On an anecdotal basis, most reports point to the opposite phenomenon where demand has exceeded supply to this point, as many lumber mills have been shut down for years and the restart time to get a mill back up to speed can take several months. Moreover, it seems that many mill operators have been taking a cautious and gradual approach in increasing supply with the recognition that the recovery remains fragile and the pace of the recovery could still unexpectedly slow. The following is just one of many articles to this point.
A Very Large Tree Is Falling In The Stock Market Forest [View article]
Hello bbro,
Thanks as always for your comment. You are correct that over time that the S&P 500 Index and lumber prices have entered into extended periods where this correlation relationship has deviated. While stocks and lumber were highly correlated from the early 1980s to the early 1990s, lumber initially move of stocks in the early part of the 1990s only to have stocks surge higher amid the parabolic move associated with the tech bubble. This relationship reconverged once the tech bubble burst during the early part of the 2000s up until the peak of the housing market in late 2005/early 2006 when housing starts peaked while the stock market continued in its second bubble higher through late 2007. In both past cases where these prices deviated, lumber prices were serving as a leading indicator of future weakness in stock prices and the relationship subsequently converged once again with the latest joining together occurring with the onset of the financial crisis in late 2007/early 2008 that has lasted through today.
So while selected historical deviations have occurred over the past 30+ years, both instances can be attributed to overextended stock market bubbles. Otherwise, the historical relationship has been fairly strong.
A Very Large Tree Is Falling In The Stock Market Forest [View article]
Hello curiouscat - Thanks for your comment and for letting me know. Sorry for the error. I asked the SA editorial team to correct my error and they have since made the change. Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello TDune75,
Thanks so much for taking the time to comment and for your very kind words on my articles and comments. It means a lot to me and I genuinely appreciate it!!
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello Gerry - Please replace my references to "yield to maturity" in the above bond examples to "current yield". Sorry for the confusion - it must be the late hour! Thanks again for your comment.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello Gerry,
Thanks for your comment. You raise excellent points here as always.
Thanks for sharing Cullen Roche's recent article on JGBs. I have been a long time follower of Cullen's and remember reading this specific article, so I appreciate where you are coming from by sharing it completely. I know where Cullen is coming from in his point, but I view it a bit differently for the same reasons that you have highlighted in your comment. Moreover, viewing data like yields on a standard scale can be a bit deceiving because it obscures the impact of convexity. And for a 10-year bond with a yield of 1% or less, the impact of convexity is extreme.
The following is a vastly oversimplified example to highlight this point. Suppose a $1,000 par value bond has a coupon of $80, implying a coupon rate of 8%. If the yield to maturity on this bond is 10%, the current value of the bond would be $800 (80/800 = 10%). Thus, a two percentage point move higher in the bond yield at this higher coupon rate resulted in a 20% loss in the value of the bond. Now suppose a $1,000 par value bond has a coupon of $5, implying a coupon rate of 0.5%. If the yield to maturity on this bond suddenly moves to 1%, the current value of the bond would be $500 (5/500 = 1%). Thus, just a half percentage point move higher in the bond yield at this much lower coupon rate resulted in a 50% loss in the value of the bond. Once again, while this is a vastly oversimplified example with many elements held equal, it highlights how the impact of convexity is obscured when looking at yields on a standard scale absolute number basis.
