Hall Capital “Market Views” Newsletter July 2013

This is the 13th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

QE: To End Or Not To End
- that is not the question

What happens when the Fed stops buying $85 billion of bonds each month is a HUGE question. IF it stops is not. The Fed will not continue to pump $6500 per American worker annually into the economy forever.

Arguably, the Fed has accomplished part of its goal: boost asset prices, namely stocks and housing, so that confidence can build leading to ultimately hiring and wage growth. The first part has been successful. We are being bribed by the Federal Reserve to own stocks and houses. We have argued that it is smart to respond to that bribe, and own real estate and stocks, but with some hedges.

The Great Rotation
- from bonds to stocks

The chart above provides the case for both asset classes (blue line: stocks, brown line: bonds). Higher returns can be expected from stocks. Steadier, but lower, income returns can be expected from bonds. This has been the relationship forever. The challenge today for bonds is the expected return is low relative to stocks and very low in absolute terms. This is why we have emphasized intermediate term bonds, and NO long term bonds. In the very near term, bonds, especially munis, appear to be over sold in reaction to investor nervousness on Fed policy, rather than an uptick in inflation which would have been more fundamental. Nevertheless, we continue to favor equities. In our global screens for value, selected Chinese companies show as having the most compelling valuations.

Focus List

Apple Computer, off another 11% in the quarter, continued to drag down the list, bringing the Focus List three month return to -1% vs a 3% gain for the S&P 500. However, note that AAPL now has the lowest PE on the list and just since the end of the quarter AAPL has regained 5%, well ahead of the market.

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

"Debt in the developed world - Europe, Japan and US- is the key challenge for policy makers”.
- Indeed. This will be the case for many more years.

"The real "fiscal cliff" is not the withdrawal of government spending, but a sharp rise in interest rates if bond buyers go on strike".
- The economy has not been derailed by the "sequester", and it remains to be seen if bond buyers go on strike. The back up in interest rates this year has been sharp, but from such a low level so as not to be a major dampening factor.

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