01-08-2018: March Lumber: Wildfires, Hurricanes, and Trump Tariffs

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Introduction
Intermarket
Parabolic

Nirvana
News
Point & Figure
Cyclic/Seasonal

Internal Progrm
Third System
Margin

Historic Range
Commitment
Volatility

Random Chart
Options
Calendar Spread

Level Table
Other Factors
Recommendation

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Introduction

4 Wildfires, hurricanes, and Trump are three factors combining to drive up the cost of lumber to highs not seen in a long time. People need to rebuild their thousands of homes lost in the fires or destroyed by hurricanes in Florida and Texas. With his impeccable sense of timing, President Trump puts "American First" by increasing costs to all consumers by at least 20% due to hefty import duties imposed on Canadian softwood imports. As Canada moves to ship more lumber to Asia and replace its former dependence on the now unreliable trading partner, the U.S., it seems clear tariffs will eventually hurt everyone and drive up inflation.


Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:




Parabolic Chart

March Lumber:

Parabolic Chart


Nirvana Chart

March Lumber::

Initial Chart


News Analysis

The primary concern of the moment in the lumber industry is the U.S.-Canada lumber trade issue. The U.S. Dept. of Commerce released its preliminary determination in the countervailing duty case against Canadian lumber imports on April 25, 2017. The Canadian Government said Wednesday last that it has launched a legal challenge to hefty duties imposed by the U.S. on its softwood lumber industry. Chrystia Freeland, Canada's Minister of Foreign Affairs said Ottawa is following through with an appeal to the International Trade Commission (ITC). The commission decided in November to levy anti-dumping duties on lumber imports. Freeland said, "Canada will continue to vigorously defend our industry and its workers against the protectonist trade practices represent by unfair, unwarranted and troubling U.S. duties on Canadian softwood."

The U.S. Government has been investigating Canda's newsprint industry since the end of August after Washington-based North Pacific Paper Co., complained Canada was dumping newsprint into the U.S. market and unfairly subsidizing it at home. About 25 lumber mills in Canada would be hurt by the duties, most in Ontario and Quebec. Canadian comanies exported about $1.6 billion worth of newsprint into the United States in 2016. But with the expansion of digital print, newsprint sales are declining by about 10% per year. More than 1,000 small and mid-sized U.S. newspapers have asked their federal government not to institute duties because they can't sustain an increase in newsprint prices. Canada under Montreal-based Resolute Forest Products (RFP.N) is the world's largest newsprint exporter.

Newsprint would be the third Canadian wood product targeted by Americans, after softwood and supercalendered paper. The latter is the glossy paper used in magazine covers, and was the first to be hit with duties. Canada's low Dollar relative to the U.S. has been helping with exports. Most complaints are from U.S. companies on the West Coast and moist effects of the U.S. trade system changes affect the middle and Eastern United States.

Canada is also seeking help from the World Trade Organization (WTO).

The actual duties amount to a 20.23% price increase on imported Canadian softwood. Despite this EACOM Timber Corporation (a large Canadian player) is making investments in its sawmill and diversifying its offerings.

Soaring lumber prices have helped Canada offset the impact of duties for Canadians. Lumber prices are at highest levels in over a decade due to a perfect storm of supply constraints in B.C. from the wildfires this summer, and increased demand from the U.S. housing market and rebuilding efforts in hurricane-ravaged regions. Some Canadian companies are even considering moving to the U.S. to get around the duties. B.C. forests minister Doug Donaldson head out for China and Japan to seek new destinations for exported lumber and decrease reliance on the U.S. as a trading partner.

Despite severe wintry weather that disrupted markets across much of the U.S., framing lumber prices opened the year witha firm to stronger tone. Distribution and sales were adversely affected in the Northeast, Midwest, and along the Atlantic Seaboard as far south as Florida. But mills in most producing regions fielded a steady flow of inquiries and sales from the outset of the Holiday-shortened week. Oriented strandboard production was disrupted by heavy snow in the Northeast and frigid temperatures. Pent-upo demand was evident in Southern Pine plywood markets despite jobsites being idled by cold weather and snow. Buyers wo pared inventories at year-end, replentished in anticipation of warmer temperatures in the coming weeks. Western Fir plywood trading was steady but not spectacular. Lean inventories were widely acknowledged there.

