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Credit Conditions index explanation Guide
Please see important disclosures at the end of this report.
Credit Conditions IndexExplanation Guide
Ned DavisResearch
Inc.
Alejandra Grindal, International EconomistJoseph F. Kalish, Senior Macro Strategist
The credit cycle is a crucial determinant of economic and financial market performance. Easy credit is associated with strong economic growth and above-average stock market returns, whereas tight credit is associated with weak growth and below average equity returns. Recent spread widening makes this an ideal time to unveil our model. In this issue of Trends & Themes, we introduce the model, describe its applications, and examine its components.
The Model
Clients can now easily and objectively track the credit situation by looking at just a single gauge. Created using 25 market and survey-based data series that evaluate credit standards and conditions, the indicators are divided into two equal-weighted components: the NDR Business Credit Conditions Index and the NDR Consumer Credit Conditions Index.
The NDR CCI has been at exceptionally favorable levels over the past three years. While the index is still safely above its historical mean, it has begun to trend down in recent months (below). Much of the latest decline is attributable to deteriorating consumer credit conditions, particularly for mortgages.
www.ndr.com
Monthly Data 8/31/1990 - 6/30/2007
(E555)
6/30/2007 = 65.5
NDR Credit Conditions Index*
*Equal Weighted Average of Business and Consumer Indexes
Mean = 60.6
Credit Conditions Favorable
Credit Conditions Unfavorable
35404550556065707580
35404550556065707580
NDR Business Credit Conditions Index
6/30/2007 = 78.9
Mean = 64.6
Credit Conditions Favorable
Credit Conditions Unfavorable
2530354045505560657075808590
2530354045505560657075808590
NDR Consumer Credit Conditions Index
6/30/2007 = 52.1
Mean = 56.7
Credit Conditions Favorable
Credit Conditions Unfavorable3942454851545760636669
3942454851545760636669
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
NDR Credit Conditions Index and its ComponentsNew Chart
Summary:
The NDR Credit Conditions Index (CCI) is designed to objectively measure credit conditions in the U.S. market, specifically the cost & availability of credit. The index consists of two equal-weighted components and historically evaluates business and consumer credit conditions. Current conditions are positive for the economy and stocks.
The NdR CRediT CoNdiTioNS iNdex July 2007
3 July 2007 Trends & Themes #07.07 Page 2
Please see important disclosures at the end of this report.
NdR CRediT CoNdiTioNS iNdex CoMpoNeNTS
Chart Consumer Credit Conditions index page #
B0033 Mortgage Backed Securities Option-Adjusted Spreads 8
E0184 Mortgage Delinquency Rates 7
E0538 Delinquency Rates on Consumer Loans at Commercial Banks 8
E519 Debt/Net Worth of Household Sector 10
E0509 Household Financial Obligations Ratio 9
E510 Household Liquid Assets/Short-Term Debt Obligations 10
GIX4161 Senior Loan Officer Survey: Lending Standards for Consumer Credit Cards 9
GIX4161 Senior Loan Officer Survey: Lending Standards for Other Consumer Loans 9
GIX4162 Senior Loan Officer Survey: Lending Standards for Residential Mortgages 7
Chart Business Credit Conditions index
B385 Investment Grade Credit Default Swap Spreads 11
B385A High Yield Credit Default Swap Spreads 11
B368 Corporate Option-Adjusted Spreads 12
B384 High Yield Option-Adjusted Spreads 12
B160 10-Year U.S. Dollar Swap Spreads 12
B0124 30-Day Nonfinancial Commercial Paper Spreads 13
B0122 LIBOR minus T-Bill Yield 13
E537 Delinquency Rates on C&I Loans at Commercial Banks 14
E615 Debt/Net Worth of Nonfinancial Corporations 17
E0623 Net Interest/Cash Flow of Nonfinancial Corporations 17
E617 Short-Term Debt/Credit Market Debt of Nonfinancial Corporations 16
E617 Liquid Assets/Short-Term Liabilities of Nonfinancial Corporations 16
E0530 Senior Loan Officer Survey: Lending Standards for Large Businesses 14
E0531 Senior Loan Officer Survey: Lending Standards for Small Businesses 15
E550 NACM Credit Managers’ Index 16
E0276A NFIB Expected Credit Conditions Index 15
Table 1
Table 1 lists the components used in the NDR Consumer and Business CCIs as well as the indicators’ corresponding charts. The indicators for each index range from market-based variables such as credit default swap spreads (CDS) and option-adjusted spreads (OAS) to survey-based indicators such as the Senior Loan Officer Survey and the NACM Credit Managers’ Index. The CCI and its component indexes have a maximum possible reading of 100 and a minimum possible reading of zero. Each index is designed such that a high number depicts more positive credit conditions (100 = all indicators point to record high credit conditions), while a low number is indicative of poor conditions (0 = all indicators at record low credit conditions). Each individual indicator was assigned a value of 100 at a historically positive condition, a value of zero at a historically negative condition, where 50 would equal neutral conditions. The model is normally updated at the beginning of each month.
