Is Lending Returning to Normal?

Includes: DIA, QQQ, SPY
by: Balaji Viswanathan

The last couple of weeks we are seeing a thawing of global credit markets. The credit crisis caused lenders to be extremely cautious and tighten standards in September. Loans to individuals and corporations with poor credit shrank substantially and banks started hoarding cash. The interest rate spreads between less risky and more risky loans widened substantially.

However, recently things are seemingly coming back to normal and most people in the market believe that credit is getting available once again. CalculatedRisk blog writes about some of the progress made in the credit markets recently. Stock markets saw the progress and are having a rally the past 7 days. So, is it time to get back into the markets and start investing again? Should you consider buying more Financial sector ETFs like XLF and UYG? Well, not so fast.

Bleaker forecast for banks in 2009

According to three separate news quoted by HousingWire the pain is expected to continue as the big banks forecast a bleak 2009. JP Morgan (NYSE:JPM), UBS and Royal Bank of Scotland (NYSE:RBS) (among the most reputed banks in the world) have all given bad outlook in the forthcoming year. And then Citi (NYSE:C) said that the troubles are expanding more rapidly in the credit card business and the company expects losses to continue.

Market watch reports that:

"Credit card losses may continue to rise well into 2009, and it is possible that the company’s loss rates may exceed their historical peaks," the banking giant said in its filing with the Securities and Exchange Commission late Friday.

Federal Loan Survey Results:

The Federal Reserve (American central bank) conducts a survey every quarter among senior loan officer and the results of third quarter that came Monday look really ugly.


The report says that credit standards are still getting tightened and smaller banks have almost cut off the loans to businesses.

In the current survey, large net fractions of domestic institutions reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months. The net percentages of respondents that reported tightening standards increased relative to the July survey for both C&I and commercial real estate loans, as did the fractions reporting tightening for all price and nonprice terms on C&I loans. Considerable net fractions of foreign institutions also tightened credit standards and terms on loans to businesses over the past three months. Large fractions of domestic banks reported tightening standards on loans to households over the same period. Demand for loans from both businesses and households at domestic institutions continued to weaken, on net, over the past three months.

And this is having further effects on the already sagging housing markets. According to housing wire blog:

Tighter lending standards generally lead to reduced borrowing, which explains the report’s findings that 50 percent of domestic respondents — up from about 30 percent in the previous survey — experienced weaker demand for prime residential mortgages. Seventy percent indicated weaker demand for nontraditional mortgage loans, including Alt-A and jumbo loan products.

Thus, we believe that the trouble is not over yet and market can expect bears to attack in the next few weeks. So, it is time to be more cautious rather than get fooled by the stock market rally. It is time to look deep in your portfolio and if you need any money in the next 5 years, it is time to sell off that portion of stocks. Also look at bonds and other investment alternatives and go for a balanced choices that is weighted slightly less in stocks.

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