A Credit Crunch Ceases

- Bank lending standards continue to ease. "The most important news in the past 10 days has not been the Fed’s outlook or the corporate enterprise spending forecasts put out by a leading technology bellwether, but rather the latest data from the Fed’s quarterly bank lending standards survey. Indeed, the results showed a continued trend towards easing conditions and its track record with respect to forward business activity is hard to dispute given that the cost of capital and thereby credit is very instrumental to business investment decision making."
- Commercial & Industrial (C&I) loans generally lag conditions by six quarters. "While there is and has been great frustration expressed about the seeming lack of a pickup in bank loans, it is critical to understand that credit standards lead loan trends by six quarters in either direction (with respectable correlation), and the current lag is typical. Indeed, lending standards even lead credit markets by a few months, but it must be recognized that capital markets offer far better terms than banks do when the credit environment improves – plus, with record junk bond issuance, it is hard to suggest that risk-oriented credit is severely limited."
- Corporate balance sheet strength may limit the need for more loans. "The attempt to create so-called “bullet proof” balance sheets after the near collapse of the financial system in 1Q09 has led many corporate financial executives to build up huge cash reserves in a bid to prevent liquidity-driven internal crises. Yet, as money begins to flow towards business investment, management teams do not need to borrow more when they can tap their own respective cash hoards."
- Business investment activity has rebounded without a loan pickup. "One can see that business investment already has picked up based on GDP data. Furthermore, our studies of capital spending plans of more than 625 US nonfinancial publicly traded companies demonstrates planned actions that show increased activity. However, it is not well understood that capital spending moves in tandem with employment trends more so than consumer spending does and thus a turn in hiring plans is relatively important, too."
- Jobs should rebound modestly alongside the normal nine-month wait. "The angst over high and stubborn unemployment is both understandable and warranted, but the trends are shifting and the lending standard results show the likelihood for continued albeit modest jobs recovery over the next three quarters which should also benefit capex and industrial production trends. Thus, beneficiaries of better business activity in the next six to nine months should be able to report improved trends in the next several quarters, though commodities have spiked faster than in the past so that area may be less affected; thus, we prefer the Capital Goods and Energy industry groups."


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