Model AppliCATioNS
3 July 2007 Trends & Themes #07.07 Page 3
Please see important disclosures at the end of this report.
At its current level, the NDR CCI corresponds to above trend economic growth. The index, however, has been creeping closer to the intermediate zone, which is consistent with trend growth.
(E555A)
Monthly Data 8/31/1990 - 6/30/2007 (Log Scale)
Coincident Indicators Gain/Annum When:(8/31/1990 - 6/30/2007)
NDR Credit Gain/ %Conditions Index Is: Annum of Time* Above 61 3. 0 56. 2
Between 47.5 and 61 1. 8 26. 947.5 and Below -1. 0 16. 9
Source: The Conference Board88.089.891.693.495.297.199.0
101.0103.0105.0107.1109.2111.3113.5115.8118.1120.4122.8
88.089.891.693.495.297.199.0
101.0103.0105.0107.1109.2111.3113.5115.8118.1120.4122.8
Strong Economic Growth
Economic Contraction
6/30/2007 = 65.5
Shaded Areas RepresentNBER Recessions
33363942454851545760636669727578
33363942454851545760636669727578
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
The Index of Coincident Indicators
NDR Credit Conditions Index
New Chart
(E555B)
Monthly Data 8/31/1990 - 6/30/2007
5/31/2007 = 3.3%
Real PCE Gain/Annum When:(8/31/1990 - 5/31/2007)
NDR Credit Gain/ %Conditions Index Is: Annum of Time
Above 57 3. 9 52. 8* Between 48 and 57 2. 9 31. 3
48 and Below 2. 4 16. 00
1
2
3
4
5
0
1
2
3
4
5
Credit Conditions Favorable
Credit Conditions Unfavorable
6/30/2007 = 52.1
Shaded Areas RepresentNBER Recessions
3840424446485052545658606264666870
3840424446485052545658606264666870
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Real Personal Consumption Expenditures (Smoothed Year-to-Year Change)
NDR Consumer Credit Conditions Index
New Chart
Part of the movement toward more restrained growth can be explained by the consumer. The chart below shows real personal consumption expenditures versus the NDR Consumer CCI. Since the beginning of the year, the NDR Consumer CCI has been in the neutral zone, which is consistent with more subdued consumption growth.
3 July 2007 Trends & Themes #07.07 Page 4
Please see important disclosures at the end of this report.
Nonetheless, corporate profit growth remains strong. Profit growth tends to accelerate when credit conditions are positive and slows when the credit situation is deteriorating. But higher interest rates and reduced consumption spending pose risks to the profit outlook.
(E555D)
Quarterly Data 12/31/1990 - 6/30/2007 (Log Scale)
3/31/2007 = 1671.4
$ Billions
Profits From Current ProductionGain/Annum When:
(12/31/1990 - 6/30/2007)
NDR Credit Gain/ %Conditions Index Is: Annum of Time* Above 64 10. 9 49. 2
Between 49.5 and 64 7. 6 30. 849.5 and Below 5. 2 20. 0
448481516554595639686737791849912979
1052112912131302139815011612
448481516554595639686737791849912979
1052112912131302139815011612
Credit Conditions Favorable
Credit Conditions Unfavorable
6/30/2007 = 66.9
Shaded Areas RepresentNBER Recessions
363942454851545760636669727578
363942454851545760636669727578
4 119912 3 4 1
19922 3 4 1
19932 3 4 1
19942 3 4 1
19952 3 4 1
19962 3 4 1
19972 3 4 1
19982 3 4 1
19992 3 4 1
20002 3 4 1
20012 3 4 1
20022 3 4 1
20032 3 4 1
20042 3 4 1
20052 3 4 1
20062 3 4 1
20072
Profits From Current Production
NDR Credit Conditions Index
New Chart
Quarterly Data 6/30/1991 - 12/31/2007
(E555C)
NDR Credit Conditions IndexAdvanced Two Quarters
12/31/2007 = 66.9Scale Left
( )
34353637383940414243444546474849505152535455565758596061626364656667686970717273747576777879
Nonresidential Fixed Investmentas a Percentage of GDP
(Year-to-Year Point Change)3/31/2007 = 0.1
Scale Right( )
Correlation Coefficient = 0.76-1.7
-1.6
-1.5
-1.4
-1.3
-1.2
-1.1
-1.0
-0.9
-0.8
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2 3 4 119922 3 4 1
19932 3 4 1
19942 3 4 1
19952 3 4 1
19962 3 4 1
19972 3 4 1
19982 3 4 1
19992 3 4 1
20002 3 4 1
20012 3 4 1
20022 3 4 1
20032 3 4 1
20042 3 4 1
20052 3 4 1
20062 3 4 1
20072 3 4
NDR Credit Conditions Index vs Nonresidential Fixed InvestmentNew Chart
There has also been a strong positive correlation between capital expenditures and the NDR CCI, as easier credit standards and terms encourage capital spending.
