Hall Capital “Market Views” Newsletter October 2012

This is the 10th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Pending Election and "Fiscal Cliff"
- will dominate investor views in the near term

Thus, short term uncertainty is high. The combined impact of higher taxes and spending cuts of the fiscal cliff is some $800 billion. If there IS a compromise, it is difficult to contemplate what it would be at this point.

To repeat a point from last quarter's letter: Investors are worse off without a plan as they have to hedge against the greater uncertainty. Our strategy remains the same, some hedge but with most assets in a concentrated (not diversified) portfolio of large cap, strongly competitive dividend paying stocks. The second largest weight for additional tax free income is a diversified portfolio of intermediate term municipal bonds. We continue to avoid "safe" long US Treasuries and most long bonds in general.

Our Focus List Should Weather Any Storm
- despite higher prices

We provided this list NOT as evidence that it is possible to beat the market, but to suggest that one could MATCH the market without taking on the full risk of the market. These are less risky companies than the average stock in the S&P 500. The second reason for the list was to provide perspective on long term expected returns. A final reason to provide the list was to demonstrate that it is possible to earn attractive returns without much trading. Remember, "don't just do something, stand there".

Regarding the first point, as it turned out, a good defense was a stellar offense. This list has outperformed dramatically since inception. This year, our Focus List returned 24% for the first 9 months. The S&P 500 was up 16.4% for the same period.

Regarding the second point, for a group of truly strongly competitive companies, the long term expected return should be at least the earning yield. The current average earnings yield is 7.1%, down from the 9.6% we presented two years ago in the first list. There has been only one change in the list since then. The main reason for the change in earnings yield has been the change in the denominator, namely higher stock prices.

And finally, regarding trading - truly distinguished investors, such as Warren Buffet, distinguish themselves by taking a long term view. A long term view on value reduces the need for frantic trading. Longer holding periods not only saves income taxes, but we believe it contributes to returns as there is less "thought competition" in the longer term horizons.

Looking forward, clearly the expected return has declined somewhat as prices have advanced. We, however, believe our list maintains its defensive characteristics, despite the substantially higher prices. And for that reason, we wish to maintain the list as is for now. However, we do not believe the "offensive" advantage can continue -- that is, out performing in a rising market, until the earnings can catch up bringing the earnings yield back to a premium compared to the average stock.

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

- Key Issue Remains: Debt in the Developed World.
Indeed.

- Diversification is Overstated as Remedy for Risk in Stock Selection
Heresy, we realize, for an advisor to say. However, see comments above re Focus List. The number of truly attractive stocks is limited. It will be interesting to see when, inevitably, one of the companies stumbles, if the portfolio can maintain its defensive characteristics.

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