Fundamental storm clouds are receding, so news related sell-offs offer opportunity
Political news flow has introduced market volatility, but fundamentals have actually been improving....
Read MoreThe Latest from Macro News
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April 23, 2017
When sentiment reaches neutral levels (like now) in a Stage 2 bull, be a buyer
In a Stage 2 bull market, momentum pushes stocks higher and investor sentiment rarely reaches negative levels....
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April 12, 2017
While valuations may appear aggressive, they are actually just around average compared to historical valuations in similar inflation and tax environments...
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March 23, 2017
Not to be a broken record, but when this next dip comes (and it will) buy it
Fundamental and management sentiment factors continue to point to a positive trend in underlying corporate profitability and growth, justifying current premium valuations. However, investor sentiment indicators remain overly effusive, creating reason for concern about increased volatility with any potential bad news....
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February 23, 2017
All signs still point to longer-term fundamental tailwinds, but near-term volatility
Fundamental and management sentiment factors continue to point to a positive trend in underlying corporate profitability and growth, justifying current premium valuations. However, investor sentiment indicators remain overly effusive, creating reason for concern about increased volatility with any potential bad news....
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January 19, 2017
Overly bullish investors point to the likelihood of a market dip, but be sure to buy it
Since the December Market Phase Cycle, where we highlighted that short-term sentiment had gotten ahead of admittedly bullish fundamentals, the market has been largely sideways. However investor sentiment indicators have not worked off their excesses, and remain exceptionally bullish, spelling risk for a short-term correction. But continued positive indicators around growth accelerating for the first time in years, and limited credit risk mean that any dip is an exceptional buying opportunity ahead of a 2ndstage bull market....
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December 22, 2016
Growth is emerging – but markets need to pause for fundamentals to catch up
Since Donald Trump was elected on 11/8 markets have risen by 6%, driven by potential benefits from his plans, and from improvements already seen in the economy. However, with short-term sentiment indicators now at extended levels and substantial capital having been deployed into the market, a period of settling, or a nearterm correction early in 2017, may be warranted before valuations and the market are likely to move higher....
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November 23, 2016
Green shoots of growth are starting to emerge post-election
Equity markets expect continued subdued growth and ROA’ reaching historic peaks. Expectations that have been correct for most of the past 5 years. However, growing management confidence, renewed easing of credit standards and a changed political environment pointing to signs that growth may be just around the corner. This could lead to earnings growth that would warrant equity upside....
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October 20, 2016
With many catalysts, and all conflicting, what to do? Wait.
Traditional multiples are at elevated levels and adjusted metrics point to a fully valued market. But long-term investor leverage metrics are low, implying potential for incremental investment
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in an environment with limited alternatives.... -
September 21, 2016
Analyzing credit default swaps (CDS) for corporate credits can be helpful to understand current market dynamics. It can help investors understand where there may be value inside the investible credit environment. It can also help investors understand when there is panic in the credit market that is not being reflected in the equity market, which may be an early warning sign for equity investors....
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September 21, 2016
Corrections remain buying opportunities due of lack of investment alternatives
Correlation levels have spiked recently, signaling potential for continued near term volatility, especially with near-term sentiment indicators stretched. But investors have substantial dry powder available based on credit balances, and based on the trillions of dollars currently parked on zero-interest bearing debt. Even with current fully valued equity markets, a rotation away from fixed income into the equity markets could facilitate upside....
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September 16, 2016
“Net/Gross PP&E” levels are yet another indicator that U.S. firms are reluctant to invest. This forestalls any growth cycle and contributes to market multiples remaining at 20x to 22x Value-to-Earnings ratio and thereby a sideways to slightly upward S&P 1500...
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August 16, 2016
Maybe sentiment isn’t too extended – Interest rates and leverage offer upside
Short-term sentiment indicators remain very elevated, and the US equity market remains fully valued. But investors have substantial dry powder available based on credit balances, and based on the trillions of dollars currently parked on zero-interest-bearing debt. If investors start deploying leverage as they have historically and move money away from fixed income, there could be more upside in this market, even though fundamental upside appears limited....
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July 31, 2016
ROA’ forecast revisions are a positive, but excessive investor optimism is a risk.
After positive ROA’ forecast revisions, 2016 ROA’ is forecast in line with market expectations, as is growth, implying market expectations are reasonable. However, investor sentiment indicators have all reached excessively optimistic levels, signaling risk for a pullback. Credit indicators continue to not signal a catalyst, however with fully valued markets and excessive investor optimism, upside appears muted and downside risk is elevated....
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July 15, 2016
The ratio of Net PP&E to Gross PP&E (property, plant, and equipment) is a useful metric to use to understand when companies have been “milking” their balance sheets or ramping up investment in the face of expected growth opportunities. When Net/Gross PP&E ratios dramatically rise (as they did in 2005-2007), it means that management teams are aggressively investing in their assets to drive growth. When Net/Gross PP&E levels fall, management teams are instead deferring maintenance capex and managing for higher free cash flows in the near term....
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June 15, 2016
Catalysts for growth remain absent, increasing valuation and sentiment risk.
Equity valuations continue to imply expectations for either a rebound in ROA’, or an acceleration of growth. Investor sentiment also points to growing positive expectations. However, management sentiment remains subdued and investment indicators continue to point negatively, limiting potential for growth upside. Without this growth, bullish investor sentiment and premium market valuations imply potential for downside risk going forward....
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May 18, 2016
Investor sentiment appears ahead of management action, spelling volatility.
For the first time in several months, management’s confidence around growth turned more positive in April. However, investor sentiment has already grown rather optimistic, and equity market valuations are already pricing in ROA’ improvement. If management’s confidence is confirmed in coming months, with renewed investment and a resumption of ROA’ expansion, equity markets are currently fairly valued. On the other hand, if investor expectations are disappointed, the lower end of the recent market range may be retested....
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April 25, 2016
- Our concerns about value destruction in Corporate China were highlighted in last month’s Seeking Alpha article, Economic Suicide in China, which garnered a number one ranking for readership in its category, and 75+ comments
- Much has been in the press about the problems with Chinese banks. However, we analyzed the aggregate performance of 850+ publicly-traded Chinese non-financial firms, adjusting for financial statement reporting distortions to get a clear apples-to-apples comparability over time and around the world...
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March 1, 2016
- The optimists’ argument is that problems can be avoided in the short term. What about after that?
- Laurence Scofield and Joel Litman provide a research perspective on China from both top-down and bottom-up fundamental perspectives.
- China’s debt-to-GDP ratio today dwarfs that of Japan at the time it fell into crisis in 1989....
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September 2, 2015
Throughout history, for a correction to turn into a bear market, a catalyst has been needed beyond valuation levels and earnings trends. Specifically, bear markets need credit destruction. The credit seizures can come from approaching debt maturity headwalls for corporations for which they greatly struggle to refinance. It has also come from excessive investor leverage, such as investor margin accounts. Today, corporate and investor balance sheets are not flashing signs that would imply the current correction could turn into a bear market. This current correction is looking similar to the opportunities we saw in October 2014 and Spring 2013 before that....
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