Hall Capital “Market Views” Newsletter October 2019

This is the 38th edition of Market Views from HALL CAPITAL. Our aim is to provide concise views of where we see risk and opportunity for investors.

Should Investors Worry About Political Risks?
- it depends

We have discussed ad nauseam the risk associated with a trade war. The main player in the trade dispute is China. If we do not make progress on trade talks with China, this will weigh on profit growth and, therefore, stock prices. It is already taking it toll on manufacturing which is showing its weakest Purchasing Managers' Index reading since the Great Recession.

In recent days "impeachment risk" has been reintroduced. This writer would say that this is NOT a large risk to investors. That is, while there is some uncertainty on how the impeachment inquiry is concluded, the main uncertainty revolves around who will serve as POTUS. That is different than the uncertainty regarding policy on, say trade, for example. I would submit even if the House impeached the president, this would not introduce any ADDITIONAL uncertainty on who will serve as president following the 2020 elections -- the outcome of which is highly uncertain already. Furthermore, even if one knew for sure who was POTUS following 2020, the value of that information now would not be great from an asset allocation point of view. The main uncertainty policy makers have some control over that the stock market investors want resolved right now - is not impeachment - but trade.

Could US Interest Rates Go to Zero?
- yes, indeed

Some $15 trillion or 25% of the world's sovereign debt now offers no interest, or negative interest. This is unprecedented. The fact the dominate financial and military power in the world is still offering a yield greater than Spain and Italy is remarkable and suggest world bond buyers will continue to buy US bonds pushing our rates lower. While this increases the TINA (There Is No Alternative) factor for equities, it is disquieting. We would prefer firm, but not surging interest rates. Notwithstanding the disquiet, if the US economy can continue to show growth, even slow growth, equities continue to be the asset of choice.

Despite the fact that there is a good argument that US interest rates could go lower, perhaps to zero even, and this would by definition boost bond prices, we are not tempted by long bonds. We are long term investors and, as such, we find the long term return on bonds uninteresting. Thus, our portfolio exposure to bonds is limited to some short to intermediate term maturities.

Focus List Advances 5%
- ahead of the market

The average stock in the US actually declined modestly last quarter, though the capitalization weighted S&P 500 edged up 1.7%. The Focus List provided a return well ahead of the market or 5.1% for the period which brings the year to date to 16.1% compared to 20.3% for the S&P 500. Over the long term since inception over nine years ago, the Focus List provided an average compounded annual return of 15.9% vs 14.5% for the S&P 500. Next year will be our 10th year of publishing the Focus List. We expect the 10 year result will be notable, both absolutely and relatively, especially compared to a benchmark which has been very difficult to beat.

As good as the return was for the FL last quarter, the return would have been better without, Carnival, our last addition which declined 5% over the period. Carnival is the largest player in the cruise industry and the parent of cruise brands such as Carnival, Princess, Holland and Seaborne. The stock trading at merely 10x earnings represents good value given its competitive position and growth prospects. Furthermore, even if there is little growth, the 4.7% dividend is a minimum return expected. Carnival paid a dividend through the Great Recession.

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

Hall Capital Focus List

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Follow Up – from our letter one year ago

"... tariffs so far have not been significant enough to derail the economy. ... the real risk is a meaningful reduction in trade due to price or to supply chains disruptions"
- Companies report reduced trade with China and supply chain issues. US exports to China are down 24%. While tariffs have yet to derail the economy, they are taking their toll.

"Bonds don't have more fun."
- Well over this past year, they actually did.

"The 10 year UST bond is yielding 3% which is less than 1% after inflation. This return is not very interesting, especially given the risk that some day the US may monetize its $21 trillion debt driving inflation higher."
- The US 10 year has plunged to just 1.7% yield. - even LESS interesting.

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