Harley-Davidson Malinvestment. Is a Harley-Davidson Skyscraper Next?

Monday, February 8, 2016
Posted in category Economics

As a Harley-Davidson lover and owner, one thing I noted during the bubble years of the early-to-mid 2000s was the influx of mega-gaudy Harley-Davidson complexes – huge, new, brick buildings with massive square footage, casting an immense footprint on pricey, suburban land. Harleys were flying out of the door of these dealerships, thanks to ultra-low (or no) interest rates and other monetary policy interventions. I watched folks turn around one-or-two-year-old Harleys for new ones, on impulse, like they were buying a pack of gum. The company’s finance arm, Harley-Davidson Financial services (HDFS), was chasing subprime borrowers who liked to overspend on toys they couldn’t afford. This careless lending led HD to take on a huge subprime portfolio, and as a result, the company booked a $6.3M write-down because of default rates.

The good times went on for years until 2007-2008 came upon us and a financial meltdown and prolonged recession forced consumers to stop spending money they didn’t have. The HD dealers were hurting, and the company spiraled in 2009. Twenty+ HD dealers closed in 2009, the company dropped its Buell line, and it laid off workers. 2009 financial results for Harley-Davidson show the following:

- Revenue down $1B from 2008
- Income decreased year-over-year from $684M (2008) to $70M (2009)
- An earnings per share drop of 89% from 2008
- A 4th quarter loss of $147M
- In the 4th quarter 2009, HD shipped 20,000 motorcycles in the US, compared to 57,000 in the same quarter in 2008.

Everyone in the HD world was so heavily over-expanded that when the meltdown became manifest, the company’s margin was being eroded by its massive fixed costs attached to that very expansion activity.

The problem HD faced was that consumers need discretionary income to buy $15k+ motorcycles, expensive accessories, and desirable, overpriced clothing, but the company’s buyers were losing their ability to borrow and spend on non-essentials. In 2008, Americans in some sectors were still consuming, refusing to believe that the meltdown was anything more than a temporary blip in their spending frenzy. By 2009, it became obvious to the average consumer that the party was over. A chart in the WSJ shows Harley-Davidson hit its peak pre-bubble bust in 2006-2007, with the bottom falling out in 2009.

HD2

 

Roll forward to 2016. HD reported a 43% decline in 4th quarter 2015 profit (from the 4th quarter 2014) after a relatively unremarkable first three quarters of 2015. The company announced, in January, that it was rolling back its shipment forecast for 2016. HD stock also lost 30% of its value in 2015. And just last week Harley-Davidson announced another stock buyback, and that is on top of the repurchase authorization its Board approved in June 2015. Moody’s had deemed the June 2015 share repurchase a “credit negative event,” however, there was no credit rating action taken against the company. The graph below shows HD’s 12-month stock chart and its precipitous decline.

HD3

Crain’s Detroit just did a story on a local HD dealer, Motor City Harley-Davidson, and its project to construct a new 106,00 square foot facility in Farmington Hills, MI, a suburb of Detroit. The ostentatious complex will include a brew pub, gourmet market, outdoor movie theatre, and a riding academy. And this is in spite of the company’s late 2015 financial performance, sagging market indicators, and the company’s revised forecast numbers. Due to all of the above, I am therefore seeing Harley as a honking bubble risk that may go boom, especially in light of its stock buyback frenzy.

motor city hd

 

Familiar Utterances: Zero Chance of Recession

Monday, February 8, 2016
Posted in category Economics

In the Wall Street Journal on February 4th, David Rosenberg, chief economist for Gluskin Sheff & Associates, a Canadian wealth management firm, was quoted as such:

I put the odds of a U.S. recession in the next year as close to zero as anything could be close to zero.

Today, Mish Shedlock points out that the service economy is slowing and key industries that have provided job growth are now contracting. In fact, Mish thinks that the recession began in the 4th quarter of 2015.

Pay-For-Crimes

Wednesday, February 3, 2016
Posted in category Welfare State

The headline reads, “DC bill would pay people stipends not to commit crimes.

They say crime doesn’t pay, but that might not be entirely true in the District of Columbia as lawmakers look for ways to discourage people from becoming repeat offenders.

The D.C. Council voted unanimously Tuesday to approve a bill that includes a proposal to pay residents a stipend not to commit crimes. It’s based on a program in Richmond, California, that advocates say has contributed to deep reductions in crime there.

This bill is trying to address violent crimes perpetuated by repeat offenders. Wait – aren’t we already paying police and politicians enough dough?

