November 30, 2012
It has been years since I have been involved in the Lumber market. That is no longer the case.
I AM BUYING LUMBER FUTURES AND CALL OPTIONS IN THE MAY AND JULY, 2013 CONTRACTS.
During the past 3-4 years, an enormous percentage of lumber mill production has essentially been blown out of existence due to the almost total absence of business in the housing and construction industries. I do not know any exact numbers, but when I have heard for some time now, “9 out of 10 guys are G-O-N-E”, from people in the lumber milling business, that’s good enough for me. With this in mind, I have long believed we WILL reach a point where just a smattering of demand results in substantially higher wood prices. Anybody in the lumber business will tell you this is already, and has been, the situation for some “cuts”, that if you want something just slightly out of the norm, you have to pay up, that “the fellas who made that aren’t around anymore”.
For two reasons, I think we are there…at that point where prices now have nowhere to go but up…And I could rattle on for hours as to why (inclusive of the IMMEDIATELY bullish economic future of the USA) but I will keep this down to the skinniest of reasons. It’s Friday afternoon.
The first is the simple belief we have long since passed the bottom in housing prices. Money is cheap. Labor is cheap. Consumer debt has fallen dramatically. The economy IS on the upswing. Unemployment IS declining. The fiscal cliff doesn’t matter. There is more pent up demand in the Real Estate market than has been the case, I think, in my entire lifetime….and I THINK THE COMING SPRING OF 2013 IS GOING TO BE WHITEHOT IN THE BUILDING BUSINESS…and this is going to be, and probably already has begun to be, BULLISH FOR LUMBER PRICES.
The second reason is Hurricane Sandy…and the undeniable fact that the massive rebuilding now beginning to take place in New York and New Jersey was obviously not anticipated by the lumber industry, or the lumber market itself…and with production having been sharply reduced these past 4 years, I just don’t see how the potentially massive demand for 2 x 4’s (what the futures contract is based on) coming out of the Northeast can do ANYTHING but exert upward pressure on prices.
I think mills will be running in flat out overdrive to keep up with demand from now until deep into 2013, and this is not the equation, nor an environment, which will lead to softer prices. From a recent review of every lumber futures contract since they started trading it in 1970, I can tell you this market RARELY goes sideways, and for my money, I think the is nowhere for prices to go but up…A LOT. And yes, this is only my opinion. I may be dead wrong.
As further evidence of why I think as I do, here’s a little bit of statistical research I put together today…
To look for correlations between lumber prices and direct hurricane hits on major urban areas, I went through a list of the most deadly and/or destructive hurricanes for the USA since lumber started trading in 1970. I also flipped through every futures contract chart ever (month by month) to freshen my impressions and memory as to how this market “behaves”.
I count 20 very clear bull markets since the contract started trading in 1970.
They are generally not that long in duration, usually lasting only for a matter of months. They don’t go on and on over periods of years. When it goes, it often goes in a fairly straight line. And when it’s over, it’s OVER. They can hit the skids in astounding fashion.
There is a definite tendency to end bull moves in the early part of the year with 15 of the 20 bull markets noted having ended between January and June, with a predominance being in February thru May, probably reflecting building demand becoming a known (“in the market”) by the time we get to spring.
Taking out the bull moves following 3 of the most famously destructive hurricanes, the average gain in a Lumber futures bull market is about 47%.
There have been many named hurricanes since 1970, and various means of classifying them as “deadly” or “destructive”, but Agnes (SE USA & New York), Andrew (south Florida), and Katrina were three big hitters that definitively resulted in increased demand for building materials for reconstruction…
Here are the stats on those 20 bull markets…Agnes is noted twice as there were two stages to the move up…
As for those three hurricanes, as can be seen on the charts below, all 3 landfalls were followed by relatively immediate and dynamic upturns in prices in the months following their respective landfalls. Though the bull markets that followed all 3 hurricanes may be coincidental, I remain convinced they are not. Again, this is own opinion.
So…No, I do not know that any of these 3 markets turned up simply because of hurricane damage…And I also have to be clear that just because they went up following these hurricanes does not mean the same thing will happen over the next 6-9 months due to Superstorm Sandy…But that IS the bet I’m making…
MAYBE I’M WRONG, BUT I DO THINK THE COMBINATION OF SEVERELY REDUCED PRODUCTION, A STRENGTHENING ECONOMY…AND THE NORTHEAST REBUILD CAN ONLY MEAN HIGHER PRICES FOR LUMBER FUTURES…I THINK THIS MOVE IS ALREADY UNDERWAY AND WILL BEGIN BUYING IT ON MONDAY.
Here’s the rest of the story…the present…
The long term chart…
And here’s a recommendation…
This is one option possibility…I think there are LOTS of choices as to what you buy here…I am currently using the May contract as there are so many instances when previous bull markets ended their moves in the Feb to May period…Even if this market ends up climbing all the way to July, I suspect there will at least be some sort of nasty Spring retracement which I will be looking to avoid (if I am right of course).
I currently have no particular price target in mind…except to say new all time highs would not surprise me…This IS a volatile and relatively thin market…which lends itself to an “ANYTHING can happen” sort of trading atmosphere. Right now. I just want to own this market and see what happens.
I think this is a smart idea.
Can’t do it for you. Wish I could.
Pick up the phone and call me.
AND I AM STILL VERY BULLISH COTTON AND VERY, VERY, VERY BEARISH CORN, WHEAT AND THE SOYBEAN COMPLEX. I THINK THOSE THREE MARKETS HAVE ALL ROLLED OVER AND HAVE SEEN THEIR HIGHS FOR MANY YEARS TO COME. MEANWHILE, EVERY TWO DAY RALLY IS SEEMINGLY SEEN BY THE MEDIA AND TRADING MASSES AS THE BEGINNING OF ANOTHER “LEG UP”.
The author of this piece currently trades for his own account and has financial interest in the following derivative products mentioned within: Cotton calls, Corn, Wheat and Soybean Meal puts.
Bill Rhyne does not currently maintain positions in the commodities mentioned within in this report: Lumber (but I will be doing so Monday).