As a result, the recovery this cycle is likely to be, as we are seeing, less robust than in past recoveries. The US private sector added only 83,000 jobs in June. While positive, at this meager rate it will take over seven years to employ half the currently unemployed. This rate is not even enough to offset population growth.

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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