Inc. - NDR · The NDR Credit Conditions Index (CCI) is designed to objectively measure credit...

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



2530354045505560657075808590

2530354045505560657075808590

NDR Consumer Credit Conditions Index

6/30/2007 = 52.1

Mean = 56.7


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

http://www.ndr.com/clients/

3 July 2007 Trends & Themes #07.07


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

http://www.ndr.com/clients/products/B0033.pdf

http://www.ndr.com/clients/products/E0184.pdf





http://www.ndr.com/clients/products/GIX4161.pdf

http://www.ndr.com/clients/products/GIX4162.pdf


http://www.ndr.com/clients/products/B385A.PDF













http://www.ndr.com/clients/products/E0276A.pdf



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



6/30/2007 = 52.1


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)


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.



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)


Between 49.5 and 64 7. 6 30. 849.5 and Below 5. 2 20. 0

448481516554595639686737791849912979

1052112912131302139815011612

448481516554595639686737791849912979

1052112912131302139815011612



6/30/2007 = 66.9


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


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.



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)


S&P 500 Gain/Annum When:


Between 47.5 and 57 6. 1 18. 447.5 and Below -6. 4 16. 8

320350383419458501548599655716783857937

10241120122513401465

320350383419458501548599655716783857937

10241120122513401465



6/30/2007 = 65.5


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


New Chart

(B345)


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



6/30/2007 = 65.5


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


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.



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)


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 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


New Chart

(ESX4055)


S&P Financials Sector RS Gain/Annum When:(8/31/1990 - 6/30/2007)


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



6/30/2007 = 78.9


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.



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


(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



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



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



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



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



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



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



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



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



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


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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