3 July 2007 Trends & Themes #07.07 Page 5
Please see important disclosures at the end of this report.
When credit conditions have been favorable, it hasn’t been so great for bonds on average We have found that when the index is above the upper parameter, the economy tends to be strong, which is consistent with favorable credit conditions and downward pressure on bond prices. Levels below 49.5 have been bullish for bonds.
(S915)
Monthly Data 8/31/1990 - 6/30/2007 (Log Scale)
S&P 500 Gain/Annum When:
NDR Credit Gain/ %Conditions Index Is: Annum of Time* Above 57 15. 2 64. 9
Between 47.5 and 57 6. 1 18. 447.5 and Below -6. 4 16. 8
320350383419458501548599655716783857937
10241120122513401465
320350383419458501548599655716783857937
10241120122513401465
Credit Conditions Favorable
Credit Conditions Unfavorable
6/30/2007 = 65.5
Shaded Areas RepresentNBER Recessions
33363942454851545760636669727578
33363942454851545760636669727578
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Standard & Poor's 500 Stock Index
NDR Credit Conditions Index
New Chart
(B345)
Monthly Data 8/31/1990 - 6/30/2007 (Log Scale)
Lehman Long-Term Govt Bond IndexGain/Annum When:
NDR Credit Gain/ %Conditions Index Is: Annum of Time* Above 63.5 0. 3 51. 0
Between 49.5 and 63.5 1. 9 26. 749.5 and Below 4. 4 22. 3
125212821313134413761409144314771512154815851623166217011742178418261870
125212821313134413761409144314771512154815851623166217011742178418261870
Credit Conditions Favorable
Credit Conditions Unfavorable
6/30/2007 = 65.5
Shaded Areas RepresentNBER Recessions
33363942454851545760636669727578
33363942454851545760636669727578
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Lehman Brothers Long-Term Treasury Bond Price Index
NDR Credit Conditions Index
New Chart
When credit conditions have been favorable, the S&P 500 has gained at over a 15% per annum rate. When the CCI has been below the lower parameter, the S&P has experienced an average annual loss of 6.4%. That compares to an overall gain/annum of 9.0% since 1990.
3 July 2007 Trends & Themes #07.07 Page 6
Please see important disclosures at the end of this report.
The components of the NDR CCI can help with equity sector selection. When the NDR Consumer CCI has fallen below the lower parameter, it has indicated that underperformance of the Consumer Discretionary sector has reached an extreme, making it a good time to buy. Favorable credit conditions, however, have been associated with underperformance.
(ESX2555)
Monthly Data 8/31/1990 - 6/30/2007 (Log Scale)
S&P Consumer Discretionary Sector RSGain/Annum When:
(8/31/1990 - 6/30/2007)
NDR Credit Gain/ %Conditions Index Is: Annum of Time
Above 60 -4. 1 36. 6* Between 48.5 and 60 1. 4 47. 0
48.5 and Below 8. 7 16. 4
17.1617.5417.9218.3118.7119.1119.5319.9520.3920.8321.2921.7522.2222.7123.2023.7124.2224.75
17.1617.5417.9218.3118.7119.1119.5319.9520.3920.8321.2921.7522.2222.7123.2023.7124.2224.75
Credit Conditions Favorable
Credit Conditions Unfavorable6/30/2007 = 52.138
40424446485052545658606264666870
3840424446485052545658606264666870
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Standard & Poor's Consumer Discretionary Sector Relative Strength Line
NDR Consumer Credit Conditions Index
New Chart
(ESX4055)
Monthly Data 8/31/1990 - 6/30/2007 (Log Scale)
S&P Financials Sector RS Gain/Annum When:(8/31/1990 - 6/30/2007)
NDR Credit Gain/ %Conditions Index Is: Annum of Time* Above 67 0. 1 54. 4
Between 48 and 67 4. 0 25. 348 and Below 12. 6 20. 3
16.517.318.219.120.021.022.123.224.325.526.828.129.530.932.534.135.7
16.517.318.219.120.021.022.123.224.325.526.828.129.530.932.534.135.7
Credit Conditions Favorable
Credit Conditions Unfavorable
6/30/2007 = 78.9
Shaded Areas RepresentNBER Recessions
2428323640444852566064687276808488
2428323640444852566064687276808488
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Standard & Poor's Financials Sector Relative Strength Line
NDR Business Credit Conditions Index
New Chart
Similarly, we found that when the NDR Business CCI has reached the lower parameter in the chart below, the Financials sector relative strength line has already bottomed, indicating deteriorating credit conditions have already been priced in, and again, a good time to buy. Favorable conditions, however, have not necessarily been positive for Financials.
