Joseph Wagda

It's not a good sign when the money banks spend on government debt matches the amount they're loaning to businesses (chart).

According to the chart, during the two previous significant recessions, downturns in lending activity lasted roughly three years before rebounding.

So far, we are only a little over a year into this downturn in lending activity. The $64k question is whether the severity of this credit contraction will hasten its end or whether we are in for a long, ugly contraction. (I am leaning toward the long, ugly version.)

Consumer credit: Falls for a record eighth month in a row, $14.8B in September to $2.46T, 4.7% below the year-ago figure. Economists expected a $10B decline. The drop led once again by a decline in credit-card debt, which fell for a 12th month, $9.9B to $889B - a 13.3% annualized rate. Nonrevolving debt fell at an annual rate of 3.7%, $4.9B to $1.57T.

The headline numbers are not good.

However, comparing total credit outstanding as of the end of Q3 2008 (the apparent peak) of $2.58T with the total credit outstanding as of the end of 2004 of $2.19T (which can be approximated as the onset of "REALLY easy money"), and it can be concluded that credit likely must continue to contract significantly from the $2.46T reported as of the end of September.

$250B may not sound like much as far as congress is concerned, but decreasing credit availability by approximately $833 for every man, woman and child in the U.S. will present a significant headwind against the rebound of the consumer.

Harley-Davidson: Opportunity Exists to the Downside

The Wells Fargo analyst might be right regarding shipments in 2010 and 2011. At year's end, HOG will have shipped approximately 20k fewer bikes than it will have sold in 2009. If HOG ships the same number of bikes as it sells at retail in 2010, then it would generate YOY revenue growth in 2010 as long as retail sales deteriorate by less than 7% YOY.

On the other hand, it appears that HOG's sole source of operating cash flow is through TALF. HOG's operating cash flow prospects should be discounted until the company can prove that it does not need the federal government's help to monetize its finance receivables. (Additionally, HOG's WACC is artificially low because of the TALF program.)

This recession is accelerating a secular deterioration in the domestic market for HOG's flagship products. YOY retail sales will be down for the third consecutive year at 12/2009. The critical question is when retail sales will bottom out and whether they will recover. The fact that only four dealers and 15 secondary dealers/satellite retail locations have closed their doors to date in 2009 tells me that the consumer's pain has yet to fully manifest itself in HOG's sales.

I was surprised that HOG pulled the plug on Agusta to "focus on the Harley-Davidson brand". Given a secular decline in the demand for motorcycles, the remaining customer base for the entire industry will be those who have a passion for motorcycling, not a passion for chrome and $450 leather jackets. Agusta could have been developed into a brand which could appeal to those enthusiasts. Unfortunately for HOG, management will find out the hard way over the next several years that the only way to achieve growth through the H-D brand is to invest in tattoo-removal equipment manufacturers.

HOG at $28 is pricing in a healthy dose of future good news as well as the continuation of government largesse.

P.S. Only a sell-side analyst could use HOG and "share repurchase program" in the same sentence without any hint of sarcasm.

Quantifying the cost of too big to fail: A new study calculates the difference between the rates smaller banks pay to attract deposits and borrow funds against those paid by behemoths perceived as too big to fail at $34.1B/year.

I thought we relegated the sophists when we elected our philosopher king.

It's odd and ironic that Hertz Global (HTZ), which by its own admission has a list of risk factors "nearly a mile long" (10-K), is suing research firm Audit Integrity for placing HTZ on its most likely to bankrupt list, Doug McIntyre says. Hertz is wasting shareholder money, and drawing attention to something that most shareholders probably never knew.

Congrats, Hertz management.

Your cosmically stupid litigation just landed your company on the radar screen of every short seller in the world.

August Nonfarm Payrolls: -216,000 vs. consensus of -230K. July revised to -276K from -247K. Unemployment 9.7% vs. consensus of 9.5%. Bottom line: Aug. was better than expected, but most of that came from the July revision. Unemployment was 0.2 points worse than expected.

Sorry for the tortured English. Maybe the above post can be made into a GMAT question!


On Sep 04 11:31 AM Joseph Wagda wrote:

> Had the BLS not shunk (conveniently) the labor force by approximately
> 350 workers in July and August, we already would be rock-throwing
> distance from 10% right now.

August Nonfarm Payrolls: -216,000 vs. consensus of -230K. July revised to -276K from -247K. Unemployment 9.7% vs. consensus of 9.5%. Bottom line: Aug. was better than expected, but most of that came from the July revision. Unemployment was 0.2 points worse than expected.

Had the BLS not shunk (conveniently) the labor force by approximately 350 workers in July and August, we already would be rock-throwing distance from 10% right now.

