Credit markets still crashing

Although I’d love to see the US economy recovering, I believe that the credit meltdown is still on-going.

After listening to several conference calls, including American Express, Target, CarMax and Lab Corp, it sounds like the US consumer is still struggling in a major way.

Another sign of credit market malaise can be seen in yield spreads. The spread between low and high quality credits keeps getting wider, and this is a sign of continued credit market weakness.

How big of an impact do credit markets have on the US economy and US businesses? Very big.

It’s easy to see why businesses must borrow frequently–they must produce before they can sell, and many businesses borrow to do that. But, many don’t seem to grasp to what degree US consumers have been living beyond their means for the last decade.

US consumer debt is at record highs when compared to income and assets. Consumers are having a harder time paying their bills and their debt levels aren’t helping.

US consumers borrowed against their homes to buy stuff over the last decade.

American Express highlighted this in their recent conference call. Their customers in markets with declining housing prices are spending much less than they were a year ago–across all income levels!

Target is also experiencing difficulties with their credit racked customers. CarMax is struggling to sell cars because customers can’t get loans. Why? Because the credit markets aren’t buying car loans.

Even Lab Corp, a company that specializes in running tests for hospitals and physicians, is feeling the credit pinch. On their conference call, analysts hammered company management about their receivables and why customers weren’t paying. The answer–US consumers are strapped.

Credit markets will not recover until banks rebuild their balance sheets. Banks won’t rebuild their balance sheets until the US consumer recovers. And, the US consumer will not recover until housing bottoms.

I don’t know when that will happen, but I know it hasn’t happened, yet.

Stock markets may do well as election year uncertainty clears up this fall. But, when that is past, investors will refocus on corporate earnings, credit markets, the financial services industry, and the housing market. Until those things improve, I wouldn’t expect too much from stock markets.

(Full disclosure: I don’t own any shares of American Express, CarMax, Target or Lab Corp).

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.