Lumber's Decline Likely Means Predictions of Housing Bottom Were Premature

Lots of the smarter financial commentators were on tap several months ago to state that a move up in lumber would presage a bottoming in the housing market.

So around the end of April when lumber bottomed at $150 and began moving up all looked good. And as the price moved up to $190 on April 13, it looked like the bottom for housing was in.

But then lumber began to fall, and as of Wednesday hit $160. Given the downward momentum it appears that it won't take too much to get it back down to the $150 level.

This round turn in the lumber prices probably tells us that the predictions of a bottom in the housing market were premature.

I wonder if the false rally in lumber also could tell us something about the current rally in the stock market.

Comments

[jeandit75:]

I hope you're right Marc and I believe that the lumber market is more efficient than the equities markets which are being manipulated by FED officials so...hang on to your IYR short.

Apr 30 11:12 AM

[conceptwizard:]

Yes, some of the subliminal messages like lumber, oil and concrete etc offer a truer picture of what is happening. The housing numbers are being manipulated by the banks by keeping the amount of foreclosures for sale to keep the market falsely elevated to stem their losses. The Fed is looking for quick responses to keep the market from collapsing rather than dealing with the toxic asetts for once and be gone. The unemplyment numbers are being reported incorrectly as the true shadow number is closer to 20%. You really have to filter things through to get the mud out of the water.

Apr 30 11:36 AM

[2houndz:]

Yeah, the lumber market and that Case-Schiller graph, which is still going down. I'm not sure where people saw the good news in that, but I could not.

Marc- those are some good-looking dogs in the photo. Are they American Pit Bulls? One of my favorite breeds.

Cetin - this article was about the housing market, not the stock market. Give it a rest, will ya? You are beginning to sound like a religious zealot.

Apr 30 02:18 PM

[Mad Hedge F...:]

It's got to be a long term buy here. With the lumber industry approaching its fifth year of what is nothing less than the Great Depression II, you’d think that this is the last place that futures traders would want to play. Prices for this commodity are driven primarily by housing starts, which have been in a death since 2006. No surprise then that lumber futures have plummeted from 70%, from $4.60 to $1.38 a contract, the lowest in 30 years. By the time you add up inventories of developers like Centex (CTX), Lennar (LEN), and Pulte (PHM), bank repossessions, and a gigantic overhang of anxious sellers desperately trying to get out of homes they can no longer afford, the number of houses for sale probably exceeds 5 million, or 8% of the total housing stock in the US, the most in 70 years. But the market thinks otherwise. The lumber industry has been downsized down to the bone through bankruptcies, mill closures, and distress inventory sales. So guess what happened in February when the trade never thought anyone would ever buy a stick of wood again? The Chinese showed up out of the blue as major buyers, triggering the ritual short covering rally, and chalking up two back to back limit up days in the futures market. Russia provided an assist by raising the tax on its lumber exports from 25% to 90%. Prices have recently settled at $1.85. I’m not by any means calling an end to the real estate crisis here, but lumber has suffered enough, and is a bargain. Smaller funds might consider using dips to accumulate longs. One futures contract get’s you 110,000 board feet of 2” X 4” soft spruce, fir, and pine in mixed 8’ to 20’ lengths, worth $20,350, about two thirds of a rail car full. With a maintenance margin requirement of only $1,650, the contract gives you 12:1 leverage. It’s a way to play the global demand for lumber without being held back by the continuing stress in American housing. If you don’t need the leverage, look at the biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) which have already had huge moves. After seeing similar Chinese moves in copper, crude, and coal, this could be further proof of the beginning of a much broader, long term bull market in commodities.

Apr 30 03:33 PM

[Harry Tuttle:]

The Chinese strategy is concentrated in investment and infrastructure which at some point require a return. So, unless global demand picks up, they could end up with a lot of spare capacity and nothing more.

Interestingly enough, the rally in commodities is two-tiered. Those commodities with large liquid future contracts, like oil and copper, have outperfomed other commodities. This indicates speculative buying ahead of the Chinese, just like in the 2005-2007 period.

As for lumber, I am not smart enough to call the bottom, but let me point out that the boom was unprecedented and the recovery could very well be a long L. After all, most real estate cycles take decades and not years.


On Apr 30 03:33 PM Mad Hedge Fund Trader wrote:

> It's got to be a long term buy here. With the lumber industry approaching
> its fifth year of what is nothing less than the Great Depression
> II, you’d think that this is the last place that futures traders
> would want to play. Prices for this commodity are driven primarily
> by housing starts, which have been in a death since 2006. No surprise
> then that lumber futures have plummeted from 70%, from $4.60 to $1.38
> a contract, the lowest in 30 years. By the time you add up inventories
> of developers like Centex (seekingalpha.com/symbo...), Lennar
> (seekingalpha.com/symbo...), and Pulte (seekingalpha.com/symbo...),
> bank repossessions, and a gigantic overhang of anxious sellers desperately
> trying to get out of homes they can no longer afford, the number
> of houses for sale probably exceeds 5 million, or 8% of the total
> housing stock in the US, the most in 70 years. But the market thinks
> otherwise. The lumber industry has been downsized down to the bone
> through bankruptcies, mill closures, and distress inventory sales.
> So guess what happened in February when the trade never thought anyone
> would ever buy a stick of wood again? The Chinese showed up out of
> the blue as major buyers, triggering the ritual short covering rally,
> and chalking up two back to back limit up days in the futures market.
> Russia provided an assist by raising the tax on its lumber exports
> from 25% to 90%. Prices have recently settled at $1.85. I’m not by
> any means calling an end to the real estate crisis here, but lumber
> has suffered enough, and is a bargain. Smaller funds might consider
> using dips to accumulate longs. One futures contract get’s you 110,000
> board feet of 2” X 4” soft spruce, fir, and pine in mixed 8’ to 20’
> lengths, worth $20,350, about two thirds of a rail car full. With
> a maintenance margin requirement of only $1,650, the contract gives
> you 12:1 leverage. It’s a way to play the global demand for lumber
> without being held back by the continuing stress in American housing.
> If you don’t need the leverage, look at the biggest producers, Weyerhaeuser
> (seekingalpha.com/symbo...), Rayonier (seekingalpha.com/symbo...),
> or Louisiana Pacific (seekingalpha.com/symbo...) which have
> already had huge moves. After seeing similar Chinese moves in copper,
> crude, and coal, this could be further proof of the beginning of
> a much broader, long term bull market in commodities.

