Valens Market Phase Cycle Monitor & Corporate Credit Macro View - August 2018
The title of Nate Silver's 2012 best selling book about predictive models, The Signal and The Noise, is referencing identifying real signals from statistical data, versus identifying false noise and relationships, and the risk of conflating the two.The market almost broke to new all-time highs earlier this month. Now the market is seeing increased overall volatility due to concerns about trade and Turkey, and significant individual stock volatility as we work through earnings season. It is worth wondering, which set of datapoints is the signal, and which is the noise?
Looking at sentiment indicator levels before the recent volatility in the market gives a clue to answer this question. As the market approached all-time highs, sentiment had grown very positive, with low correlations, falling short-interest levels, and active investor equity allocations at the higher end of ranges – investors were not expecting any bad news. This caused the recent volatility, investors are being spooked by the noise because they had not been positioned for it.
The real signal remains strong though. The fundamentals of this market remain exceptionally healthy. Thus far, over 90% of the S&P 500 has reported Q2 earnings, and almost 80% have beaten bottom-line estimates. UAFRS-adjusted EPS growth forecasts remains robust, and market valuations are pricing in much slower growth. Also, US corporate balance sheets remain robust. Even in a more volatile macro environment, there is limited risk of a credit shock to offer a catalyst for a major market sell-off.
The market is focusing on the noise, and in this case, overstating risks that could cause a sell-off. Investors that focus on the signal of a strong fundamental environment and use this buying opportunity will be rewarded.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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