Hall Capital “Market Views” Newsletter July 2012

This is the 9th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Debt Remains the Key Issue
- and it will be for years and years

Debt in the developed world - Europe, Japan, and US - is the key challenge for policy makers. Greece is the canary in the coal mine on the consequences of out of control government debt. Europe is currently scrambling with some creative solutions but nothing has solidified. The U.S. is in better shape but we have yet to hammer out a plan, such as proposed by the Simpson-Bowles commission, to reduce the growth in our national debt.

Investors are worse without a plan as they have to hedge against the greater uncertainty. The real "fiscal cliff" is not the withdrawal of government spending, but a sharp rise in interest rates if bond buyers go on strike. Any constructive plan would require deleveraging at the government level. In a deleveraging economy, income becomes king. In this environment, dividend paying stocks should have a prominent role in conservative portfolios.

Our Focus List is Dividend Heavy
- averaging 2.4% vs 1.7% for 10 yr UST

The scramble for yield is one of the reason investors have bid up our list. However, yield per se was not the main attraction of this list in the first place. It was a combination of strong balance sheets, enviable competitive positions and modest P/E multiples. All the stocks on this list, except Exxon, out-performed the S&P 500 in the first half of this year, with an average return of 17.4%. The market, as measured by the S&P 500, returned 9.5%. This follows the 13.4% return for our Focus List in 2011.

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

Hall Capital Focus List

Follow Up
- is instructive on many levels

The idea of having a regular follow up was taken from the long running practice at Barron's and Forbe's. It is not meant to demonstrate prescience. To the contrary, it can demonstrate just how wrong one can be if the prediction "reach" is too great. "Forecasting is dangerous, especially when it is about the future."

I have the luxury of defining my "reach". We don't have a prediction of what level the stock market will end up or what return the Focus List will provide for any particular year. These are silly forecasts. However, the mission of this newsletter is to provide helpful insights. The commentary is not very helpful if it is entirely analysis of what happened in the previous quarter -- which is what makes up most quarterly letters from investment managers. Thus, a perspective on the future is needed. But we provide it only when there is confidence in that expectation.

Even with confidence, the expectation is often dashed. However, so far I think I can say that the reach has been defined in such a way to make forecasts that are both relevant and accurate enough to further an investment strategy focused on preserving and growing capital. At times, we have admitted that confidence is such a rare commodity more hedges are needed against great uncertainty. Appreciating what you don't know is one of the most important principles of successful investing. Thus, one of the reasons for the follow up is purely internal. There is something to learn by going back one year and re-living the thought process. In so doing, we hope to fine tune the confines of our reach.

What do I mean by "we"? While Market Views are my views, they are influenced by a network accumulated in my 25 years as a professional investor. Influencing these views are former colleagues, fellow investment managers, investment consultants, financial journalists, academics, Wall Street analysts, investment bankers, investment strategists, financial journalists, and corporate executives.

So from our letter one year ago:

A Conservative Stock Portfolio Can Perform as Well as the Market - while offering hedge properties...
- Indeed. This was within our "reach" as defined above. We were confident in this, hardly outlandish, statement. However, we were also suggesting that a conservative portfolio was the only correct strategy given the environment. Our strategy has not changed. When it comes to investing, the advice "Don't just stand there, do something" is more often the opposite of a profitable strategy. We often say, "Don't do something, just stand there."

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