But with all of this being said, I agree with Cullen's point and I appreciate you raising it here that not too much should be made about the move in JGB yields to this point. But if the volatility and trend higher continues going forward, the potential for increasing instability could quickly present themselves in full force.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello Oxyman,
Thanks for your comment and for sharing your perspectives. A good argument can certainly be made for your strategy at this point. By holding cash for now, you've protected yourself against the risk of a sharp and unexpected downside loss. And if fundamentals do ultimately return to support the market, there will always be attractive investment opportunities to reenter the market.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello bartpr,
Thanks as always for your comment. I agree with your points here completely. Investment markets in general and the stock market in particular has become increasingly disconnected from reality over the last several years. And your point on past episodes is spot on - we've seen this script before, and while it seems like nothing will stop it when its roaring higher, it has never ended well. I don't suspect this time will be any different, particularly given the fact that the stock market has registered virtually all of its gains over the last 18 months purely on multiple expansion.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello skywola,
Thanks for your comment. We are certainly long overdue for some type of correction at this point in U.S. stocks. It will be interesting to see if it actually comes to pass in the coming weeks. The resiliency of the stock market has been incredible in recent months, so it could definitely break either way.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello Rich,
Thanks as always for your comments and for sharing your insights both here and in your comment below. I agree with your view that the Fed is increasingly monitoring the potential froth building in many pockets of the economy. It also seems after they missed the mark with their recent "may give more or less if needed" language that Bernanke was compelled to get the point across more directly during his recent Congressional testimony that tapering may be coming sooner rather than latter. Whether they actually follow through or not is another story, but clearly it is at least on the radar screen at the Fed. I also think that your call that the correction may end up being more severe than anticipated once it takes hold is a very good one. Given all of the leverage that has been accumulated in the system, the potential is certainly there. You have been spot on with so many of your calls over the last several years, so I appreciate your sharing your views here.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Hello aarc,
Thanks for your comment and for the detailed information on employment particularly as it relates to the dearth of qualified candidates in the high tech industry.
Your comment caused me to think about a related point. Often people will talk in the media or the press about the pending economic recovery as a reason for optimism about the stock market going forward. And while some do offer compelling arguments as to why this will occur, many will simply make this statement in passing without explaining exactly why we should expect this to happen. Because of the fact that a sustained recovery has been widely called for since 2010 but has proven elusive makes such statements warrant at least further explanation in many cases instead of simply being accepted as given, particularly with all of the persisting risks and areas of weakness today.
A Very Large Tree Is Falling In The Stock Market Forest [View article]
A Very Large Tree Is Falling In The Stock Market Forest [View article]
Thanks for your comment and for raising an excellent question in regards to the current supply/demand dynamics in lumber.
For those that are interested in obtaining historical lumber data, the following link may prove useful. The data requires a subscription.
http://bit.ly/19rGdhx
On an anecdotal basis, most reports point to the opposite phenomenon where demand has exceeded supply to this point, as many lumber mills have been shut down for years and the restart time to get a mill back up to speed can take several months. Moreover, it seems that many mill operators have been taking a cautious and gradual approach in increasing supply with the recognition that the recovery remains fragile and the pace of the recovery could still unexpectedly slow. The following is just one of many articles to this point.
http://bit.ly/11bgkfe
I will continue to look for publicly available supply data and will pass it along if I find something worthwhile.
Thanks again.
A Very Large Tree Is Falling In The Stock Market Forest [View article]
A Very Large Tree Is Falling In The Stock Market Forest [View article]
Thanks as always for your comment. You are correct that over time that the S&P 500 Index and lumber prices have entered into extended periods where this correlation relationship has deviated. While stocks and lumber were highly correlated from the early 1980s to the early 1990s, lumber initially move of stocks in the early part of the 1990s only to have stocks surge higher amid the parabolic move associated with the tech bubble. This relationship reconverged once the tech bubble burst during the early part of the 2000s up until the peak of the housing market in late 2005/early 2006 when housing starts peaked while the stock market continued in its second bubble higher through late 2007. In both past cases where these prices deviated, lumber prices were serving as a leading indicator of future weakness in stock prices and the relationship subsequently converged once again with the latest joining together occurring with the onset of the financial crisis in late 2007/early 2008 that has lasted through today.
So while selected historical deviations have occurred over the past 30+ years, both instances can be attributed to overextended stock market bubbles. Otherwise, the historical relationship has been fairly strong.
Thanks again for your comment. I appreciate it.
A Very Large Tree Is Falling In The Stock Market Forest [View article]
A Very Large Tree Is Falling In The Stock Market Forest [View article]
Thanks for your comment. I appreciate it!
As for $LUMBER on StockCharts.com, it is my understanding that it is based on random length lumber futures data from the CME Group.
Thanks again
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks so much for taking the time to comment and for your very kind words on my articles and comments. It means a lot to me and I genuinely appreciate it!!