3 July 2007 Trends & Themes #07.07 Page 7
Please see important disclosures at the end of this report.
Model CoMpoNeNTS: CoNSuMeR
Much of the recent deterioration in the consumer credit situation is associated with a reduction in mortgage lending standards. With home loans comprising over two-thirds of household debt, tighter mortgage lending standards have had a detrimental effect on the consumer component of our index. The total mortgage delinquency rate has been flirting with its highest level in three years, despite decreasing slightly in Q1. Delinquency rates on loans 60 days or more past due, a measure we like to emphasize, reached 1.91% in Q1, the most in nearly 20 years.
Quarterly Data 3/31/1979 - 3/31/2007
(E0184)
Total
4.24.54.85.15.45.7
4.24.54.85.15.45.7
30 Days Past Due
2.803.003.203.403.603.804.00
2.803.003.203.403.603.804.00
60 Days Past Due
0.600.650.700.750.800.850.900.95
0.600.650.700.750.800.850.900.95
90 Days or More Past Due
Series Break Before 20020.50
0.60
0.70
0.80
0.90
1.00
0.50
0.60
0.70
0.80
0.90
1.00
60 or More Days Past Due
Source: Mortgage Bankers AssociationWashington, D.C.
1.301.401.501.601.701.801.90
1.301.401.501.601.701.801.90
1980 1985 1990 1995 2000 2005
Mortgage Delinquency Rates
Monthly Data 8/31/1990 - 7/31/2007 (Log Scale)
(GIX4162)
Net % of Commercial BanksTightening Standards
for Residential Mortgages
7/31/2007 = 25.4%
Tighter Standards
Easier Standards-15-12-9-6-30369
12151821242730
-15-12-9-6-30369
12151821242730
Net % of Commercial BanksReporting Increasing Demand
for Residential Mortgages 7/31/2007 = -18.9%
Increasing Demand
Decreasing Demand
-70-60-50-40-30-20-100
102030405060
-70-60-50-40-30-20-100
102030405060
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Lending Standards for Residential Mortgages
Demand for Residential Mortgages
Last Data Point NDR Estimate
In a recent survey, a net 25% of commercial banks were tightening standards for home loans compared with three months earlier, the highest in 16 years. Just a year earlier, a net 9.4% of banks were loosening standards.
most in 20 years
highest in 16 years
3 July 2007 Trends & Themes #07.07 Page 8
Please see important disclosures at the end of this report.
OAS on mortgage-backed securities (MBS) have been widening, an indication of greater risk, to its highest levels in nearly four years.
Daily Data 8/15/2000 - 7/02/2007
(B0033)
Lehman Mortgage Backed Securities (MBS) Yield
4
5
6
7
4
5
6
7
Lehman Average MBS Option-Adjusted Spread (OAS)In basis points
30405060708090
100110
30405060708090
100110
MBS OAS/Lehman Aggregate OASSource: Lehman Brothers
405060708090
100110120
405060708090
100110120
S N J2001
M M J S N J2002
M M J S N J2003
M M J S N J2004
M M J S N J2005
M M J S N J2006
M M J S N J2007
M M J
Mortgage Backed Securities Yields, OAS and Relative OAS
Quarterly Data 3/31/1991 - 3/31/2007
(E0538)
Consumer Loans 3/31/2007 = 2.96%
All measures seasonally adjusted2.82.93.03.13.23.33.43.53.63.73.83.94.04.1
2.82.93.03.13.23.33.43.53.63.73.83.94.04.1
Credit Cards
3/31/2007 = 4.06%3.43.63.84.04.24.44.64.85.05.25.4
3.43.63.84.04.24.44.64.85.05.25.4
Other Consumer Loans 3/31/2007 = 2.30%
2.22.32.42.52.62.72.82.93.03.13.23.33.43.5
2.22.32.42.52.62.72.82.93.03.13.23.33.43.5
119912 3 4 1
19922 3 4 1
19932 3 4 1
19942 3 4 1
19952 3 4 1
19962 3 4 1
19972 3 4 1
19982 3 4 1
19992 3 4 1
20002 3 4 1
20012 3 4 1
20022 3 4 1
20032 3 4 1
20042 3 4 1
20052 3 4 1
20062 3 4 1
2007
Delinquency Rates on Consumer Loans at Commercial Banks
outside of home loans, consumer credit conditions are more sanguine. Delinquency rates on credit card loans and other consumer loans have been rising since bottoming in early 2006, but they are still below their historical averages.
highest since 2003
credit cycle has now turned for non-home loans
3 July 2007 Trends & Themes #07.07 Page 9
Please see important disclosures at the end of this report.