Assault(s) By Badge: Local Roundup

Wednesday, February 3, 2016
Posted in category police state

The Detroit media is saturated, this week, with a rash of stories involving police abuse of power. In Inkster, ex-officer William Melendez was sentenced to prison for the brutal beating of Floyd Dent, an unarmed man who was dragged out of his car and tased, punched, and kicked during a traffic stop. (See video below.) Thanks to the power of social media and public backlash, the police chief was forced out of his job earlier this year. If you turn to the 28-second spot of the 2nd video in this story, you’ll see the buffoons back at the station, mocking Dent, his injuries, and his reaction to the gang beating.

In nearby Dearborn, the police currently have two cases pending where unarmed citizens were killed by their assailants-in-blue. Just last week Janet Wilson, who was unarmed, was murdered in her car after she left a mall where she had a run-in with security. The Medical Examiner ruled the death a homicide, as Janet was shot multiple times.

In December, Kevin Matthews was wanted for a misdemeanor warrant. He was involved in a struggle with a Dearborn cop after a foot chase, when he was shot and killed. The Medical Examiner reported multiple gunshot wounds and ruled the death a homicide. Media reports say he was “on medication for schizophrenia.”

Federal Reserve: Finally, Going Broke Has Become Affordable

Wednesday, February 3, 2016
Posted in category housing bubble

I don’t want to believe that I am the only one amused by this article: “The Return of the Affordable Starter Home.” The opening paragraphs from the article are exactly what I would expect from a story in The Onion. But it’s real, and very serious in its tone.

Surging prices have almost closed off the new-home market to young buyers like Brandon and Quincey Lindemann. But the Denver-area couple has found a way in.

The Lindemanns paid $350,000 in October for a three-bedroom house at Tri Pointe Group Inc.’s Terrain, a new Castle Rock, Colorado, community designed for first-time buyers. While the home has press-board kitchen counters and a yard too small for the children the Lindemanns plan to have, it’s almost 30 percent cheaper than the average for a new house in the area.

“We were willing to sacrifice some luxury to have some solid equity in a home,” said Brandon Lindemann, 25, an auto-repair shop manager who plans to install tile flooring himself. “We couldn’t afford much more than the basic, but I’m a pretty big do-it-myself person.”

What stands out, first of all, is that a $350k home is even tagged as a starter home, let alone being hailed as “affordable.” Furthermore, a $350k home has press-board counters and a yard barely capable of sustaining a child’s plastic pool. Also, the buyer is 25 years old and an auto mechanic. An auto mechanic buying a $350k home? The glorification of false prosperity has become so unrestrained and routine that the bubble mentality is the accepted orthodoxy. Decades of conditioning the masses on the virtues of living in debt to live beyond one’s means has made a permanent mark on American society. The “American Dream,” as it is currently defined, is being doled out equitably to all who apply for their fair share of affluence.

A “homebuilding analyst” from Bloomberg is quoted in this article, and it is almost as comical: “The recovery in the move-up segment is getting long in the tooth — there are only so many buyers who can pay $400,000 and above.” This is written as if $400k is the point where home prices are considered to start getting a bit pricey. Inflation is not to be feared, but revered. The conditioning of the American mindset triumphs over the realities of prior experience. The meltdown of 2007-2008 and beyond never happened. It passed, therefore it ain’t.

This article is so full of ‘money’ quotes, with this being another one to point out.

Most builders continue to chase larger profit margins by catering to move-up and luxury buyers. Large builders such as Lennar Corp. and PulteGroup Inc. continue to focus on wealthier customers rather than first-time homeowners.

The words “affluent” and “luxury” and “wealthy” are tossed out without regard as to their actual definitions. Actually, the vast majority of these buyers are not wealthy at all, but it is true that they are luxury buyers, thanks to the Federal Reserve’s monetary policy, the US government’s political policies, and the political manipulation of financial markets. These are middle-class, high time preference buyers who have been conditioned to accumulate debt to live beyond their means in a home they believe represents an “investment.”

I found numerous articles on the Internet that describes this Castle Rock community in Colorado as breaking new ground to make homes affordable for millennials. These $300-$500k homes are described as “low-cost,” and of course, the millennials who mortgage their future away are referred to as “affluent.” Welcome to Meltdown, Part II.

Lawrence Welk and the Federal Reserve

Wednesday, February 3, 2016
Posted in category Economics

I’ve been working on an article or two, plus some blogs on matters of the financial markets, housing bubble, auto bubble, the perpetuation of near-zero interest rates, real estate tomfoolery, student debt bubble, stock market bubble, household debt, retail bubble, corporate stock buybacks, and assorted other corporate earnings shenanigans. Along the way, I came up with a logo that is a cheery representation of current trends.

