Kass: Harley Hogs Feed at the Subprime Trough

03/28/07 - 12:51 PM EDT

Doug Kass

Editor's note: This column by Doug Kass is a special bonus for TheStreet.com and RealMoney readers. It first appeared on Street Insight on March 28 at 8:35 a.m. EDT. To sign up for Street Insight, where you can read Kass' commentary in real time, please click here.

Judging by the commentary and the virtual invulnerability of worldwide equity prices, most see only a speed bump in the recent subprime scare. There is still a general belief on the part of the investment community that the mess is a containable fluke.

I have stressed the likelihood of a subprime contagion. After all, subprime is subprime and credit is correlated. Lower-quality, more-levered lending (with less collateral) is not confined to consumer loans, credit cards, homes, recreational vehicles and autos -- as investors might soon find out.

Even motorcycle (loans) are hitting potholes!

Indeed, it appears growing credit losses and delinquencies are beginning to render Harley-Davidson's (HOG Quote - Cramer on HOG - Stock Picks) motorcycle loans, well, increasingly like hogs.

Thirty-day delinquencies (and loss trends) in Harley-Davidson's receivables book offer a clear picture that credit-quality issues are broadening as HOG's receivables experience has begun to trace a pattern of deterioration that we first began to see in subprime mortgage loans during the first half of 2006.

Harley-Davidson's 30-Day Delinquencies
4Q2006 5.18%
3Q2006 4.46%
2Q2006 3.61%
1Q2006 3.69%
4Q2005 4.83%
3Q2005 4.07%
2Q2005 3.66%
1Q2005 3.60%
Source: Lehman Bros.

As I have mentioned previously, Harley's finance subsidiary (HDFS) funded almost half of Harley-Davidson's motorcycle loans. Like subprime mortgage loans, HDFS' hog loans are pooled and securitized to institutional buyers. Unfortunately -- in credit trends and terms -- HDFS is also beginning to look more and more like New Century(NCBC Quote - Cramer on NCBC - Stock Picks), Fremont(FMT Quote - Cramer on FMT - Stock Picks) and Accredited Home Lenders(LEND Quote - Cramer on LEND - Stock Picks) did in early 2006.

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