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Harley-Davidson: Cheap Insurance Against Future Market Turmoil

Mar. 02, 2018 12:50 PM ETHarley-Davidson, Inc. (HOG)7 Comments
Glacier Capital profile picture
Glacier Capital


  • The motorcycle sector is currently underperforming the general economy and will probably continue to underperform in a recession.
  • Debt increased by 33% over five years, while revenue and operating margin are down.
  • The company is reacting by relocating part of the production to Asia and increasing the number of dealerships, mainly in Europe.
  • The higher debt, lower profitability, lower revenue might become a serious problem in an economic downturn.
  • Expected equity risk premium over the next five years is negative.

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Investors are currently overwhelmed with information about central banks regarding future interest rate increases and/or lowering quantitative easing programs. This article is not about discussing future central bank policies, but first about the effects of a change in interest on stock prices and second about presenting a cheap insurance against market turmoil due to an interest rate increase.

Higher interest has a negative effect on profits of most companies. Furthermore, higher interest reduces consumption and investment of individuals. Finally, a higher risk-free rate implies that investors ask for a higher yield in risky assets such as bonds, stocks and real estate.

As you can see on the following chart, stock markets and treasury yields tend to increase simultaneously and vice-versa. This reflects the fact that central banks tend to increase interest in a growing economy to avoid an overheating. On the other side, they decrease interest in a recession to make investments more attractive. The economy is strong enough to absorb the higher interest.

The next chart compares dividend yield to treasuries. What you can see is the narrowing of these two yields and therefore, the reduction of the equity premium. The equity premium on this chart does not consider the past capital gains of the S&P 500 index.

Stocks are, by definition, riskier than debt because in the case of a bankruptcy, creditors get paid before shareholders. Furthermore, the bondholder has no volatility risk if he holds the bond to the end. The higher risk of holding shares is compensated by the ability to participate in the

This article was written by

Glacier Capital profile picture
Hello, I am based in Luxembourg, Europe. I am a Lawyer that turned Fund Manager mainly because I like the diversity and complexity of investing. In fact, I like studying and understanding myself as well as other investors. I have three masters, in Law, Economics and Finance.My investment strategy turns around my an my counterparties' central hypothesis.I try to base my argumentation on  sufficient conditions that offer a fair risk-return by knowing however that most variables are probably unknown to myself.Interesting would be to understand what variables your subconscious considered? This is also important to determine the degree of luck.Have a nice day/night.

Analyst’s Disclosure: I am/we are short HOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

I want to see the good people at Harley be successful but I tend to think that sales have peaked and we are heading into a recession..... not many buyers for premium motorcycles..
HOG has in the past been at a low at this quarter, only to sky rocket in the next quarters.....Spring,Su... is coming....long live the HOG.
Recreational purchases are the first to stop in a recession.
During recessions folks sell recreational and luxury items just in order to survive and during the last recession everything was half price.

Necessities have to be purchased and therefore those are the stocks to hold.
toniortiz82 profile picture
I usually agree about every USA politic decission but this last one was a "very" big fail.
250F profile picture

Source: http://bit.ly/2Fi5ik0

Published 3/6/2018

" On hearing that President Trump might impose tariffs on aluminum and steel, Sen. Lindsey Graham was beside himself: “Please reconsider,” he implored the president, “you’re making a huge mistake.”

Twenty-four hours earlier, Graham had confidently assured us that war with a nuclear-armed North Korea is “worth it.”

“All the damage that would come from a war would be worth it in terms of long-term stability and national security,” said Graham.

A steel tariff terrifies Graham. A new Korean war does not?"
WD40W profile picture
02 Mar. 2018
Get ready for Trade Wars...Tariffs are a bad idea...
vmaxJim profile picture
European Union consider to impose punitiv tariffs for Harley Davidson Motorcycles.
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