Hall Capital “Market Views” Newsletter JULY 2021

This is the 45th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Will the Rise in Inflation Be Transitory?
- that is the key question for investors

First the obvious: the economy is opening up in earnest with pent up demand; fiscal policy is distinctly stimulative; prices for gas, homes, air fares, cars, food are all up; employers are complaining about the shortage of workers; and wages are starting to bend up; all driving May's CPI reading to 5%, the highest we have seen in almost three decades. All the while, the Fed is intent on keeping short interest rates near zero.

In the capital markets, the yield on the 10 year US Treasury has held steady around 1.5% and the stock market has advanced to new highs. Do investors not care about inflation and potentially higher interest rates? Trust me, they care. The level of inflation and interest rates is the most important factor driving the value of all long term assets. The main reason stocks and bonds have enjoyed near 40 years of impressive returns is that inflation has been tame and interest rates have trended down.

Jerome Powell suggests the long term trend toward low inflation remains intact and that the recent upward pressure on prices will subside once production bottlenecks are resolved and the workforce is restored. We realize Powell has all the economists he needs at his disposal to opine on the outlook. We will give him the benefit of the doubt that he is not being political. However, we also know, that he, nor does anyone, know how this will turn out. We appreciate many of the factors that have kept inflation tame for 40 years are still in place, but given the current situation of both stimulative fiscal AND monetary policy in the face of an already recovering economy, we prefer some hedges against the scenario of more persistently higher inflation and higher interest rates. At the same time we welcome somewhat higher inflation rather than the threat of DEflation we had a year ago.

Sensible Investing Principles
- can make all the difference

From time to time, I like to step back away from discussion the macro environment or what investments are likely to do well and share some of what I have found to be helpful investment principles. Here are five:

  1. It is better to miss the party than to suffer the hangover. Do you really want to "party like it's 1999"? Many don't want to admit how much they lost in the aftermath of the dot com bust. So what if bitcoin quadruples? Do you really have to participate without a sound valuation argument?

  2. Patience is a virtue. Good investments can take time to ripen. The best ones compounded over many years. The reward is not immediate because investing is not gambling. Many approach the stock market as a source of short term excitement. When I first decided I wanted to be a professional investor I was drawn to a career in which the news of the day could be a money making idea. I finally realized that nearly all the news on any one day is a noisy distraction.

  3. Never think your are smarter than Wall Street. Money attracts brains. And no where is there more money, and, therefore brainpower, than Wall Street. It is difficult to outperform the market over the long term. However, it can be done if you simply acknowledge your limitations and, most importantly, don't make stupid mistakes. It's easier to be "un-stupid" than to be brilliant.

  4. Gather enough understanding to have a strong conviction, but be open minded. While this may seem like a contradiction, it is crucial. Two prominent thinkers commenting on new information that challenges your understanding summed it up this way: "Be willing to crush your most cherished beliefs" - Charles Darwin. "It's not that learning is so hard, it's the unlearning." - Charlie Munger.

  5. Be willing to make small mistakes, but never make a big mistake. If you are so risk adverse you never take risks, you will never make much of a return. On the other hand, it is very hard to come back from severe losses.

Focus List Returns 19.2% YTD
- vs 15.3% for the S&P 500

After a very robust Q1, some of the stocks in the Focus List relaxed a bit, but still returned 7.2% in Q2 vs 8.6% for the S&P 500. Since inception over 10 years ago, the FL returned 17.4% vs 16.2% for the S&P 500.

Our defensive telecom stocks lagged the strong market. We are removing China Mobile, not because we are concerned about the company's fundamental outlook, but due to a legacy of the Trump administration's policies, we, as with all US holders of the stock have to sell their position before this November. While we had hoped the Biden administration would reverse this mandate, the relationship with China has, unfortunately, remained frosty so we are exiting our position. This is the only change to the list we are making this period.

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

Hall Capital Focus List

Verizon - largest cell phone service provider in the US. Some debt but safe 4.4% dividend yield.
Vanguard FTSE All World Ex US - developed and emerging market non-US stocks are selling at much lower P/E compared to US.
NovoNordisk - Danish company has 50% of the global market for insulin. Strong balance sheet.
Alphabet - Google is the "oxygen of the internet". Leader in AI and other forward technologies. Cash on hand >$135 bil.
CVS Health - with Aetna insurance and growing in store clinics the chance to become the most integrated health care company.
Apple - brand with 1.4 billion users providing new growth opportunities in service revenue and wearables.
Corning - leader in glass for fiber optics and displays.
Goldman Sachs - Wall Street's premier investment banking firm.
OraSure - small, but established life science test company. No debt and large cash position to fund growth.
Unum - established life and disability insurance provider whose depressed stock price should benefit from higher interest rates.

Follow Up – from our letter one year ago

"A Trillion Here, A Trillion There - is tonic for asset prices"
- Indeed.

"We are likely to muddle through the health care crisis but it will be messy and inhibit growth into 2021"
- After some muddling, finally in the fall the vaccine roll out began and the US seemed to get its act together -- if later than it should have.

"My best guess is that we will see something resembling a reversed 'square root' (shaped recovery). That is, a sharp rebound but not up to where we were in February, and then slow growth from there."
- We are seeing the sharp recovery. It remains to be seen if it is sustainable. But continued government support looks likely for this year.

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