Weyerhaeuser: A Good Near Term Short Opportunity 22 comments
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Yesterday Weyerhaeuser (WY) was upgraded by Deutsche Bank to Buy. This might normally be a signal to buy. Certainly a lot of people interpreted it this way as the stock ran up more than $2 today. However, today’s action has completed a run up from a bottom of $18.67 to a strong resistance level $26.10 to $26.87. WY may be set to fall from here at least in the near term. The NAHB’s March Housing Index was reported at 9 yesterday. This is the same as February’s reading. It is very low. The upgrade effect normally wears off after a day or so. When the building permits numbers and the housing starts numbers come out tomorrow, WY seems primed to go down on bad numbers, and I don’t think anyone expects those numbers to be good.
Add to this the rising number of foreclosures, and you have further impetus to the downside. Add to this the rising unemployment, which is predicted to go over 10% sometime this year. This will likely add further to the foreclosure problems. It seems unlikely that those will be improving quickly.
Keep in mind the WY news release on Mar. 11, 2009, “Weyerhaeuser Co. is shutting mills in Simsboro and Dodson, La., eliminating a total of 185 jobs. The company blames lower demand for wood products for its decision to indefinitely close the two north Louisiana mills, as well as one in Alabama and one in Kentucky. The company also says it will permanently close five mills elsewhere in the nation.” WY is also apparently shutting 5 service centers.
Keep in mind WY reported operating losses of $1.5B in its last earnings report. These latest plant closings do not indicate to me that WY will be making more money in the near future. Instead they indicate the WY will have further non-recurring costs to record as losses in the next reporting period, and WY will have less revenue to possibly make money with. Keep in mind that Dr. Roubini is calling the current rally a “Dead Cat Bounce”.
I generally like this company. It undeniably has a lot of great assets, which give it an almost unassailable position in its market. I think that its short term outlook is definitely down. I do not see it turning around to a more profitable situation in the next couple of quarters. I am not even sure things will improve at all for WY for the rest of this year. The number of foreclosures and the unemployment will continue to keep the amount of building low. This should keep WY’s sales low. I foresee a lot more pain to come for this company this year. I have included the chart below as an illustration of the likely direction of WY in the short term. It seems likely it will grow in 2010, but it remains to be seen how low a point it will grow from. You want to wait to buy this stock, or you want to short it.
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This article has 22 comments:
The PPI data was a little different than analysts expected, but it was not defaltionary or overly inflationary. In other words, it was generally good news.
The ICSC retail sales numbers were down this week by 0.1% from the prior week and 1.4% from the year earlier week.
After all this, it is hard to determine the overall direction of the market (or this stock). Certainly the housing data was encouraging, but Meredith Whitney's words about the financial sector are likely to haunt the market today. A healthy financial system is essential to the health of the overall markets. $2.7T worth of shrinkage (even if it is an illusion of sorts) is a lot of shrinkage in the effective buying power / wealth of the country. This is really not too much different than when Dr. Roubini said we still had several trillion of bad assets to write off. At that point we all thought he was talking about real estate loans (and some emerging country loans). We were probably right. This new $2.7T loss is likely on top of that. If so, it means people will not be spending as much on new housing (or new building) over the next year. If consumer credit tightens, the overall credit markets will likely tighten. If the builders can't get loans, it should decrease the amount of building they do.
Overall I think you have to consider this morning's news negative for WY, even though the housing starts news was much better than expected.
Completions of housing units rose 2.3% to a seasonally adjusted annual rate of 785,000. Completions of single-family homes fell 8.2% to a record-low 505,000.
The number of units under construction fell 2.7% to a 762,000 annual rate. Single-family homes under construction dropped 3.4% to 370,000, the lowest in 38 years.
Starts rose 89% in the Northeast, rose 58% in the Midwest, rose 30% in the South and fell 25% in the West.
Also in the news this morning WY announced a slew of further plant closings and cut backs. This is likely to depress the stock after the initial euphoria about housing starts wears off.
Last month Standard and Poor's cut its long-term ratings on WY one notch to right above junk status, saying the company will likely continue to post poor results.
With all of the charges likely associated with the recent plant closings, the results next quarter are likely to show a lot of red ink. WY may soon get downgraded to junk. This would be very bad for the stock.
However, there is a good chance that it will move downward tomorrow. They don't really know if the housing starts number is really real yet. It may simply be an artifact of better than normal Feb. weather. It clearly is not in sync with the building permits growth. If WY goes down tomorrow, the near term short strategy is probably still intact.
Perhaps most important of all, I should have mentioned that the price of lumber (lumber futures) have been in a steep downtrend since the late summer of last year. They were north of $270 then. They are now at about $140. It's much harder to make money at this price. Without a big increase in construction, it seems unlikely that these prices will go up demonstrably.
There are probably a few more points to make about this apparent jump in housing starts last month. First the standard error for the housing starts number is 13.8%, so the 22% number may be highly in error. In fact the building permits number is usually looked at as a better guage of actual activity because it is a much more reliable number. It was only up 3%. Second the weather was unseasonably warm in Feb. This could have led to some projects starting earlier in the year than they might have otherwise. This may mean that we will see the reverse effect on the number next month. All the projects that started a little early, will tend to subtract from the ones that would normally have been recorded for March. Finally since a lot of the new starts had to do with apartments, they may have been anxious to start because they take a longer time to finish than simple single family homes. This too may have skewed the numbers to Feb. from some that might have been in March normally.