Commercial banks’ lending standards for consumer loans outside of mortgages are mixed. While standards for credit card loans have been easing at the fastest pace in at least 11 years, banks have been tightening standards on other consumer loans.
Consumers’ ability to service debt has been deteriorating. The Financial Obligations Ratio, which is all required debt payments (i.e. minimum payments on outstanding mortgage and consumer debt, vehicle leases, homeowners’ insurance, property taxes, and rent) as a percentage of disposable income, has been trending upward since the collection of this data began in 1980. The ratio fell to 19.2% in Q1 from 19.4%, but if mortgage rates remain high, this ratio could jump to a new record in the next few quarters.
(GIX4161)
Monthly Data 8/31/1966 - 7/31/2007
Net Percentage of BanksMore Willing to Make
Consumer Installment Loansvs. Three Months Prior
Banks More Willing to Make Loans
Banks Less Willing to Make Loans
7/31/2007 = 9.9%
-60-45-30-150
153045
-60-45-30-150
153045
Net Percentage of BanksTightening Standards on
Consumer Credit Card Loansvs. Three Months Prior
Banks Tightening Lending Standards
Banks Easing Lending Standards
7/31/2007 = -11.1%
-505
1015202530354045
-505
1015202530354045
Net Percentage of BanksTightenting Standards onOther Consumer Loansvs. Three Months Prior
Banks Tightening Lending Standards
Banks Easing Lending Standards
7/31/2007 = 7.8%
-8-4048
121620
-8-4048
121620
7/31/2007 = -24.0%Stronger Demand For Consumer Loans
Weaker Demand For Consumer Loans
Net Percentage of BanksReporting Stronger Demand
for Consumer Loansvs. Three Months Prior
-40-30-20-100
102030
-40-30-20-100
102030
1970 1975 1980 1985 1990 1995 2000 2005
Bank Lending Practices for Consumer Loans
Quarterly Data 3/31/1980 - 3/31/2007
(E0509)
Financial Obligations Ratio3/31/2007 = 19.2%
16
17
18
19
16
17
18
19
Homeowner Financial Obligations Ratio3/31/2007 = 18.0%
Scale Right( )
14
15
16
17
Renter Financial Obligations Ratio3/31/2007 = 25.1%
Scale Left( )
23
2425
26
2728
29
3031
Debt Service Ratio3/31/2007 = 14.3%
10.811.111.411.712.012.312.612.913.213.513.814.114.4
10.811.111.411.712.012.312.612.913.213.513.814.114.4
1980 1985 1990 1995 2000 2005
Household Debt Service and Financial Obligations Ratios
obligations and debt service remain
in uptrends
3 July 2007 Trends & Themes #07.07 Page 10
Please see important disclosures at the end of this report.
Similarly, the household sector’s debt to net worth ratio has been reaching record levels of 24% over the past year. If mortgage rates remain elevated and house prices stagnate, this could further lift the ratio, potentially limiting the ability for consumers to take on more debt, worsening credit conditions for consumers.
Quarterly Data 3/31/1952 - 3/31/2007
(E519)
Debt / Net Worth of Private Sector
3/31/2007 = 29.3%121416182022242628
121416182022242628
Debt / Net Worth of Household Sector
3/31/2007 = 23.9%89
1011121314151617181920212223
89
1011121314151617181920212223
Debt / Net Worth of Business Sector
3/31/2007 = 44.4%182124273033363942454851
182124273033363942454851
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Debt / Net Worth of the Private SectorChart has been modified.
(E510)
Quarterly Data 3/31/1960 - 3/31/2007
Household Liquid Assets = $9788.4______________________________Total Household Liabilities = $13432.3 = 72.9%
Scale Left ( )
$ Billions
Data Subject To Revisions ByThe Federal Reserve Board
Household Liquid Assets =Deposits + Credit Market Investments
72757881848790939699
102105108111114117120123126129132135138141144147150153156159162165168171174177180
Household Liquid Assets = $9788.4______________________________Short-Term Household Liabilities = $496.2 = 1972.5%
Scale Right ( )
152415711619166817191772182618821940199920602123218822552324239524682544262227022785287029583048314132373336343835443652376438793998412042464376451046484790
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Household Liquidity MeasuresChart has been modified.
Household liquidity, which is the ratio of household liquid assets (e.g. cash, checking, CD’s, money market funds, etc.) to total household liabilities, has been shrinking drastically over the past 40 years. Such a low number is worrying. With less cash on hand, households are more likely to default on loan payments. Liquid assets as a percentage of short-term liabilities, however, has been trending upward since reaching a record low in 2000.
record debt
3 July 2007 Trends & Themes #07.07 Page 11
Please see important disclosures at the end of this report.
