Valens Market Phase Cycle Monitor & Corporate Credit Macro View - February 2019
John Templeton was likely the first, and unsurprisingly one of the best, at summarizing what really drives market cycles. It is likely that Templeton would look at today's market and not yet see the euphoria he referenced in the above quote.He would not see euphoria from analysts. Analysts are forecasting as-reported EPS growth to slow from 26% last year to 11.3% this year. Certainly management teams are not yet showing euphoria in terms of interest in investing in their companies, with M&A spend almost $1tn lower in 2018 than at its 2015 peak. Nor would he see investors showing euphoria. As-reported P/E may look elevated at first glance at 19.7x, but this is slightly below average valuations for the current low-inflation, low-tax environment. For each of these metrics, UAFRS metrics tell similar stories.
This is not a young bull market. But markets do not die of old age, there needs to be a catalyst. Credit issues are generally that catalyst. However, credit spreads and credit fundamentals do not point to concerns in the next year, especially with high yield CDS at low 200bps levels, and investment grade CDS still at sub 50bps. Some credit signals may point to potential concerns 2 years down the road, but there are no catalysts to take us to euphoria and turn it into despair until those catalysts become more real.
The market continues to climb a wall of worry. And that is good for investors, because that worry tells us we are not yet at the euphoric stage. Because of that, the Market Phase Cycle points to reasons to continue being optimistic for equity market appreciation, and we continue to see compelling stock ideas to make investors money in the current market environment.
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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