Valens Market Phase Cycle Monitor & Corporate Credit Macro View - June 2018
Equity markets rallied 6% from early-May to mid-June. Concerns about inflation, interest rates, geopolitical problems, and trade issues dropped to the background in the face of an earnings season that produced strong earnings and management confidence about corporate outlooks.That rally, justified by fundamentals, moved investor sentiment from levels that had been overly conservative the last several months to levels that appear rather extended in the near-term.
This is occurring at a time when geopolitical commentary is just starting to heat up. US tariff discussions, European political issues, and geopolitical volatility in Asia all remain headline risks. With investors having rapidly moved to a more bullish position, this could create volatility in the near-term.
However, as recent Market Phase Cycle reports have highlighted, if there is volatility, it is a buying opportunity, in the midst of a strong second-stage bull market. Investors have a lot of reasons to see through the headlines:
- Corporate fundamentals remain strong. Earnings growth is robust and adjusted-ROA are at historic peaks. At the same time, valuations are relatively muted.
- Corporate credit risk remains low, with CDS and iCDS levels at very healthy ranges. Debt maturity headwalls are several years in the future, limiting refinancing risk. Also, lending standards remain loose and easing, limiting risk for corporations accessing credit. Bear markets do not happen without a credit crisis
- Investment is primed to accelerate, boosting earnings growth. Management teams continue to grow more confident about their outlook. Old assets and rising capacity utilization signal a required capex cycle just as growth is accelerating.
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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