Valens Market Phase Cycle Monitor & Corporate Credit Macro View - May 2018
In the new Star Wars movie coming out on Memorial Day weekend, a young Han Solo flips his classic line “I've got a bad feeling about this†at what appears to be a tense moment for the crew. His rare optimism seems appropriate as we exit Q1 2018 earnings season.With Q1 in the books, 2018 forecast ROA' is coming into focus. ROA' is forecast to continue to accelerate in 2018, rising to historic peak 12% levels and further in 2019. Asset' growth also has started to accelerate, and is forecast to continue to be strong in 2018.
While fundamentals appear to be starting to show acceleration, the market has shown more pessimism. Market expectations are now for returns to actually fall back to 2016 cycle lows going forward, and Asset' growth is slowing too. This presents an opportunity for fundamental upside if companies can continue to execute.
There are several reasons to think that companies can continue to execute. Management teams are growing more confident about investing in growth, capacity utilization levels are rising to levels that may lead to capex spending accelerating, and credit standards remain easy, providing access to credit.
Credit risk, already limited, has further improved, limiting the catalyst for a downside shock to the market. Corporate management teams have rolled a significant amount of their debt maturities to 2021 and beyond, extending the runway to invest without risking a cash crunch.
With fundamental pointing favorably and markets not yet fully capturing it, there are a lot of reasons to agree with Han's …“I've got a really good feeling about this.â€
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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