Lawrence Welk

Stock Buyback Frenzy, Part 119

Monday, January 18, 2016
Posted in category Financial Markets

Balance sheet beheading – one of the many variables pointing to the fact that things are on target to go boom all over again. Tom Woods: are you at the ready to pen “Meltdown” Part 2?

The same Goldman Sachs report showed buybacks totaling just $155 billion in 2009, the nadir of the financial crisis. The year before the crisis, 2007, share buyback executions totaled $760 billion.

General Motors Co. last week said it plans to boost its current buyback program by 80% and extend it through 2017. Domino’s Pizza Inc.’s finance chief, Jeffrey Lawrence told investors at a presentation last week that it is “in the market executing an accelerated share repurchase” of $600 million, which will be completed by the end of the first quarter, according to a transcript.

Love this guy’s comment on WSJ:

jim paulsen wrote:

Hasn’t there been enough “financial engineering” to artificially inseminate earnings? Isn’t time for companies to actually grow the top line?

Re: Size Matters . . . [and corporate response to government inflation]

Sunday, November 29, 2015
Posted in category Economics

This is an add-on commentary to Tom DiLorenzo’s blog post on LewRockwell.com.

————————————————

Tom, your point on inflation and how product sizes are chopped to mask price increases due to government inflation has been a huge marketing challenge for companies, especially over the last five years post-meltdown. I wrote this piece in 2011 (“Why Blame Corporations for Inflation?”) in response to an April 2011 article by the Inflation Street Journal that deemed inflation pressures to be “subdued” because economic indicators cited only took into account price trends, and, as you said, they completely ignore packaging downsizing trends as companies try to protect profit margins in an era of creeping inflation and other economic uncertainties.

Your link to the Tyler Durden article in Zero Hedge is acutely interesting, and that’s because I called out Mr. Durden in 2011 for an article he wrote in 2010 where he somewhat blames Walmart for “penny pinching” to “mask inflation.” He also points the finger at retail stores for “price masking gimmicks” even though he clearly seems to understand that the downsizing in packaging is an adjustment for inflation. He cites an example of Walmart brand coffee and writes that he is “confident this is not an isolated ploy to pass on surging input prices.”

Word usage here (“ploy,” “mask,” and “gimmicks”) tells me that Durden was confused in 2010 and he has since evolved his understanding of using product packaging and marketing to escape the ravages of government inflation. A marketing example being products that are labeled “concentrated” or “super concentrated” in trying to convince consumers that they can use less of the product (such as detergent or fabric softener) and still have the same – or better – results.

Other bloggers back during that time were also placing blame on corporations, with one in particular, the Modern Survival Blog, using the phrase “corporate scheming, trimming, squeezing, downsizing, profit optimizing…” It’s peculiar that these individuals who understand government policy and inflation would also, in the same breath, blame companies for not being willing to give a huge advantage to their competitors by leaving size untouched and instead attach escalating prices to their products. Perhaps those folks need a couple of years in a corporate finance department working in accounting operations, management accounting, and financial reporting.

The industry I work in is such that our products are not so “touchable” and are more service-based, thus we can’t reduce packaging. Instead, executives and managers are constantly challenged to find ways to offer insurance that lowers coverage and reduces cost; makes services performed by health partners more efficient; and offers cost-cutting buyers such as groups and individuals myriad benefit options, such as larger deductibles and co-pays, to avoid the rise in costs. But the whole healthcare industry in the age of ObamaCare is challenged well beyond inflation in terms of its spiraling costs. And the auto industry – where I used to work in Finance groups – has a similar challenge in dealing with the government’s green-environmental and safety mandates.

Puppy Love Becomes Sexual Harassment

Monday, November 16, 2015
Posted in category Feminism

The religion of feminist-political correctness has created a nation of perpetually-offended imbeciles who cannot – will not – ever comprehend life without entitlement and victimology. The fact that this 9-year-old boy’s love note became a news headline mentioning “sexual harassment” indicates an Idiocracy gone wild.

21st Century Regulation

Monday, November 16, 2015

As quoted from “the White House“:

“To help our economy grow to its full potential, we need to create a 21st century regulatory system.”

The John Locke Foundation calls this White House report “a case for significantly curtailing occupational licensing in North Carolina and elsewhere” and “a major boost” from the White House. In fact, this report is chock-full of support for continued government management of licensure and professions. If this meaningless, definition-less puffery gets past these folks without a single utterance of “WTF?”, they have a very broken Stupid Indicator.