After Lenny Dykstra's implosion, you've got to wonder about the timeliness of Todd Stottlemyre's hedge fund pitch.

This article does not even warrant posting on SA.

It belongs on Cetin's blog.

Stottlemyre's talent will either get him funded or it will not get him funded.

More from Goldman Sachs (GS): The firm says that with the $318M in dividends it paid on its $10B TARP investment (and the $1.1B it paid to redeem warrants), U.S. taxpayers have gotten a return of 23%.

What is our ROI on the $13B we "lent" to AIG to make Goldman's CDS whole at 100 cents on the dollar (or for that matter the $6(odd)billion Goldman received from AIG imediately prior to our national "investment" in AIG)?

What is Berkshire's ROI on its preferred stock w/warrant investment in Goldman made conconcurrently with the TARP?

23% IRR is a poor return for a distress investment resulting in a successful recapitalization. What was the return of GS' common stock over the same period?

Merrill Lynch now sees H2 U.S. GDP growth of 2.7%, almost double its previous forecast of 1.4%. Firm predicts stronger consumer spending due to stimulus programs, and thinks home sales could continue to level off.

BofA removed the "bull" from Merrill and replaced it with B.S.

Design A Country Rescue Package Here (Comment Competition)

Mandate that CalPERS issue the state of CA a $20B, non-guaranteed loan, and continue to issue debt in the future sufficient to cover any future state budget deficits.

I am sure that CalPERS and it managers will have no problem with this proposal, given that "investing" in Califonia's future is clearly the highest and best use of capital. Why let the taxpayers hog all of the action?

On May 25 09:14 PM Arete wrote:

> Give them a loan. The willingness to in effect guarantee their continued
> solvency will allow the country to engage in the type of fiscal stimulus
> necessary to prevent a more severe recession, and promote a faster
> recovery. The credit markets stay open to them, they are able to
> repay the loan in an expeditious manner in the future, and the union
> goes on with a minimized interruption to normal economic activity.
>
>
> Since the country forms a part of the monetary union, their fiscal
> stimulus is important to our overall recovery, and they will likely
> not be the only such country to need help. Willingness to help here,
> now, will help keep credit markets open for other members in the
> union; and that, in turn, will also promote a speedier recovery,
> at lower public cost.
>
> Counter-intuitive, perhaps, but that's the nature of economics in
> a recession or depression. A long-term fix may be needed, but hammering
> a country in the middle of a recession is not a good way to obtain
> that fix---or have we truly learned nothing from the recent past?

'Surgical' Bankruptcy for Chrysler

I'll take the over on $250 MM, too, LOL!

With so many zeros its easy to get disoriented momentarily while typing.

'Surgical' Bankruptcy for Chrysler

I hope that, by the time this "surgical reorganization" is confirmed in 2011, Obama et. al. will be sorry that they underestimated the reluctance of the Southern District of New York to turn 200+ years of bankruptcy statute and case law on its ear.

I am sure that Judge Gonzalez recognizes that this case (given the roster of competing creditor interests) may be the most important in the history of Chapter 11. For the sake of capitalism, I hope he chooses to enforce the laws of the land rather than head down the path of Obama-sponsored judicial activism.

Warren Buffett gets many things right, but Andy Kern of Berkshire Ruminations says his stance on the U.S. debt bubble - that "we'll be fine in the long run" - is wrong. "How will we be living when 75% of our GDP is committed to simply servicing our national debt?"

Archman,

It's been 20 years since I lived on the "plant" you may be thinking of...(actually barley and hops, LOL!)

The biggest public employee scam, however, is the way many pension payouts are established - based on take-home pay in the employee's final year of service. Our "heroic" police and firefighters here in CA have been taking huge amounts of overtime in their final year to establish pension payouts exceeding their annual salary levels.

This scam against the taxpayer is systemic in many municipalities and considered part of the job to the point where, when the city of San Bernardino, CA cut out police overtime from the city budget, a significant percentage of the police force quit. I guess that royalies from shaking down gangs and freebies from working girls do not constitute sufficient benefits for our "heros". These guys have the sense of entitlement to triple dip the taxpayers (salary, pension and overtime scam income), as well.

It is safe to assume that our equally heroic NY MTA and other members of the entitled bureaucrat class are scamming the system the same way.

I feel for the private citizen taxpayer in NY and elsewhere, who is on the hook for this pension scam in addition for being on his or her own when Social Security runs out.

Pending home sales fell a more than expected 4% (vs. -1% consensus), NAR says, citing mounting job losses and evaporating consumer confidence. NAR chief economist Yun says 2009 will depend heavily on the real-estate weighting of the much-anticipated Obama-boost.

Queue up the laugh tracks - the great Yun has spoken!