Model CoMpoNeNTS: BuSiNeSSDaily Data 3/21/2005 - 7/02/2007
(B385)
North America Investment Grade IndexIn Basis Points 7/02/2007 = 42.77
Source: Dow Jones Indexes35404550556065707580
35404550556065707580
North America Investment Grade High Volatility Index 7/02/2007 = 105.89
80
100
120
140
160
180
80
100
120
140
160
180
Emerging Markets Index 7/02/2007 = 112.85
120150180210240270300
120150180210240270300
Emerging Markets Diversified Index 7/02/2007 = 76.31
80
100
120
140
160
180
80
100
120
140
160
180
A M J J A S O N D J2006
F M A M J J A S O N D J2007
F M A M J J
Credit Default Swap Spreads I (Investment Grade and Emerging Markets)
Daily Data 4/13/2005 - 7/02/2007
(B385A)
North America Crossover Index 7/02/2007 = 200.00In Basis Points
120140160180200220240260
120140160180200220240260
North America High Yield Index 7/02/2007 = 342.35
Source: Dow Jones Indexes200250300350400450500
200250300350400450500
North America High Yield BB Index 7/02/2007 = 242.62
150180210240270300330360
150180210240270300330360
North America High Yield B Index 7/02/2007 = 325.98
240270300330360390420
240270300330360390420
M J J A S O N D J2006
F M A M J J A S O N D J2007
F M A M J J
Credit Default Swap Spreads II (High Yield)
Business credit conditions have been quite favorable over the past three years. But that has begun to change. In June, higher interest rates coupled with weaker consumer credit conditions, particularly those associated with the subprime market, are beginning to make investors uneasy, subsequently affecting the pricing of business credit risk.
Spreads on investment grade CDS widened last month, an indication of increased risk, to the most in a year (above). High yield CDS spreads have moved to the highest level since last August (below).
ig spreads widening
HY spreads widening
3 July 2007 Trends & Themes #07.07 Page 12
Please see important disclosures at the end of this report.
Likewise, the corporate OAS has broadened, with investment grade breaking out to levels last seen in December 2005. And the high yield OAS has begun to trend upward as well.
Weekly Data 7/07/1989 - 6/29/2007
(B368)
Mean = 29
U.S. Agencies
In Basis Points102030405060708090
102030405060708090
Mean = 65
Mortgage-Backed Securities
40
60
80
100
120
40
60
80
100
120
Mean = 104
U.S. Investment-Grade Corporate Credit
60
90
120
150
180
210
240
60
90
120
150
180
210
240
Mean = 517
U.S. High Yield
OAS = Option-Adjusted SpreadNDR Estimates prior to August 15, 2000
Source: Lehman Brothers300400500600700800900
1000
300400500600700800900
1000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
OAS on Agencies, Mortgages, Corporates, and High Yield
(B160)
Daily Data 12/31/1997 - 7/02/2007
10-Year U.S. Dollar Swap Yield7/02/2007 = 5.62%
( )
10-Year Treasury Yield7/02/2007 = 5.00%
( )
3.33.63.94.24.54.85.15.45.76.06.36.66.97.27.57.8
3.33.63.94.24.54.85.15.45.76.06.36.66.97.27.57.8
Brackets plotted at +/- 1 S.D.
7/02/2007 = 62
In basis points
3035404550556065707580859095
100105110115120125130
3035404550556065707580859095
100105110115120125130
10-Year U.S. Dollar Swap Yields
10-Year U.S. Dollar Swap Spread
1998M J S D
1999M J S D
2000M J S D
2001M J S D
2002M J S D
2003M J S D
2004M J S D
2005M J S D
2006M J S D
2007M J
The 10-year U.S. dollar swap spread widened earlier this month to the most since March 2002.
largest spread since 2002
highest since 12/2005
moving up
3 July 2007 Trends & Themes #07.07 Page 13
Please see important disclosures at the end of this report.
