Hall Capital “Market Views” Newsletter October 2010

This is the 2nd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Seasonal Influence Positive for Stocks
- October through May

Of all the indicators toward divining the intermediate term direction of the stock market, few can match the record of seasonality. ALL the price appreciation for the DJIA since the 1920s has occurred between the end of October through April. "Sell in May and go away" has been perennially good advice. No single theory can explain this strong seasonality. Most likely it has to do with the typically optimistic earnings forecasts being brought down to reality by the third quarter. This year is an exception as earnings are proving to surprise expectations to the upside.

Bond Values Less than Compelling
- long term

Bond managers know that the sensitivity to interest rates (duration) increases as interest rates decline. So the view that Fed action will drive down interest rates somewhat further has professional bond managers looking for additional gains on bonds in the short-term. We view is on the long term. While we can find a place for bonds in balanced portfolios, with the 10 year Treasury yielding a mere 2.5%, we favor a tilt toward equities at this time.

Quality Large Cap Global Stocks
- remain attractive despite recent rally

Individual stocks valuations are usually compared to that of a broad index, such as the S&P 500. As discussed in our last report, another approach removes much of the statistical noise that write-offs and cyclicality of many lower quality stocks contribute to the aggregate comparisons. This alternative approach defines the "market" by the valuation of several large cap quality stocks. Compared to the average stock, these quality companies, which carry much of the weight in the indices, have fewer write offs and less variability to their earnings and dividends due to cyclicality.

We have updated our list. The average dividend yield of this group is 2.5%; the average Earnings Yield is 9.6%. This is a high quality list, with stronger competitive positions and balance sheets than the average company. The 9.6% earnings yield could provide a greater total return than 9.6% over the long term if these companies are able to reinvest their some of 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 Continues to Recover
- if very slowly

Cost cutting has resulted in good corporate profit growth. However, more sales growth is needed for the current profit pace to continue. Cost cutting can go only so far. More debt pay down will limit GDP growth suggesting modest sales growth and therefore modest profit growth going forward. Though not ebullient, this scenario is far more comforting than the environment of two years ago when the entire financial system was on the brink of collapse.

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