06-16-2014: July Lumber: Politicans Upend the Lumber Market

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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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6

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Introduction

We usually pick commodities to review from a list of ones that are showing the strongest trend in one direction or the other. This time, we looked at two weekly activity summaries and attempted to pick the commodity that showed the most change from strength in one direction to strength in the other. That turned out to be undeniably lumber.

With not much in the news to account for why lumber prices should be weakening in the face of "the perfect storm" of trade wars, forest fires, and railcar shortages, we wondered how futures prices recently related to actual cash prices. Had wild speculation gotten out of hand? Compared to a U.S. "composite" value, our conclusion is that they may have so done when they crossed over $500 per 110,000 board feet. So with the exhuberance let out of the market, prices started to head back down in the futures market. We also see some skepticism in the more forward contracts (backwardization) in futures markets where farther out contracts ignore carrying charges and are closer to historical values. However, there does appear to be legitimate underlying support from the cash market somewhere below current exhuberant levels, and we are rapidly approaching that, if we haven't already hit it. Lumber may well not be done on its meteoric rise to all-time highs. Nonetheless, our technical indicators suggest that this was indeed a "blowoff" and that lumber may have by now priced in all the fears generated by trade, fire, and rail factors.


Intermarket Analysis

We fed Lumber, the U.S. Dollar Index, and the S&P 500 Index into a neural network to get the following result:




Parabolic Chart

July Lumber:

Parabolic Chart


Nirvana Chart

July Lumber:

Initial Chart


News Analysis

The leaders of Canada and the U.S. are locked in an ugly escalating public dispute over trade barriers, tariffs, and how they think theworld should resolve its problems. With the U.S. President Donald Trump and Justin Trudeau at the enter of the dispute, the back and forth has intensified since just before the start of the month when the Americans imposed hefty steel and aluminum tariffs on Canada. The situation only got messier from there, particularly to the lead up to, during, and right after the G7 leaders' summit.

Trump, after announcing the tariffs, send a message to Trudeau about NAFTA talks on May 31st. It said, "The U.S. will agree to a fair deal, or there will be no deal at all."

Trudeau fired back over tariffs being applied on the premise that Canada poses a national security risk to the U.S. Trudeau said, "Let's be clear: These tariffs are totally unacceptable... That Canada could be considered a national security threat to the U.S. is inconceivable."

On June 1st, Trump sent the first of several Twitter salvos against what he said were Canada's unfair trade policies. He objected to dependence upon Canada's steel use in military fighter jets. Tweets continued through June 4th, regarding trade barriers erected by Canada on U.S. agricultural products. ON June 7th, the eve of Trudeau's G7 summit (more like G6 + the U.S.), Trump sent out another message regarding Canada's 300% tariff on U.S. dairy products. Trump also mentioned a "$151 billion EU trade surplus." On June 8th Trump sent out another tweet about a 270% tariff on U.S. dairy products charged by Canada. On June 9th before leaving Quebec, Trump charges that "We're like the piggybank that everybody is robbing, and that ends."

From there it went on with more back-and-forth between the two leaders, and Larry Kudlow, Trump's top economic advisor, got involved by declaring that Trudeau ?stabbed us in the back." Trump's trade advisor Peter Navarro added, "There's a special place in Hell..." (for Trudeau).

Canada has been considering tariffs on plywood exports to Canada. This could happen after June 15th looking at about a 25% tariff on oriented strand boards.

Trump's Twitter claims that Canada has a reallyi high trade surplus with the U.S. is proven false. Canada actually ran an $8.4 billion trade deficit with the U.S. last year.

The European Union, Canada, and Mexico are all hitting back at the U.S. Plywood was certainly a target.

A new forecast by the Export Development Canada (EDC) organization predicted that despite NAFTA uncertainties, exports including forestry to the U.S. will grow by 6% this year in all categories and by 16% for lumber. Increased housing demand and rising prices in the U.S. will be the result of anti-dumping and countervailing duties imposed in the softwood lumber dispute. Supply in the sector has been constrained, due to record wildfires in British Columbia. Forestry exports to the U.S. could also be constrained by investments in lumber mills in the Southern U.S.

There has been a "perfect storm" for lumber markets, a confluence of strong global demand and critical supply issues that caused futures prices for 1,000 board feet to break $500 for the first time eveer. To put that number in perspective, lumber broke $400 onlyi eight times in the decade from 2001-2010. Futures contracts for 1,000 board feet recently touched $639, a new record, up 70% year over year and far above the level lumber sold during the housing bubble..

Aside from tariff issues, there have been beetle infestations in the U.S., forest fires in Canada, labor shortages for everything from logging, trucking to lumber mills as factors. China's gradually slowing deforestation rate flipped the country to a net importer of wood, and synchrony ineconomic grwoth across the world's major regions. Canada also has a railroad capacity crunch for moving lumber. A glut of grains and coal meant that demand for boxcars to carry lumber outstripped supply. Inventories at sawmills and pulp mills of a number of timber companies were piling up because of lack of trains. Flatbed rates have jumped from $2.75/mile to $3.19/mile in one recent week alone.

