Valens Research US Market Phase Cycle Monitor & Corporate Credit Macro View - December 2017
As the world rings in to the new year in a few days, many will sing Auld Lang Syne. The lyrics ask if we should put the past behind us, or take the opportunity to remember the friendships that got us where we are today. It is a perfect time to reflect on one old friend…the current bull market. It is approaching 7 years old (or even longer, depending on how you define the beginning of the bull)… The phase “bull markets don't die of old age” has been written a lot of use in the past year, because of the age of this one. John Templeton's statement that, instead of old age, bull markets “die on euphoria” is relevant when reflecting on some investors concerns as we look to 2018. We are still far away from euphoria, by any definition: Equity market valuations do not appear euphoric. They do not appear to be pricing in the substantial boost in profitability that corporate tax cuts are about to deliver, let alone the significant potential for upside from any resumption in corporate investment. Investor sentiment indicators are far from euphoric. Both short-term and intermediate-term also appear very muted Credit market euphoria, the greatest signal of the impending death of a bull market, also appears far off. M&A and corporations taking on sizable short-term leverage to fuel growth, which could spell a crisis, remains a distant risk. While CDS levels remain tight, it is justified by fundamentals. So instead of having fears of the year ahead, may we all enjoy the holidays and the new year, knowing we don't need to worry about this old friend leaving us as we ring in 2018.
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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