Valens Research US Market Phase Cycle Monitor & Corporate Credit Macro View - February 2018
In the last month's Market Phase Cycle, we highlighted inflation as a key risk that investors would be focused on as we moved through 2018. Shortly thereafter, the market had a correction due largely to this issue and its implications for interest rates and equity investors. Inflation also is a negative for equity multiples longer-term because of its implication for real returns for investors. In essence, inflation leads to lower valuations in the long-term. However, in the nearer-term, inflation is driven by a strongly growing economy that will facilitate earnings growth. Even if rising inflation causes market discount rates to rise slightly, that stronger earnings growth justifies higher multiples. The market is not yet pricing in that stronger earnings growth. Sentiment indicators did not fully %u201Cwash out%u201D in the market correction earlier in February, not yet giving an %u201Call clear%u201D for the market to move higher immediately. However, based on accelerating earnings growth, reasonable valuations, and safe credit risk, it continues to be a buy-the-dip market environment. As the report highlights: Bear market cycles do not happen without a credit crisis. UAFRS-based fundamental credit risk is muted until 2020-2021. Lending surveys and charge-offs at an aggregate level also point to further credit creation in the near-term, not destruction UAFRS analysis shows market valuations are not aggressive and earnings growth justifies upside %u2013 it is this strong earnings growth that is driving inflation Investor sentiment is mixed - neither clearly positive or negative in the near-term - however, fundamentals warrant a buy-the-dip market if any re-test occurs
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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