Daily Data 1/02/1997 - 6/29/2007
(B0124)
A2/P2 Rate6/29/2007 = 5.36%
( )
AA Rate6/29/2007 = 5.23%
( )
2
3
4
5
6
7
2
3
4
5
6
7
A2/P2 Rate minus AA Rate(In Basis Points)
6/29/2007 = 13
102030405060708090
100110120130140
102030405060708090
100110120130140
1997M J S D
1998M J S D
1999M J S D
2000M J S D
2001M J S D
2002M J S D
2003M J S D
2004M J S D
2005M J S D
2006M J S D
2007M J
30-Day Nonfinancial Commercial Paper Rates
30-Day Nonfinancial Commercial Paper Spread
Daily Data 1/03/1989 - 6/29/2007
(B0122)
3-Month T-Bill Yield6/29/2007 = 4.82%
( )
Fed Funds Target Rate6/29/2007 = 5.25%
( )
3-Month LIBOR6/29/2007 = 5.34%
( )2.003.004.005.006.007.008.009.00
10.00
2.003.004.005.006.007.008.009.00
10.00
T-Bill Yield minus Fed Funds Target Rate
6/29/2007 = -0.43%
Mean = -0.17%-1.20-0.90-0.60-0.300.000.300.60
-1.20-0.90-0.60-0.300.000.300.60
LIBOR minus Fed Funds Target Rate 6/29/2007 = 0.09%
Mean = 0.15%-0.60-0.300.000.300.600.901.201.50
-0.60-0.300.000.300.600.901.201.50
LIBOR minus T-Bill Yield 6/29/2007 = 0.52%
Mean = 0.32%0.000.300.600.901.201.501.80
0.000.300.600.901.201.501.80
1989M J S D
1990M J S D
1991M J S D
1992M J S D
1993M J S D
1994M J S D
1995M J S D
1996M J S D
1997M J S D
1998M J S D
1999M J S D
2000M J S D
2001M J S D
2002M J S D
2003M J S D
2004M J S D
2005M J S D
2006M J S D
2007M J
T-Bills, Fed Funds, & LIBOR
As for short-term credit indicators, the spread between LIBOR and Treasury bill yields widened last month to the most since April 2001 (above). However, the 30-day nonfinancial commercial paper spread, although volatile, has remained relatively narrow since late 2002 (below).
mostsince 2001
3 July 2007 Trends & Themes #07.07 Page 14
Please see important disclosures at the end of this report.
Helping keep credit conditions favorable for businesses, delinquency rates on commercial and industrial loans were at 1.18% in Q1, the lowest since at least 1987.
Consequently, a net 3.7% of commercial banks were loosening standards for commercial and industrial loans to large businesses in May, according to the Federal Reserve’s Senior Loan Officer Survey.
Quarterly Data 3/31/1987 - 3/31/2007
(E537)
Total Loans 3/31/2007 = 1.72%
All measures seasonally adjusted2
3
4
5
2
3
4
5
Real Estate Loans 3/31/2007 = 1.75%
234567
234567
Consumer Loans 3/31/2007 = 2.96%
2.83.03.23.43.63.84.0
2.83.03.23.43.63.84.0
Commercial & Industrial Loans 3/31/2007 = 1.18%
2
3
4
5
6
2
3
4
5
6
Agricultural Loans 3/31/2007 = 1.14%
2345678
2345678
1990 1995 2000 2005
Delinquency Rates on Loans at Commercial Banks
Monthly Data 5/31/1990 - 5/31/2007
(E0530)
Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
Tighter Standards
Easier Standards
5/31/2007 = -3.7%
-20
-10
0
10
20
30
40
50
60
-20
-10
0
10
20
30
40
50
60
Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks' Cost of Funds
Spreads Rising
Spreads Falling
5/31/2007 = -52.8%
-60-50-40-30-20-100
1020304050
-60-50-40-30-20-100
1020304050
Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans
Increasing Demand
Decreasing Demand 5/31/2007 = -22.6%-60-50-40-30-20-100
10203040
-60-50-40-30-20-100
10203040
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Bank Lending Practices to Large Businesses
leastsince 1987
3 July 2007 Trends & Themes #07.07 Page 15
Please see important disclosures at the end of this report.
Commercial banks, however, have begun to tighten standards for small business loans. Although at a net 1.9% of banks’ tightening standards, levels are nowhere close to the 50% reading last seen in 2002 (above). The expected credit conditions component of the NFIB Small Business Optimism Index, although volatile from month-to-month, has been trending slightly lower over the past three years (below).
