Hall Capital “Market Views” Newsletter October 2011

This is the 6th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Key Issue Remains: Debt in the Developed World
- Next three months will be critical for policy makers in Europe and U.S.

The problems are well known: The U.S. has to rein in its deficit and stop the expansion of national debt. European banks are over leveraged and exposed to sovereign risks such as Greece. An example of the later is Dexia which has $500 billion of assets, $25 billion of those assets in Greek debt, and only $5 billion of equity. This week Belgium moved to take over Dexia by providing $6 billion in fresh cash and guaranteeing deposits.

What is NOT known is how the rest of the weak European banks will be saved, nor do we know the implications if they are not. Given the experience of the Lehman failure, it is not a leap to figure that the later would be jarring for markets.

In the U.S. the Special Committee in Congress is scheduled to submit its plan before the end of November. Fortunately, the U.S. banks are in better shape with leverage closer to 14:1 and their exposure to weak sovereign credits like Greece is small. However, the U.S. fiscal deficit and debt problems loom large for investors.

We should know how both continents will cope by the time Hall Capital issues its next quarterly letter. What few are expecting is that Europe hammers out a solution and the U.S. comes up with a Simpson Bowles type debt plan that Congress passes. Though unexpected for some very good reasons, if clarity on these issues were achieved, stocks would soar.

Risk On or Risk Off?
- We prefer a balanced approach at this time

Currently we prefer a conservative portfolio including an ample position in cash, despite the low yields. We would hold some intermediate term bonds (NOT US Treasuries). However, given there is SOME probability of progress on the debt front and the recently improved valuations, we would hold more high dividend paying stocks than bonds. Most portfolios should also have some exposure to gold, oil and emerging markets.

Diversification is Overstated as Remedy for Risk in Stock Selection
- It is more valuable when used across asset classes

As mentioned in our last letter, for the first half of this year, our short list returned 8% vs 6% for the S&P 500. For the quarter just ending this portfolio was back down -8% vs a -14% decline in the S&P 500. ALL these stocks out performed the S&P 500, except France based Sanofi, which was dragged down by the dreadful performance of European markets. Sanofi held up better than the typical European stock, however.

Though this list is particularly short as an example of the type of stocks we are buying for clients who own individual stocks, we believe a carefully selected CONCENTRATED portfolio of well priced, large, strongly competitive companies is more productive than a highly diversified list.

Of course, past performance, particularly short term from a concentrated portfolio, is not necessarily indicative of future performance. The ten year results of our stock selection strategy can be provided on request.

Hall Capital Focus List

Follow Up
- Here are excerpts for our letter one year ago

Below is a comment taken from our 10/10 letter:

"More debt pay down will limit GDP growth suggesting modest sales growth and therefore modest profit growth going forward."
- Indeed, this is still the case.

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