Hall Capital “Market Views” Newsletter October 2015
This is the 22nd edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.
Mixed Economic Outlook
- confounds Federal Reserve
Slow global growth spooked the Federal Reserve which pushed out its intent to raise interest rates. Europe is slow; China is slowing more. The US continues to be the "big engine that could" chugging along with a 2.7% GDP for the last year. However, weak global markets and a strong dollar are challenging earnings causing durable good orders to fall and contributing to a a weak job report most recently. The only problem with inflation is that we have none, and 2% is what the Fed would like to see. Thus, the contour of the economy is sufficiently vague to put the Fed in an awkward position on when to begin "QT" or quantitative tightening.
In addition to a "growth scare" some investors were also concerned about credit problems, particularly in the depressed commodity sector.
Our long term expected return from stocks is unchanged in the mid-single digits. An environment of slow growth and low inflation is usually friendly to investors. Regarding credit concerns, though more Glencores will likely surface in the commodity sector, we think not such that would trigger a crisis. In fact, short term oil prices along with energy related stocks are due for a recovery.
Long term expected returns from bonds are clearly less. The yields on high yield bonds have risen sharply recently but not yet enough to warrant aggressive purchases.
Seasonality is Persistent
- if not every year
One study shows that for 50 years one could have "sold in May and gone away" until the end of October and still enjoyed ALL the price return that the market had to offer over those 50 years. This is one of the most reliable intermediate term market indicators I have seen, which is not to say one should sell everything in May. However, when the market is weak going into the fall, as it has been this year, there is good reason to believe – barring some terrible fundamental news – that market psychology will improve enough to provide for a stronger fourth quarter. Every year is different, and this one we have to contend with a potential interest rate hike by the Fed. Nevertheless, a steadily growing US economy, reasonable, if not cheap stock prices, and seasonality patterns bode well for a much better quarter than the one we just experienced.
Focus List Takes a Hit
- along with the market
By design we don't change the FL often and never take a short term gain, but this quarter we have several changes. Last quarter we mentioned that Abbott is no longer undervalued and we will have to say good-by to our steady friend. The portfolio without Abbott dropped - 6.5% in the period erasing the year's progress to date. (With Abbott the decline would have been - 8.2% which happens to be exactly the same as the average stock mutual fund in the period). Year to date the FL portfolio has returned - 2.2% vs - 5.3% for the S&P 500. Since inception the FL has advanced 118%, well ahead of the S&P 500 at a time when matching the market was a major challenge.
Recently, the FL would have performed better had it not been for the oil headwind Exxon was facing, some poor earnings by Walmart and the inexplicable swoons in CVS and Apple.
As to changes, we are "doubling down" on an oil recovery by swapping Exxon for the more upstream focused Chevron. We are exchanging Sanofi, which like Abbott has performed well and is fully priced, for the more depressed Corning. And we are removing the two companies that used to be Ebay (now Ebay and PayPal) in favor of Sanderson Farms, a straightforward chicken processor.
We bought Ebay for PayPal. PayPal has been a star delivering tremendous returns to the parent and shareholders. However, the star now spun out of the parent is no longer under-appreciated like it once was.
Corning's recent earnings have been adversely affected by a strong dollar. However, the largest maker of glass in the world (such as display glass for LCD TVs and iPhones) is well positioned for the long term.
Sanderson Farms is suffering from several crosscurrents which will eventually settle out in this fundamentally simple business. While at any one time there may be a miss match between the number of chickens produced and those demanded, the "chicken cycle" is short and growers are rationale about adding capacity. No one goes into the chicken business because it is fun.
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
"Their (ISIS) impact on the US investors will be limited as well..."
- The spread of ISIS a year ago was headline news and had spooked investors. ISIS has spread even further, but the impact on US investors has indeed been limited.
"Ebola will be contained soon, or we will have a problem"
- Likewise the spread of Ebola was headline news a year ago and impacted our market. This and other worries, such as ISIS, were put in context by the section heading of "What to Worry About and What Not".
"Of the political issues, Putin remains the main concern, not because of Russia's role in the global economy, but because Russia is a nuclear power."
- Still the case.
"However, 2014 should end up a decent year for investors."
- Stocks were up 13.7% and bonds up 6% in 2014.
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