Monthly Data 5/31/1990 - 5/31/2007
(E0531)
Net Percentage of Domestic Respondents Tightening Standards for Small Business Loans
Tighter Standards
Easier Standards
5/31/2007 = 1.9%
-20-15-10-505
101520253035404550
-20-15-10-505
101520253035404550
Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks' Cost of Funds
Spreads Rising
Spreads Falling
5/31/2007 = -37.2%
-50-40-30-20-100
102030
-50-40-30-20-100
102030
Net Percentage of Domestic Respondents Reporting Stronger Demand for Small Business Loans
Increasing Demand
Decreasing Demand5/31/2007 = -19.2%
-40
-30
-20
-10
0
10
20
30
-40
-30
-20
-10
0
10
20
30
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Bank Lending Practices to Small Businesses
Monthly Data 1/31/1974 - 5/31/2007
(E0276A)
Sales Expectations Over Next 3 Months 5/31/2007 = 16%
National Federation ofIndependent BusinessWashington, DC
Source:
-20-100
10203040
-20-100
10203040
Expected Credit Conditions(Easier vs Harder in Next 3 Months)
5/31/2007 = -6%Data reported quarterly prior to 1986-12-10-8-6-4-2
-12-10-8-6-4-2
Inventory Satisfaction(Too Low vs Too High)
5/31/2007 = -6%Too Low
Too High-9-6-303
-9-6-303
Inventory Plans Over Next 3-6 Months 5/31/2007 = 0%Increase
Decrease-10-505
1015
-10-505
1015
Capital Expenditure Plans Over Next 3-6 Months 5/31/2007 = 29%
2024283236
2024283236
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Components of the NFIB Small Business Optimism Index II
3 July 2007 Trends & Themes #07.07 Page 16
Please see important disclosures at the end of this report.
But overall, the NACM Credit Managers’ Index confirms a solid credit situation for businesses. The index has shown continuously improving credit conditions since the survey began in 2002. Readings above 50 indicate favorable conditions.
Abundant liquidity for nonfinancial corporations is a positive for credit conditions. At 44.4%, the availability of liquid assets relative to short-term liabilities is close to the best level in over 45 years, while the ratio of short-term debt to total credit market debt was near a record low 27.1% in Q1. Given these pronounced trends, our model incorporates relative changes within each business cycle.
Monthly Data 2/28/2002 - 6/30/2007
(E550)
Total 6/30/2007 = 57.2
54
55
56
57
58
59
54
55
56
57
58
59
Service 6/30/2007 = 56.1
Credit MarketConditions Improving
Credit Market Conditions Deteriorating5051525354555657585960
5051525354555657585960
Manufacturing 6/30/2007 = 58.3
Used with permission fromThe National Associationof Credit Management
50515253545556575859
50515253545556575859
M J S D2003
M J S D2004
M J S D2005
M J S D2006
M J S D2007
M J
NACM Credit Manager's Index
Quarterly Data 3/31/1952 - 3/31/2007
(E617)
Short-Term Debt / Credit Market Debt3/31/2007 = 27.1%
2728293031323334353637383940414243444546
2728293031323334353637383940414243444546
Quick Ratio (Liquid Assets / Short-Term Liabilities)3/31/2007 = 44.4%
212427303336394245485154576063
212427303336394245485154576063
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Nonfarm, Nonfinancial Corporate Liquidity
3 July 2007 Trends & Themes #07.07 Page 17
The data and analysis contained herein are provided “as is” and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any NDR publication. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. NDR, accounts that NDR or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. NDR uses and has historically used various methods to evaluate investments which, at times, produce contradictory recommendations with respect to the same securities. When evaluating the results of prior NDR recommendations or NDR performance rankings, one should also consider that NDR may modify the methods it uses to evaluate investment opportunities from time to time, that model results do not impute or show the compounded adverse effect of transactions costs or management fees or reflect actual investment results, that some model results do not reflect actual historical recommendations, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, the performance of NDR’s past recommendations and model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors. For data vendor disclaimers refer to www.ndr.com/vendorinfo. Further distribution prohibited without prior permission. Copyright 2007 © Ned Davis Research, Inc. All rights reserved.
Nonfinancial corporations’ solvency is in its best shape in 20 years. The ratio of debt to net worth has hovered around 40% over the last year, the least since 1986 (above). The ratio of net interest payments of nonfinancial corporations relative to cash flow has fallen drastically to 9.8%, a good sign for businesses, since peaking at 17% in 2001 (below).
The solvency and liquidity situation of corporations as well as generally positive credit market surveys depict a very favorable credit background. But markets are already pricing in greater risk, evident through the wider spreads recorded last month as consumer conditions worsened. our indexes will help objectively monitor credit conditions in the future.
Quarterly Data 3/31/1952 - 3/31/2007
(E615)
Historical Cost Basis3/31/2007 = 61.9%
Market Value Basis3/31/2007 = 40.8%
94.5
66.8
56.1
48.2
22242628303234363840424446485052545658606264666870727476788082848688909294
22242628303234363840424446485052545658606264666870727476788082848688909294
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Debt/Net Worth of Nonfarm Nonfinancial Corporate Business
(E0623)
Quarterly Data 3/31/1948 - 3/31/2007
3/31/2007 = 3.8%-6-4-202468
101214161820222426
-6-4-202468
101214161820222426
3/31/2007 = 9.8%23456789
10111213141516171819
23456789
10111213141516171819
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Gross Value Added of Nonfinancial Corporate Business (Year-to-Year Change)
Net Interest Payments of Nonfinancial Corporations Relative to Cash Flow (EBITDA)
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