Valens Market Phase Cycle Monitor & Corporate Credit Macro View - December 2018
The basis for the Market Phase Cycle, and what 150+ years of market cycle research shows, is that credit market cycles drive economic cycles and equity market cycles. When access to credit is easy, economic cycles trend positively as do equity markets. When credit markets tighten, and credit destruction happens, equity markets and the economy react similarly.This is not just the case in 2008 or 1929, this is the case for every single economic cycle in the last 150+ years in the US and globally. Credit cycles lead equity and economic cycles.
Without a crisis in the credit market, an equity market sell off does not turn into a bear market rout. Contrary to what headlines might want to tell investors, the data does not show any rout at all:
-Senior Loan Office Survey statistics still show credit easing
-C&I loan growth remains robustly positive
-CDS levels for high yield, cross over and investment grade corporate credit all remain at very low, safe levels, well below even 2015 levels, let alone 2008 levels
-C&I loan charge-offs continue to trend downward
-Corporate credit debt maturity headwalls are not material until 2021, meaning the risk of refinancing issues, causing a credit crunch is very low until that period
-Consumer balance sheets remain very healthy, with debt service obligations at historic lows relative to income
None of these datapoints point to an imminent risk of credit collapse. And this is before looking at the fact that corporate profitability is strong, valuations remain low, management teams remain confident in their outlook, and investor sentiment is at very negative levels, all pointing towards reason for optimism.
This sell-off continues to be an opportunity to buy the dips, not run for the hills.
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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