My Listen to Lumber post last week got picked up by Joseph Cotterill at the FT Alphaville blog, which prompted Bill McBride of the esteemed Calculated Risk website to extrapolate on the weakness we saw in lumber futures.
Specifically, after quoting my post, Mr. McBride noted:
I have no comment on housing stocks, but I suspect this decline (in lumber) is either just “noise” following a large price increase, or more supply coming back on the market (remember many mills closed during the housing bust, and I suspect some are coming back online). Back in 2010, after the end of the housing tax credit, I noted that lumber prices collapsed. But the dynamics were different (that was obviously tax credit related and not a real recovery).
Keep in mind, Mr. McBride’s website is largely devoted to macroeconomic perspectives, while I am primarily intermediate-term market focused, with an occasional long-term thesis thrown into the mix. Here, the “noise” of lumber futures being rejected away from late-2012 highs may very well be just a blip in a long-term (years) uptrend.
But for our purposes as stock traders, the advance of lumber and housing/housing-related stocks over the past few years means we should at least consider the “three black crows,” or three consecutive daily strong selling candlesticks, precisely at late-2012 highs last week as a potential major source of resistance not yet ready to be overtaken by bulls.
Indeed, macroeconomic “noise” may very well be just that on a grand scale. However, for swing traders the notion of the momentum cutting both ways also needs to be considered.
I also had some insightful and intelligent comments in my original post, arguing that lumber is subject to seasonally weak periods. Here, again, despite the macro validity of such arguments, the important point for swing traders to acknowledge is that based on the past few years of market action, strong lumber has essentially equaled strong housing stocks. Should lumber build on last week’s weakness to the downside, the concept of the market already having adequately priced in the first leg of a housing recovery looking out several weeks or months becomes more pronounced.
FULL SOURCE: A Brief Comment on Lumber Prices by Bill McBride
ORIGINAL POST: Listen to Lumber
I don’t pretend to be much of a TA, leaving that to the really smart guys such as yourself, Wood, and others. My approach is more in line with M. Le Fly’s graphic TA illustrations. Having said that, I can attest to having sawdust for brains. I’ve made my living in the wood biz for a very long time, and read nearly everything of note regarding the industry and markets ( I was however, away for the past couple of weeks, being made a fool of by fish with large pointy bills — and sampling for the first time some 20yr old Pappy VW straight Kentucky bourbon).
Some points regarding lumber and lumber futures —
Lumber futures are very thinly traded, and are often disconnected from trade in the commodity so be careful drawing conclusions from futures action alone.
NA trade in lumber has been greatly impacted over the past 5 yrs with the rise of China as a global consumer of lumber. Prior to 2006 the trade in lumber to China from NA was miniscule. Today, China has surpassed Japan as Canada’s second largest export market and rivals the US.
Given the Chinese New Year holiday, combined with weather issues in the US and E Cda the last couple of weeks, near term moves in the lumber trade and in futures contracts could be easily swayed by traders not being at their desks. In summary, China has changed the rules of game and made historical comparisons less reliable.
Supply side ?? The Sierra Club and other environmentalists have pretty much put a stop to USFS timber sales, so in the US it’s about corporately held industrial timber availability. Right now, mills in the US PNW are suffering log shortages due to log exports to —- wait for it — China and Japan. A huge mill has been announced in N Florida by Germany’s Klausner corp. At 750million bd ft per yr it is roughly 3x the size of a “large” modern mill, and if built, would be the largest in the US. But wait a minute — Florida??? Southern Yellow Pine ??? Klausner ??? There isn’t enough economically accessible industrial timber in the area. SYP – not a preferred species for construction lumber. Klausner – the same dipshits who built 3 new mills in Germany without an adequate timber base and disassembled 2 of them to sell them off to Scan and Russian interests (not a great track record of sound production planning). So the stats regarding future supply increases are heavily influenced by the Klausner proposal and it could be a bowl of corn flakes (I’m told financed by the Chinese). Supply from Canada??? who historically have supplied as much as 40% of US softwood (read building construction) lumber consumption. The BC Interior region (the largest producer) is expected to close 12-15 MORE mills in the next 2-4 years due to the pine beetle infestation (to which US mills are not immune). Ontario and Quebec will reduce their provincial cuts by approximately 20% in the near future — by government mandate.
NA Demand — while US hsg starts have increased dramatically, they are still at approximately 900,000/yr which is less than half of all time highs. Depending on the stats you cite, there are 1.2 to 1.4 million families formed in the US annually – are we adding 300 – 500k families to the rolls of street dwellers annually?
Japan Demand (2012 hsg starts of 1.1million) will be robust in 2013 and likely 2014 due to the govt decision to increase the VAT in 2014 and again in 2015 – bringing hsg starts forward.
So, I am long names in lumber — CFP and IFP on the tsx. My company’s order file is stronger than it has been in 4 yrs, and I have a strong feeling that our customers have “under bought” and will be coming to table for “top up” orders within the next 2-4 weeks.
Finally – this is certainly NOT investing/trading advice, as I have been wrong lots of times.
Thanks for the insight. Appreciate it muk
Interesting stuff. Most lumber stocks are way higher than even in 2007 or so. Wall Street and traders of course are misinterpreting the “rebound” in housing as they all did after the late 1980’s bust. CR is Joe Weisenthal light these days, just with better charts, as it pertains to orgasmic bullishness and Fed applauding. I would bet my money on your analysis for the time frame you mentioned and have many times.
Thanks, GYSC. Good insights.