Given tight inventories of homes for sale, and labor needed to get more homes on the market, housing analysts orecast another moderate increase in U.S. housing starts in 2018. Canadian lumber production shifted further from British Columbia to the eastern provinces in 2017, a continuing trend that began inthe fall of 2014.

President Trump's policy on trade since becoming U.S. president has been all about putting "America First." But in the lumber industry, his policies are having the opposite effect. Some duties on Canadian lumber went as high as 31%. This causes increasing costs for American buyers, and a resulting price surge benefitted Canadian producers more than it hurt them, at least up until now. Communities in Texas and Florida rebuilding are having a major impact on the lumber market.

American companies have more investments in private U.S. timberlands and mills in the nation's south, where log prices haven't increased as much. In Canada, not a single worker has been laid off nor a single plant closed as of September, so people suffering from the U.S.-Canada battle are the U.S. consumer and people wanting to build ther homes or renovate them.

Homebuilders estimate that the trade dispute with Canada has pushed up costs for house builders in the U.S. by 20%.


Point & Figure Chart

480.0I                                                                  T  1/ 5
     I CME - Mar-18 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38  Lim.= 9.5
     I
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460.0I_________________________________________________________________________
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240.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
                    111                   11111           111111
      3344556677799912213333445555666778890111211223444678111122
      1102010001111300221222020012011020121111012012122022001201
      6814752410607024988249153686104109123157734131046655377968
The above chart is giving a conventional sell signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical low and a seasonal up period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "%R". It is giving a buy signal.

Internal Printout 1 Internal Printout 2

Results of "%R" for Lumber (blue lines = successful trades, red, unsuccessful): (Always in the market.)

Results


Third System Confirmation

Our third system is working on a long-term sell signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


Margin

The point value is $110. Initial margin on a single contract is $3,520. Use of options is advised.


Historic Range

Scale trade sellers are entering the market for the long term in this price range.

Historical Chart


Commitment of Traders

Commitment 1

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-long.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3


Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that the current uptrend remains intact from the last volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Lumber July 430 Put and Sell (1) Lumber July 445 Put @ 5.90 to the sell side or greater.


o 1 o 2 o 5


Calendar Spread

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 in the long run. The best time to enter or leave the above spread is when it is at +13.0 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +53.0 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be at the sell the far, buy the near point.





Level Table:

Level Table

The path of least resistance is up.
485.0|                                                                  R  1/ 5
 CME - Mar-18 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38  Lim.= 9.5
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                                             1 1 1 1 1 1              
       1 1 2 2 3 3 4 4 5 5 6 6 6 7 7 8 8 9 9 0 0 1 1 2 2 1           1
       0 2 0 2 0 2 0 1 0 1 0 1 2 1 2 1 2 1 2 0 2 0 2 0 1 0           0
       9 3 6 1 7 1 4 9 3 7 1 5 9 4 8 1 5 1 5 9 3 6 0 5 9 4           5


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 1/05 ).

Intraday Chart



                 Risk Versus Opportunity Report
                ________________________________

                    LBH8    March Lumber

                      High Price:  489.78
                   Current Price:  459.10
                       Low Price:  444

                            Risk:  0.065
                     Opportunity:  0.131

                    (O/R) Ratio =  2.032


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 1
Point & Figure - 1
Cyclicals - 1
Seasonals + 1
Internal System 1 + 1
Internal System 2 0
Third System - 1
Historic Range - 1
Commitment of Traders + 1
Range/Volatility + 1
Level Table + 1
Other Factors + 1
Total + 4
Place 4 March Lumber on a Buy Watch with stoploss @ -12.50 below the get-in point when recent price is represented as "459.10".
____________________________________________________________________________________________________________________________________________W.Y.