Hall Capital “Market Views” Newsletter July 2014

This is the 17th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Why Predicting the Market is Difficult
- and always will be

The arithmetic of determining the expected price (P) of the stock market could not be simpler: take an appropriate P/E and multiply by E. Walla! You are left with P.

What drives the "appropriate P/E"? Among other things, prevailing interest rates, expected growth, investor confidence, etc. These factors are in turn a function of yet another layer of issues. And this is before we even address what the E will be.

Predicting all these factors and how they interrelate is daunting, but not necessary to be a successful investor. The key is focusing on the MOST important long term factors and managing the uncertainty with appropriate hedges.

The Fed is Not Behind the Curve
- on keeping inflation in check

It is easy to get sidetracked on what is important: GDP falls 3% in Q1 but the US adds 560k new jobs, ISIS marches across the Middle East but consumer confidence improves, China growth slows but auto sales surge, etc. Overshadowing all this is the Federal Reserve's balancing act. Understanding the implications of Fed action trumps the other factors.

The Fed will indeed begin to raise interest rates next year, but not arrive at their stated target of 2% real by 2016. The impact of continued deleveraging will keep economic activity at a modest level and inflation in check. The economy cannot sustain a 2% real policy rate until debt levels are reduced more in relation to income. Odds favor the delicate balancing act will be successful and our desired scenario will play out. The longer term return implication of low growth and sustained low interest rates is 6% from stocks. Inflation may ultimately be a concern, but it will not come without warning. Our portfolio strategy remains unchanged with an emphasis on equities.

Focus List
- doing its job

As mentioned last quarter we would expect this somewhat less risky list to lag a perky market. This was the case in Q2 when the S&P 500 returned over 5%. While any of these companies could stumble at any time, the characteristics of these companies are appropriate for the market environment going forward.

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

"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 . . ."
- The stock market barely sagged in the summer and worked its way much higher for the remainder of the year with return over 30%.

"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.
- Bond prices rose slightly over the last 12 months. Munis outperformed, turning in a total return of some 6%.

"In our global screens for value, selected Chinese companies show as having the most compelling valuations.
- An index of Chinese stocks traded in the US rose over 47% despite a slowing of growth in China.

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