Monday, April 02, 2007


The Housing Bubble Blog links to a Miami Herald article with some sobering reporting:

-“Many South Floridians are eating out less and springing for fewer big purchases like a new car or expensive vacation. Economists talk about a new cost-consciousness among consumers who had relied heavily upon their houses for their net worth and are now watching the housing market slow way down.”

-“Last year, 16 percent of the new car purchases in Florida were made with home equity loans, said Art Spinella, president of market research firm CNW Research. That compares to 9 percent in 2000.”

Update: Courtesy of rgemonitor...

As reported yesterday by Douglas Kass (who has a column on there is also now evidence of a sharp increase in delinquency on the subprime loans that finance the purchase of Harley Davidson’s famous motorcycles, or “hogs” in Americana jargon. When default rates almost double in two quarters on Harley’s hogs you know that this subprime problem is a real hog for the economy. As Kass put it in sarcastic but true terms:Born To Be Wild: The Subprime Contagion Spreads

Bearish HOG

It remains investment community's general belief that the subprime lending mess is a fluke that will be contained…I have stressed the likelihood of contagion. After all, subprime is subprime and credit is correlated. Lower quality, more levered lending (with less collateral) is not confined to consumer loans, credit cards, homes, recreational vehicles and autos - as investors might soon find out. Even motorcycle (loans) are hitting potholes now!

Indeed, it appears that growing credit losses and delinquencies are beginning to render Harley-Davidson's (HOG) motorcycle loans, well, increasingly like hogs (literally and figuratively).

Thirty-day delinquencies (and loss trends) in Harley-Davidson's receivables book (courtesy of Lehman Brothers) give a clear picture that credit quality issues are broadening out as HOG's receivable experience has begun to trace a pattern of deterioration that we first began to see in subprime mortgage loans during the first half of 2006.

Harley Davidson's 30-Day Delinquencies

4Q2006 5.18%
3Q2006 4.46%
2Q2006 3.61%
1Q2006 3.69%
4Q2005 4.83%
3Q2005 4.07%
2Q2005 3.66%
1q2005 3.60%

As I mentioned yesterday, Harley's finance subsidiary (HDFS) funded almost half of Harley-Davidson's motorcycle loans. Like subprime mortgage loans, HDFS' hog loans are pooled and securitized to institutional buyers. Unfortunately -- in credit trends and terms -- HDFS is also beginning to look more and more like New Century (NCBC), Fremont and Accredited Home Lenders (LEND) did in early 2006.

In 2006-07, 28% of HDFS loans in its securitized pools had FICO scores (below 650) were considered subprime, ironically very close to the 21% subprime market share of total mortgage loans made last year! During the company's investor day (Feb. 28), Harley acknowledged that several of the securitization pools have breached their credit quality metrics (and like subprime, the most recent pools' credit losses and delinquencies are rising faster than expected and more rapidly than earlier pools). This is beginning to force Harley-Davidson to fund additional cushion reserves in the triggered securitization pools, much in the same way subprime mortgage originators have to buy back bad loans. (This takes a hefty bite out of HDFS' profitability by reducing its net interest margin).

Should the recent trend of rising credit losses and delinquencies in Harley-Davidson's loan receivable book and in the securitization pools of their financial subsidiary (HDFS) continue, tighter lending practices will likely be instituted and institutional buyers will be less receptive to buying HDFS' securitized pools. This could serve to reduce Harley-Davidson's sales growth and profitability.

Sound familiar? …It is beginning to look like the (motorcycle) lending markets are no longer ... born to be wild. And, not surprisingly, I am still short Harley-Davidson.

More importantly, the fungus of subprime is beginning to spread into asset classes other than housing and mortgages. Don't think for a moment that Harley-Davidson's dealers or the parent company were any less reluctant than the mortgage brokers to serve up loans for their product. And last time I looked, a motorcycle is far less secure and stable than a home.

Vroom! Vroom!

Position: Short HOG

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