Thanks again!
The 2 Biggest Risks Facing Stocks Right Now [View article]
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment. You raise excellent points here as always.
Thanks for sharing Cullen Roche's recent article on JGBs. I have been a long time follower of Cullen's and remember reading this specific article, so I appreciate where you are coming from by sharing it completely. I know where Cullen is coming from in his point, but I view it a bit differently for the same reasons that you have highlighted in your comment. Moreover, viewing data like yields on a standard scale can be a bit deceiving because it obscures the impact of convexity. And for a 10-year bond with a yield of 1% or less, the impact of convexity is extreme.
The following is a vastly oversimplified example to highlight this point. Suppose a $1,000 par value bond has a coupon of $80, implying a coupon rate of 8%. If the yield to maturity on this bond is 10%, the current value of the bond would be $800 (80/800 = 10%). Thus, a two percentage point move higher in the bond yield at this higher coupon rate resulted in a 20% loss in the value of the bond. Now suppose a $1,000 par value bond has a coupon of $5, implying a coupon rate of 0.5%. If the yield to maturity on this bond suddenly moves to 1%, the current value of the bond would be $500 (5/500 = 1%). Thus, just a half percentage point move higher in the bond yield at this much lower coupon rate resulted in a 50% loss in the value of the bond. Once again, while this is a vastly oversimplified example with many elements held equal, it highlights how the impact of convexity is obscured when looking at yields on a standard scale absolute number basis.
But with all of this being said, I agree with Cullen's point and I appreciate you raising it here that not too much should be made about the move in JGB yields to this point. But if the volatility and trend higher continues going forward, the potential for increasing instability could quickly present themselves in full force.
Great comment as always. Thanks again Gerry.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment and for sharing your perspectives. A good argument can certainly be made for your strategy at this point. By holding cash for now, you've protected yourself against the risk of a sharp and unexpected downside loss. And if fundamentals do ultimately return to support the market, there will always be attractive investment opportunities to reenter the market.
Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks as always for your comment. I agree with your points here completely. Investment markets in general and the stock market in particular has become increasingly disconnected from reality over the last several years. And your point on past episodes is spot on - we've seen this script before, and while it seems like nothing will stop it when its roaring higher, it has never ended well. I don't suspect this time will be any different, particularly given the fact that the stock market has registered virtually all of its gains over the last 18 months purely on multiple expansion.
Great points as always. Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment. We are certainly long overdue for some type of correction at this point in U.S. stocks. It will be interesting to see if it actually comes to pass in the coming weeks. The resiliency of the stock market has been incredible in recent months, so it could definitely break either way.
Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks as always for your comments and for sharing your insights both here and in your comment below. I agree with your view that the Fed is increasingly monitoring the potential froth building in many pockets of the economy. It also seems after they missed the mark with their recent "may give more or less if needed" language that Bernanke was compelled to get the point across more directly during his recent Congressional testimony that tapering may be coming sooner rather than latter. Whether they actually follow through or not is another story, but clearly it is at least on the radar screen at the Fed. I also think that your call that the correction may end up being more severe than anticipated once it takes hold is a very good one. Given all of the leverage that has been accumulated in the system, the potential is certainly there. You have been spot on with so many of your calls over the last several years, so I appreciate your sharing your views here.
Thanks again.
The 2 Biggest Risks Facing Stocks Right Now [View article]
The 2 Biggest Risks Facing Stocks Right Now [View article]
Thanks for your comment and for the detailed information on employment particularly as it relates to the dearth of qualified candidates in the high tech industry.
Your comment caused me to think about a related point. Often people will talk in the media or the press about the pending economic recovery as a reason for optimism about the stock market going forward. And while some do offer compelling arguments as to why this will occur, many will simply make this statement in passing without explaining exactly why we should expect this to happen. Because of the fact that a sustained recovery has been widely called for since 2010 but has proven elusive makes such statements warrant at least further explanation in many cases instead of simply being accepted as given, particularly with all of the persisting risks and areas of weakness today.
Thanks again for your comment.