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It May Be a Good Time to Short HOG

|Includes: Harley-Davidson, Inc. (HOG)
HOG is at the top end of its Bollinger Band range again. This is a good place to short it. The FY 2009 PE is > 70. The company has a debt to capital ratio of 69%. HOG (HDFS) is holding $5.2B in motorcycle loans “for investment”. The unemployment rate continues to rise. Those loans look more and more troubled. The auto loan delinquency rate rose again in Q3 over Q2. It is expected to rise far more in Q4 over Q3. Auto sales in the US were flat. This does not generally make one believe that motorcycle sales will somehow pick up dramatically. HOG is discontinuing one motorcycle line, and it is selling another. These actions will cut sales. Other sales are still on the decline. Plus HOG is spending a lot of money on reorganization costs.
Q4 is historically a bad quarter for HOG. With declining sales and revenues (plus the extra costs), the prospects for HOG are very dim. HOG could enter bankruptcy in 2010. It could also recover somewhat. However, you cannot tell if this will happen with any certainty until HOG turns the corner on revenues. Thus far the decline has been steady (with a little blip up with CFC). The average analyst rates HOG a low hold (2.8). It is over priced for that rating. It is over priced for its earnings. Its future is more uncertain than many analysts would like you to believe. It’s a sell in my book. At the high price it is at now I am selling it short. With deflation in Japan, I am expecting price under cutting and/or perhaps dumping from there and Korea (possibly elsewhere as well).
If the overall market continues to rise, HOG will likely rise with it. However, HOG should fall faster than the overall market when the overall market falls. Since I believe the overall market fundamentals are terrible, I see the possibility of a market fall as a strong one. I see HOG as falling soon. The fair value for the S&P500 is thought by many to be in the 850 to 880 range. The S&P500 is a long way from that now. When you add Dubai into this equation you really begin to see the cracks. When MS calls out the UK on its severe debt problems, you start thinking this is a serious probability. When you realize Japan is in trouble (the JGB’s yields went up dramatically recently), you start to worry about the world economy again. When you realize Latvia, Lithuania, Estonia, Hungary, etc. all have debts in excess of their yearly GDP’s, you realize there is serious trouble brewing. The CDS rates on all of these countries have moved up dramatically in the last year. Let’s not forget that Dick Bove says 26 of the 30 top banks in the US need to raise more capital. Let’s not forget CIT. Let’s not forget the prediction for a possible failure of 1000+ US banks in the next two years. Let’s not forget that a huge number of Commercial Mortgages are coming due in the next few years. Many of these mortgages are now under water. Few businesses can afford to buy. Most have shrunk, so they do not need more buildings (i.e. there may be few if any buyers). Only large businesses have good access to credit. Small and medium business credit has been getting tighter throughout this year. The residential real estate business is not out of the woods yet.
Is HOG likely to feel some fallout from all this? It seems likely. In fact the company could end up in bankruptcy in 2010. The IMF says European banks are in even worse shape than the US banks. We may be very near a double dip. We are almost certainly near a serious retracement. When this happens, there will likely be a flight to quality (US bonds and money). The US carry trade will reverse. A USD short squeeze will ensue. This will bring down the price of commodities and other items especially real estate in the quickly expanding countries. This will bring down the equities markets.
If all of this is not enough, Fed Governor Plosser is already talking about raising interest rates. We all know he has company in at least the ever hawkish Fed. Governor Fisher. Plus the RBA has already been raising its rates. Trichet is talking about raising rates in Europe. They both already have higher rates than the US. Australia’s is now 3.75%. The US will not be able to sell its bonds much longer if it does not soon begin to follow suit. This would surely kill the USD carry trade. That situation would cause the markets to tumble as I described above.
The API petroleum inventory data yesterday was very bearish for oil (Net +7+M barrels). The ADP private payrolls losses came in higher than expected this morning at -169K vs. an expected -150K. The Challenger planned job cuts came in respectably lower than last month by 9.6% at 50,349. However, the planned plunged to 10K from October’s 57K. This is not good news, especially when paired with the ADP data. It should tend to push HOG down. The USD is slightly stronger. The day is set up to be negative so far. It may be a good day to start a HOG short.
I am short HOG at this time. A more conservative person might wish to wait until after the possible “Christmas rally”.

Disclosure: I am short HOG