Average home prices are at an all time high and growing twice as fast as wages and overall inflation. The supply side in the U.S. is very tight. But rising interest rates are beginning to affect demand for housing.

President Trump gave the gift of higher lumber prices that made almost everybody else poorer but timber owners richer. Politicians have truly upended the lumber market.

Equities of retailers like Lumber Liquidators fell in May due to a trend where fewer customers were making pruchases but a few high-end customers did boost sales a bit. The nigher lumber prices are hurting demand from smaller buyers. Installation services rather than same store sales accounted for most of any equities strength.

Will price elasticity finally bring down the cost of lumber as prices soar so high as to put new home prices out of sight and reduce housing demand? Currently, builder are enjoying a boom and continuing to stock up on lumber. This is oneof the busiest construction seasons in years. The problem includes a fact that political uncertainties are not the only things affecting lumber price rises, with forest fires and transportation problems also to blame.l


Point & Figure Chart

675.0|                                                                  T  6/13
     | CME - Jul-18 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38  Lim.= 9.5
     |
     |
     |
635.0|______________________X__________________________________________________
     |                      XO
     |                      XO
     |                      XO
     |                      XOX
595.0|______________________XOX________________________________________________
     |                      XOX
     |                      XO
     |                      X  O
     |                      X  O
555.0|______________________X__O_______________________________________________
     |                      X
     |                      X
     |                      X
     |                      X
515.0|______________________X__________________________________________________
     |                    X X
     |                    X X
     |                    X X
     |                    X X
475.0|____________________XOX__________________________________________________
     |                    XO
     |                    X
     |                    X
     |                  X X
435.0|__________________XOX____________________________________________________
     |                  XOX
     |                  XOX
     |                  XOX
     |                  XO
395.0|__________________X______________________________________________________
     |X                 X
     |XO                X
     | O                X
     | O              X X
355.0|_O______________XOX______________________________________________________
     | O    X X X     XOX
     | O    XOXOXOX   XOX
     | O    XOXOXOXO  XOX
     | OX   XOXO OXOX XOX
315.0|_OXO__XOX__OXOXOXOX______________________________________________________
     | OXO  XO   O OXOXO
     | OXO  X      O O
     | OXOX X
     | OXOXOX
275.0|_O_OXOX__________________________________________________________________
     |   OXOX
     |   OXO
     |   OX
     |   O
235.0|----|----|----|----|----|----|----|----|----|----|----|----|----|----|---
          1        111   11
      89570124567990122571233556
      11221210001031220112202221
      98612085915109883021228192
The above chart is giving a conventional sell signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical high and a weak seasonal down period.

Cyclicals Cyclicals Seasonals
Seasonals


Internal Program

Our best-performing internal program is "%R". It is giving a sell 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 has triggered a 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 $2,178. 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-short.

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 an 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 November 500 Put and Sell (1) Lumber September 545 Put @ 0.80 to the buy side or less.


o 1 o 2 o 5


Calendar Spread

What the Jul. - Nov. calendar spread suggests to us is that buying the near contract and selling the far one is at most times profitable, which we think is a sign that these futures may go up in the long run. This disagrees with our ultimate conclusion elsewhere in this writeup. The best time to enter or leave the above spread is when it is at 30.00 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at 53.00 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be sy the buy the far sell the near point.





Level Table:

Level Table

The path of least resistance is down.
660.0|                                                                  R  6/13
     |
     |Y
     |YYY
610.0|Y________________________________________________________________________
     |XYYYZZ
     |YYYZZZZZZ
     |XXXXYYZZZZZZ
     |XXYZ
560.0|XX[______________________________________________________________________
     |WX[
     |WW   <<<
     |WWWWW
     |VW
510.0|SSVVVVVVW________________________________________________________________
     |SSSUVVVV
     |SSSSU
     |RSUU
     |RRRRRTTTTTUUUUUUU
460.0|QQQQQQQQRRRTTTTTT________________________________________________________
     |PPPQQR
     |LLLLLOPPPPP
     |KLLLLMMOOOOPP
     |KKLLMNNOOO
410.0|KKKKMMMMMNNNNNNOO________________________________________________________
     |JJKKMMNN
     |JJJJK
     |HHHJJJJ
     |HH
360.0|GGHHHHH__________________________________________________________________
     |CCCFFFGGGGGGGG
     |CCCCDDDDDDDFFF
     |BCCCDDDEEEEEEEEEFFFF
     |AAAAAABBBBBE
310.0|AAABBBB__________________________________________________________________
     |
     |
     |
     |
260.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO= 0.100
                       1 1 1 1 1 1                                    
       6 6 7 7 8 8 9 9 0 0 1 1 2 2 1 1 1 2 3 3 4 4 4 5 5 6           6
       1 2 1 2 0 2 0 2 0 1 0 1 0 1 0 1 3 1 0 1 0 1 3 1 2 1           1
       4 7 2 6 9 3 7 1 5 9 2 6 1 5 2 7 1 5 2 6 2 6 0 4 9 2           3


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 6/14 ).

Intraday Chart





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 - 6
Place 6 July Lumber on a Sell Watch with stoploss @ +12.50 above the get-in point when recent price is represented as "554.60".
____________________________________________________________________________________________________________________________________________W.Y.