In sum one shouldn't read too much into this one month's worth of data. It may be nearly meaningless as a lone piece of data. I would not be at all surprised to find that next month (March) the numbers are down from Feb.'s even though one might suppose there would be more starts in a generally warmer month. If so, this might very well be because some of the starts that would have been March starts got started a little early. There might not be any increased number of overall starts.
Part of this belief is based on the economic recovery coming very slowly. I am probably in the Dr. Roubini camp in this area. I tend to think the current rally is a Dead Cat Bounce. I also, as stated above, think the uptick in housing starts is a mirage of sorts. Next month's figure will likely prove or disprove my thesis there. Meanwhile you might follow the lumber futures to get an idea of how well WY is likely to do.
I also read an article about a Canadian firm's outlook being recently improved b
This puts a further hold on this trade to the downside. However, it does not alter the dire situation facing WY for the near term (or even the intermediate term). This company is still in trouble.
There is some thought that the current rally is a Dead Cat Bounce. This action by the Fed may have some effect on that, so the "Dead" part is less certain. Still this bounce that may take us as far as $90 on the SPY. The latest action by the Fed has put my strategy for WY on hold for a short period while the market goes up. I will be looking for a significant downturn, especially if the SPY gets close to $90. That will likely be a godd time to get in to the WY trade to the downside. This company is just bleeding money too quickly. Good news is always good news. However, fundamentals eventually come into play. This stock should outperform to the downside once the market turns again.
It doesn't seem ths trade is likely to work until commodities start going down again, especially lumber. I plan on monitoring this.
Be aware that the current predictions are for a retracement most of the coming week. Then the "seers" think we may see more upside before the current rally is over. You probably would want to exit the downside trade on WY when the second phase of the current rally started. Lumber, oil, and grain futures might be good indicators to use.
If you don't like shorting WY, others have suggested selling into the chip rally, which is heavily overbought . INTC and AMAT were two of the suggestions. KLAC is another semiconductor equipment maker (AMAT being the other mentioned) that has been overbought recently. A Forbes article Friday noted the book-to-bill ratio for Feb. was only .48 in the semiconductor equipment market. These companies (AMAT and KLAC) stand to lose a lot of money in the near term.
So far the markets have not like anything he has suggested. The odds are that they won't like this new plan (or non-plan) either. If the market reaction is negative to Geithner's plan, you should be able to make good money shorting WY. If the reaction is positive, you may wish to abstain (or to cover). WY will likely follow a really strong move upward by the broader markets. Basically if they are moving upward quickly, the nearer term future is likely improving for WY.
Keep in mind that the Quantitative Easing by the Fed will likely drive the value of the dollar down. This should drive commodity prices up, including lumber. Higher lumber prices would be good for WY, which is heavily US based.
There is a flip side to the falling dollar though. It will likely mean that foreign investors will be less interested in US stocks (and bonds). If they are going down in value as the dollar devalues respective to the foreign currency, the foreigner will be less likely to want to own the stock. Of course, the Fed's buying of long term Treasuries will likely keep Treasuries' price up at least for the short term.
Then the counter-counter argument says that US equities will inflate in price with inflation in the currency, so value may not be lost if you are a foreigner. Since the equities markets have gone down mostly lately, this argument doesn't seem likely to hold sway for the near term. If the US dollar keeps going down, it may really scare some foreigners out of US equities. Multination corporations such as IBM would be a little less susceptible.
It's a complex puzzle. It's hard to see clearly what will happen. Certainly between the Fed and the Treasury they will pour $2T of stimulus into the economy. This is on top of the recent Congressional $.8T. One might think that $3T in stimulus money might be enough to stop the death spiral in the recession. We will have to see.
If the stock market steadies and rallies here, shorts may not be a good play. We will have to see. The US Dollar is supposed to recover a little this week. Certainly Japan and Britain have been doing the same thing as the US, and the European Central Bank may join them soon. There may really be no huge reason for the US dollar to go down relative to the other currencies.
By way of an impartial statement I quote from a Zacks comment about IR:
"Given our view that new home and existing home inventory remains high and demand conditions weak, we expect the residential construction market to be under continued pressure for the rest of 2009. As a result, we don’t expect an immediate (pro-forma) sales rebound at ACSS, or a near-term recovery in the new homebuilder channel at Security."
I agree with Zacks comment about the homebuilding business for 2009. This should have a very negative effect on WY's business. This stock should continue to outperform to the downside, if the market retraces as we move into Q1 earnings season. Plus the huge expenses involved in shutting plants, etc. should put a huge crimp in WY's earnings for Q1. I am looking for another big negative number. A lot of the losses may likely be reported as one time expenses. Still they will be huge losses. I am guessing WY lost more than $1B in Q1 when you include one time costs. Almost certainly WY lost more than $.5B. That's still a lot.
However, the Pulte Homes and Centex merger is thought to mean there will be less construction. This is bad news for WY. After the market runs up today (and likely next week now), it will probably be a good time to get into WY on the short side. Today's good news will likely extend the overall rally to the $87-$88 SPY level. It may even extend it to the $94 level some have suggested.
At that point the market will likely be highly overbought. It will be due for a down turn. A lot of people have suggested that the markets will retest their current lows. This may or may not happen. However, it seems extremely likely that the markets will again turn down after an extended rally that will likely be more than 30% by then. WY should outperform to the downside. It is still going to lose huge amounts of money this year.