Credit Thawing or Just Defrosting?

Ever since the financial crisis of last fall, credit markets have been tightened up. Consumers and small businesses have had limited availability of credit, causing economic growth to come to a standstill. Some financial experts see signs of credit loosening, perhaps even thawing. Here are a few reasons why some are optimistic that the credit market is stabilizing.

Sign #1: Housing Sales – After months of negative growth, home sales are finally on the rise. ABCnews website reports that August was the seventh straight month for increased pending home sales, leading to levels not seen since before the housing bubble burst. The homebuyer tax credit offered by the government is a big incentive to buyers and many are signing up before the November 30th deadline to ensure that they will be able to claim the credit. But, this doesn’t mean that they will follow through with their purchases. The ABCnews website article further relates, “these factors have made the index a less reliable gauge for completed sales. Despite a steady increase in the number of signed contracts this summer, for example, completed sales actually took an unexpected 2.7 percent dip in August.”

Sign #2: Consumer Spending – In the last few months, consumer spending has been on the up tick. After months of less and less confidence, August saw spending jump “by the most in nearly eight years” according to an article on MSNBC’s website. This is a positive sign that consumers are having access to more credit, right? Not necessarily. The MSNBC article goes on to relate that much of this spending was due to the government-run Cash for Clunkers program, which has since ended. Without a helping hand from the government, consumers are still finding it difficult just to make ends meet, much less increase their spending habits. “The surge in consumer spending is a strong signal that the economy was returning to growth this summer. But any rebound from the recession could falter if income growth does not improve”, the article stated.

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Sign #3: Small Business Credit Availability – Many small businesses are finding it easier to acquire loans. According to an article on Mainstreet website, the Small Business Administration states, “weekly small business loans are up 60% over the past six months.” Major lending institutions are showing their willingness to finance small business growth, as well. The Wall Street Journal reports that JP Morgan Chase (JPM), one of the largest consumer credit providers, “announced plans to launch four business cards developed specifically for small businesses”. The Journal goes on to state, “Economists and analysts see the developments as a sign that credit conditions are beginning to thaw.”

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Even if credit markets are finally loosening up, it doesn’t mean that relief will be felt anytime soon. An article on the PowerOptions blog reports that “the economy may cease contracting, but the effects of the economic upturn may not be felt for many months. Industries are likely to continue to struggle and unemployment could carry on rising for the foreseeable future.”

From the above indicators, there are definite signs that credit is at least defrosting, allowing consumers and business more access to financial loans. Whether this will continue and allow sustained economic recovery, however, remains to be seen.

Investors uncertain whether the economic recovery is firmly in place might consider using stock options to protect their portfolios. A put option for example can be used to insure investments much like home or automobile insurance.

Investors thinking the economic recovery will be slow and the stock in their personal stock portfolios will have poor performance over the next few months might consider selling call options against their stocks in order to generate some income. Selling a call option against a stock is known as a covered call investing strategy and analogous to leasing out a house with an option to purchase.

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[tags] financial crisis, availability of credit, economic growth, Housing Sales, homebuyer tax credit, Consumer Spending, Cash for Clunkers, consumer spending, recession, small businesses, Small Business Administration, Wall Street Journal, credit, economy, automobile insurance, JPM, J.P. Morgan Chase [/tags]