RISK AND/OR REWARD?

Nearly all of us are familiar with the concept of risk and reward. Rational investors demand a higher potential return for a riskier investment. For example, US government bonds are considered risk-free investments. They are backed by the "Full Faith and Credit" of the US government. The interest rate paid on US Treasuty Bills is generally considered the "risk-free" rate of return.Right now that rate is a little over 4%.

But investors that invest in a new strip mall, high risk tech venture, or Canadian mining stock trading on the Vancouver Stock Exchange will demand (but not neccessarily get) a higher return.

BAD CREDIT. NO CREDIT. HIGHER INTEREST RATES.

The same rules work in the credit market. If you have good credit, you can borrow money at lower interest rates. Bad credit. Be prepared to pay more.

But what about a subprime meltdown?

Mortgage lenders, especially subprime lenders, are faced with high rates of default and foreclosure. What do they do? They can play hardball with distressed borrowers, foreclose on mortgaages and effectively become real estate owners, managers and agents. Houses that are forelcosed may sell for only 50-60% of the mortgage debt. Less, sometimes, in distressed markets.

Or do mortgage lenders look more at the absolute reward side of the equation? Will they be willing to write down debt and/or lower interest rates to allow borrowers to remain in their homes and avoid foreclosure?

The Author does not have much information on the current state of loan renegotiations, but knows that a modestly discounted debt beats a dead house awaiting a sheriff's sale.

JUST A QUESTION FOR TODAY IN THE DESERT OF THE REAL!

THE HOG IS CHOKING. JAPANESE MOTORCYCLE MANUFACTURERS ALSO SLIP.

Harley-Davidson dropped this missive on the market yesterday, September 7th:

Harley-Davidson, Inc. (NYSE: HOG) announced today that it expects to ship between 86,000 and 88,000 [AUTHOR’S NOTE: That’s still a heck of a lot of motorcycles] Harley-Davidson(R) motorcycles in the third quarter of 2007. Shipments of between 91,000 units and 95,000 units were originally planned for the quarter. Shipments for the full year are expected to be in the range of 328,000 to 332,000 Harley-Davidson motorcycles.

“Initial reports about our 2008 model year motorcycles from our dealers and the media have been excellent, but this is a difficult time for the U.S. consumer,” said Jim Ziemer, Chief Executive Officer of Harley-Davidson, Inc. “Coming off a negative U.S. retail sales trend in the first six months of the year, we ran an effective promotion in July that increased retail sales and reduced inventories of 2007 model motorcycles. However, our U.S. dealers’ retail sales have fallen sharply during August. Against the current economic background, we no longer expect worldwide dealer retail sales to increase during the second half of 2007. As a result, the Company has decided to reduce its planned shipments of motorcycles to its dealers for the remainder of 2007. The Company expects its actions will result in fewer wholesale motorcycle shipments than dealer retail sales during 2007,” said Ziemer.

“Although this is a challenging time, Harley-Davidson is the worldwide heavyweight motorcycle market leader,” said Ziemer. “We enjoy an enviable position of financial strength, with a solid balance sheet, strong cash flow and a history of returning value to shareholders. While a decision to reduce shipments and expectations is never easy, it is clearly the right thing to do for the long-term health of the brand and the business,” said Ziemer.

HERB GREENBERG THINKS THAT SOMETHING “STINKS TO HIGH HEAVEN, ER, UH HOG HEAVEN”.

Herb Greenberg writes Herb Greenburg’s Market Blog. His post from yesterday, “Stinks to High Heaven, er, or Hog Heaven”, describes conditions of dealers stuffed with inventory, a finance arm stuffed with bad loans, and a stock price just plain stuffed. It is good reading, especially for those still long HOG. Or ready to buy one, as one might have some bargaining leverage.

Aaron Smith of Grow Your Funds www.growyourfunds.com/2007/09/story_stock_harleydavidson_inc.html paints a similarly dark picture from HOG’s warnings. Smith states:

The earnings guidance from HOG is nothing short of dismal. It is extremely concerning to me that HOG is not only saying that August sales have tumbled, but also dramatically lowering 2008 estimates, and totally doing away with their guidance on 2009. This tells me that something bigger is going on at Harley-Davidson, not just a simple blip on the radar screen. The company is having trouble with operating margins and the demand for its newer products. HOG used to be a trusty stock that one could always count on, but it seems that the times have changed of late. I think investors would be wise to stay away from this company until they prove to be a worthy investment again.

For the record, the Author does not own HOG, nor has he ever held HOG stock. He has owned HD’s, however.

JAPANESE SALES AND PRODUCTION ALSO DOWN.

Powersports Magazine, a leading publication of the motorcycle, ATV and snowmobile industry, notes in its August 31st edition that Japanese exports were down 20% in August, continuing a fourth-month decline.

Statistics released Aug. 31 by the Japanese Automobile Manufacturers Association revealed that its members had another down month for production and exports again in July. The month marks the fourth consecutive one for production and the third consecutive for exports that there has been a decrease on the same month of the previous year.

Production dropped 5 percent to 125,063 units for July 2007, from 131,714 units in July 2006. Honda (41,138 units) and Suzuki (34,815 units) both posted 12 percent production decreases, while Yamaha was up 4.6 percent (30,108 units) and Kawasaki was up 17.1 percent (18,966 units).

Exports dropped 20.2 percent to 79,001 units for July 2007, down from 99,034 units in the same month of the previous year. Suzuki showed a significant drop in exports, down 49 percent to 15,482 units from 30,383 units in July 2006. Honda was down 29.6 percent to 21,752 units. Yamaha slowed exports slightly (0.2 percent), to 24,454 units. Kawasaki posted an export increase of 30.8 percent to 17,313 units.

WHERE IS DUCATI, THE MANUFACTURER OF THE FINEST MOTORCYCLES IN THE WORLD, IN THIS CURRENT POWERSPORTS MARKET?

Last month Ducati announced improved financial results for the first half of 2007. However, Ducati’s guidance did acknowledge that the company has higher turnover in the first half of calendar fiscal years than the second half.


THERE ARE “TOYS”, AND THERE ARE NECCESSITIES IN THE DESERT OF THE REAL. IT SOMETIMES HARD TO TELL THE DIFFERENCE.

IMPORTANT DISCLAIMER: This blog is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The author may or may not buy or sell securities discussed in this newsletter.