01-16-2012: March Lumber: Moderate Housing Starts Improvement
"Oh look! Housing starts are improving. Homebuilders are active again!" Such are the comments that favor the lumber industry. But as one analyst observed, the previous recession at which a surplus of housing and foreclosures was at the heart was very bad. So the "improvement" is starting from such a very low number, that its effects on the economy of lumber purchases is almost negligible. Percentage-wise, yes, housing construction is on the rise. But magnitude-wise, it is still a very low number compared to previous ones. There is still a glut of inventories. Foreclosures and vacancy rates continue. The economy continues to be threatened by Europe, where a collapse there would kill any housing recovery here, due to side effects related to banks.
We fed lumber, copper, and treasury bonds into a neural network to get the following result:
March Lumber:
March Lumber:
March lumber futures have been all over the place, tumbling 14.5% to a new contract low on December 29th, then touching limit up or 4% higher after the January futures expiration. Louisiana-Pacific (LPX) stock similarly has made substantial gains of late. The company manufactures building materials and engineered wood products in the U.S., Canada, Chile and Brazil. Some of this has to be attributed to new homebuilder housing starts data. Another stock, Universal Forest Products (UFPI) has been making similar gains. We are talking about 41% gains in the last 52 weeks. Lumber Liquidators (LL) stock has also been active with about a 100% price range off the low in the past 52 weeks. Lumber producers are doing considerably better than paper and pulp producers where the latter are suffering from global economic trends, especially in Europe, where demand has fallen off. Echo Building Products (ECOB.OB) has been active in Southern California, receiving permits to construct 40 new custom homes in Lancaster (limited by water availability concerns in the desert area), and also opening a public direct supply lumber yard for contractors in Vista, Calif. A number of analysts have suggested lumber stocks have hit a plateau, and are overbought at this time. Framing lumber prices got off to a fast start at the beginning of the year, then remained firm as buyers of Southern Pine led the way, continuing to replenish after holding back through year-end to limit inventory taxes. Mild weather has continued to drive consumption, but snow in the Midwest and Northeast late in the week may quell activity. Western fir, OSB, and Southern Pine Plywood prices pushed steadily higher after a surge in sales at the mill level. The largest wood-consuming sector in the U.S., new residential construction, home repair and remodeling is forecast to show a modest increase in 2012. Southern Pine has suffered the most in the previous tough period for all softwood producing regions of North America. Finland reports timber salesawere more quiet than normal in 2011. The Finnish Forestry Federation member companies purchased 25.3 million cubic meters of wood from private-owned forests in 2011, while aggregate procurement from private forests from all purchasers totaled 34 million cubic meters in 2011. We estimate these numbers may be down as much as 20% from pervious years. Progress is being made in Brazil toward preservation of rain forests and habitats, as farmers become more conservation-conscious there, but this is somewhat offset by forest destruction in Uganda. Looting and plundering of the country's 29,000 hectare reserve seems to be unpunishable as the government there seems unable or unwilling to enforce laws. Illegal operators work day and night to take advantage of "concessions" granted by the Ugandan Government. Lennar Corporation reported an increase of 20% in home orders in is most recent quarterly report. High rents, low home prices, and low mortgage rates are helping fuel the recent rise in home building. The Canadian Government is spending $500,000 to promote use of Atlantic Canadian wood in regional construction projects. They are aiming at hospitals, schools, long-care nursing homes and arenas. Viet Nam became the largest southeast Asian timber exporter last year with $3.9 billion (U.S.) in sales. This tops Thailand, Malaysia, Singapore, Myanmar, Indonesia, and the Philippines. Wood products demand is far more sensitive to the economy than demand for almost any other product. The outlook for the next two years is moderately-positive, compared to weak domestic markets since the current downturn began. Log export markets look favorable, but with substantial risk deriving from Europe's financial crisis. Timber industry executives must plan for moderate growth while protecting themselves from a possible further recession. The problem with housing supply is simply too many houses. Vacancy rates for single-family homes and apartments is above long-run norms. Apartments are improving however, as people who cannot make payments on their homes are moving into rentals. Construction of homes is improving, but starting from a very low base. It is believed excess supply will not be worked off in 2012, but may be better by the end of 2013. Japan provides a pretty good market for lumber imports right now because of rebuilding after the earthquake and tsunami there. Odds are 75-25 that Europe will muddle through but if it collapses in a financial crisis, the rest of the world will not continue to grow moderately. A positive for the U.S. trying to sell to Asian lumber markets is a bad inflation problem in China and South Korea. Our assessment of the news is "moderately positive" for lumber as these words have come up in news item after news item.
705.0I R 1/13
I CME - Mar-12 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38 Lim.=19.0
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Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for Lumber. Therefore, the above chart is taken as giving a buy signal.
We always have to explain where it becomes obvious on charts like the one above, that Zenith uses a different method for forward adjusting different contracts. Instead of "continuous contracts" like most data source users rely upon, we make discreet adjustments to imitate how the prices would actually look for long-term holder of a contract who had to roll forward contracts from time to time over a period of a year or more. This makes historical prices look much higher for him as he takes losses. More recent dates reflect actual prices, but older dates have an exaggerated effect of rolling forward and prices appear higher than they actually were. It has little effect on most, if ot all technical prediction methods because the change is very subtle, except when viewed from the very long term.
We are headed toward a cyclical high and the seasonals are too mixed to tell.
Our best-performing internal program is "WiderRT." It is giving a buy signal.
Results of "WilderRT" for Lumber (blue lines = successful trades, red, unsuccessful): (Not always in the market.)
Our third system is working on a long-term buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $110. Initial margin on a single contract is $1,620. Use of options is not advised.
Scale traders are not a factor in this price range.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that a major change in direction to up is imminent at a volatility low point.
Our option trade recommendation is to Sell the Lumber Jul. 280 Call @ 11.30 or better.
What the Mar. - Jul. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down. The best time to enter or leave the above spread is when it is at 0.00 or narrower buying the far as prices are falling and then selling the near, and exiting or entering when it is at -27.20 or wider sellling the far as prices are rising and then buying the near.
Here's an intraday chart for the previous day ( 01/13 ).
Risk Versus Opportunity Report
________________________________
LBH2 March Lumber
High Price: 262.7
Current Price: 245.7
Low Price: 210.5
Risk: -0.144
Opportunity: -0.298
(O/R) Ratio = 2.071
| Factors | Weighted Points |
|---|---|
| Inter-Market Analysis | - 1 |
| Parabolic Chart | - 1 |
| Nirvana Chart | + 1 |
| News | + 1 |
| Point & Figure | + 1 |
| Cyclicals | + 1 |
| Seasonals | 0 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | + 1 |
| Historic Range | 0 |
| Commitment of Traders | - 1 |
| Range/Volatility | + 1 |
| Level Table | - 1 |
| Other Factors | - 1 |
| Total | - 2 |
Place 9 March Lumber on a Sell Watch with stoploss @ +26.00 above the get-in point._____________________________________________________________________________________________________________________________W.Y.