Apr 30 04:03 PM

[David in D:]

I'm not convinced that the presupposition that lumber prices will be a forward looking indicator for home price stability is accurate. It is possible that you could have declining inventories of existing and already constructed new houses, which in turn produces possible price-stability, while still having major homebuilders on the sidelines.

In other words, I think its possible that lumber prices will not preceed house price stability but possible occur simultaneously with stability.

Thoughts?

Apr 30 06:36 PM

[LKofScotland:]

Excellent piece by TMHFT. "Lumber" makes it all sound like "wood." People who drop the dog on the lap and head on down to a "lumber yard" know the difference. Interesting that this collapse in the price of "lumber" is commensurate with zero percent fiancing deals at Lowe's and Home Depot, so amazingly it's not finance related in that sense. Does this presage a bottom in these retailing stocks, then? They've had an amazing run from the market bottom in November. I certainly struggle to see how that's possible in an economic environment such as this and prefer food companies and the Coke's, Pepsi's and McDonalds of this world (although they've had a heck of run here, too.) Sell in May and go away was the trade of a lifetime last year. Discretion the better part of valor? Once bit twice shy? Great industry to look at because "lumber" has a value beyond the fact that it's "just wood" which is what has been presented by the author here.

May 01 12:10 PM

[Marc Liu:]

Houndz,

Yes - they are Pitbulls and they are the best !!

Farnsworth and Digit pictured.
Cahncey newly acquired.

All rescued from the New Haven pound.

Absolutely, wonderful dogs !!!

Marc


On Apr 30 02:18 PM 2houndz wrote:

> Yeah, the lumber market and that Case-Schiller graph, which is still
> going down. I'm not sure where people saw the good news in that,
> but I could not.
>
> Marc- those are some good-looking dogs in the photo. Are they American
> Pit Bulls? One of my favorite breeds.
>
> Cetin - this article was about the housing market, not the stock
> market. Give it a rest, will ya? You are beginning to sound like
> a religious zealot.

May 01 09:45 PM

[johnthebears:]

Harry Tuttle got it right...

"The Chinese strategy is concentrated in investment and infrastructure which at some point require a return. So, unless global demand picks up, they could end up with a lot of spare capacity and nothing more.

Interestingly enough, the rally in commodities is two-tiered. Those commodities with large liquid future contracts, like oil and copper, have outperfomed like other commodities. This indicates speculative buying ahead of the Chinese, just like in the 2005-2007 period."

It looks to me like the Chinese market (FXI) ( ^ssec) is headed for another bubble, like in 2006-2007 with all of the excess lending by the banks to support their markets and capacity growth. They are hoping to sell enough within China to replace the USA and Europe! Chinese folks know how to save money, and I doubt that they have visa cards to finance all their desires.

I understand that housing peaked in 1928 and it was not until 1954 that the housing index came back to a comparable level. With over $50 Trillion dollars loss of equity world wide, It is hard to see how this housing market can turn around any faster. Why would there be any major surge in new homes when there is such a large inventory available at much lower prices than current construction cost? Does not make sense to me.

May 02 01:43 PM

[HardwoodFlo...:]

First of all have you ever seen the pit for Lumber. There are about 5 guys there.

Secondly, most lumber is not traded via the exhchange. Car loads are bought by distribution, or the big boxes, direct. The price is closer to $185/MBFT but that is so far below raw material cost that every car load being sold is being sold at a loss.

The reality is there has been so much attrition in this business that those left (about 4 producers) are completly amped for a recovery. The shut downs in prodcution (45 in just British Columbia) have been staggering. There is so little prodcution out there that the slightest bit of demand will shoot prices up.

The best of the breed here is Weyerhauser.

I wouldn't go anywhere near the exchange. If you want to get in the game own one for the producers.

May 04 11:40 AM

[HardwoodFlo...:]

David in D you got it right there is no- 0- corrloation between the exchange and housing. The exchange is not forward looking as producers are not seelling a majority of prodcut through the exchange.

The truth in lumber is scarier than you can imagine. right now everything is being sold below raw material cost. The blood is in the streets- Plum Creek, Stimpson, Abtiti- Bowater(sp), Tembec have all cutt so much prodcution you can't even imagine. So many companies have gone out of business in the last 3 years it is staggering. Production of lumber is at it's lowest levels since the 30s (but we have 200 million more people in the country). The recovery is going to be staggering and those left in the business will be the ones poised to kick ass. I think Weyerhauser is best positioned.

May 04 11:45 AM

[Mad Hedge F...:]

Look again. Those fortunate few who took my advice to go long lumber futures (www.madhedgefundtrader... ) can now go out and build a bonfire to celebrate. Since then the homebuilder’s favorite commodity has rocketed by 35% to $200. The biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) have also done well. The last gap up was prompted by more mustard seeds that the housing market may have hit bottom. The enormous subsidies offered to first time buyers is also helping eat into inventories. After seeing similar Chinese inspired moves in copper, crude, and coal, this is further proof of the beginning of a much broader, long term bull market in commodities.

Jun 02 04:28 PM