Ned Davis Research announced a new index last week - one that seems especially timely given the current developments in the market. The NDR Credit Conditions Index [CCI] is designed to measure the cost and availability of credit.
"The index has been several months in the making. We wanted an objective measure of credit conditions," an NDR spokesperson said in an email.
The NDR CCI includes two equal-weighted components that together take into account 25 different factors. The NDR Consumer CCI includes nine economic indicators such as mortgage delinquency rates, the debt/net worth of the household sector, and senior loan officer surveys of lending standards for consumer credit cards, "other" consumer loans, and residential mortgages. The NDR Business CCI covers 16 different factors including credit swap spreads, the NACM Credit Manager's Index, LIBOR minus T-Bill yield, the debt/net worth of nonfinancial corporations and senior loan officer surveys of lending standards for small and large businesses.
The index was designed for investment professionals such as fund managers and private investment counselors, according to the NDR spokesperson.
"They can use the index to judge risk in the market and help them with sector selection," she said.
According to NDR, at the end of July the NDR CCI was at 64.1, down from the June reading of 65.5, but it remains above the mean of 60.7, indicating that credit conditions remain favorable. However, the current level is its lowest since October 2003. NDR says the index is heading out of the bearish zone for bonds and moving toward a reading that indicates moderate instead of strong economic growth, should it continue with its current trend.
The NDR CCI has been trending mainly downward since peaking in early 2005, although the index remained largely flat through 2006 before dropping sharply in 2007 from a level around 75. The subprime credit meltdown is widely agreed to have hit the markets in late 2006.
The NDR CCI's two components have displayed fairly divergent behavior in 2007. The NDR Business CCI has been in a gentle decline from its early 2005 peak but remains well above its mean of 64.7 at 77.1. However, it did experience its largest one-month drop since October 2002 in July, largely due to a broad-based widening of credit spreads, NDR says. The NDR Consumer CCI has been in a sharp decline since the last months of 2006 and is now at 51.1, below its median of 56.7.
From a consumer perspective, credit conditions are now in unfavorable territory for a number of reasons. For one thing, mortgage payments 60 or more days past due are at their highest level in 20 years, according to NDR. Meanwhile, the percentage of commercial banks tightening their lending standards for residential mortgages was at its highest level in 16 years, as of June. And the debt-to-net-worth ratio of the household sector is also at record levels.
The situation is not nearly so dire for businesses, with the NDR Business CCI safely in favorable territory, although it did take a severe hit in July and has been trending downward. But delinquency rates for commercial and industrial loans have been at their lowest levels since 1987, and although banks have begun to tighten lending standards for businesses a bit more strictly, the rate is not excessive by historical standards.
However, the effects of the subprime mortgage meltdown are still unfolding. Judging by the NDR CCI's downward trend in 2007 and the events thus far in August, it looks like the index will continue to decline.