09-09-2017: November Lumber: Trade Restrictions with Canada will Boost Prices

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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
Calend Spread

Level Table
Other Factors
Recommendation

1
2     01


Introduction

Once again the Trump Administration is jerking around commodities with rhetoric. Expected now is heavy tariffs to be slapped on Canadian Lumber, even though there is evidence this will hurt American jobs and increase the cost of living. The problem is that American lumber interests owned by privately are pressuring the government to conclude Canadian imports subsidized by the fact Canada owns most of its own forest lands are hurting American jobs. This simply cannot be true if America cannot produce enough lumber internally to meet its domestic needs. One look about the country showing forestry mismanagement by private companies everywhere, not providing sustainable forests but strip logging and not replacing denuded forest areas in states even as remote as Montana and Washington, indicates America cannot produce enough lumber. Thus governors like in Maine plead with the President to make "exceptions" but it seems pretty clear this Administration is bent upon exacting stiff tariffs on imported lumber. The risk is that common sense might prevail to stop a destructive trade war with Canada which will affect other industries, such as our milk and dairy exports to Canada. But investors are betting on the fact that tariffs will be exacted driving up the price of lumber.


Intermarket Analysis

We fed Lumber, the Canadian Dollar, and Copper into a neural network to get the following result:




Parabolic Chart

November Lumber:

Parabolic Chart


Nirvana Chart

November Lumber:

Initial Chart


News Analysis

President Trump has been threatening to make big changes in NAFTA negotiations. He has called the 23-year-old trade pact the "worst" in history and vowed to fix it or withdraw from it. Trump was not interested in tweaking a few provisions or updating a few chapters. At first Canada and Mexico shrugged off Trump's threat to blow off NAFTA. Trump's fame for heated rhetoric tend to cause foreign leaders to downplay his remarks. However, later on, Canada, the world's largest softwood-lumber exporter, affirmed its willingness to sue the U.S. if trade talks on homebuilding material fail. The U.S. has "mischaracterized" what Canada has proposed ion terms of defined market share, according to Canada's Ambassador to the U.S., David MacNaughton. The only qualification Canada wants for defined market share is that the country can supply excess lumber to the U.S. in the event that American suppliers can't meet domestic demand fully.

A gap period when lumber shipments from Canada to the U.S. will not be assessed a countervailing duty (CVD) is under way. It is expected to last until late October. The U.S. Dept. of Commerce was currently scheduled to make its final determination in the CVD/AD investigations at the time of this writing. But Commerce postponed the final CVD/AD decision until November. Sec'y of Commerce Wilbur Ross announced the postponment claiming more time was needed to study "the complex issues at hand." The U.S. International Trade Commission will rule if Canadian lumber imports injured the U.S. industry in late October. It the ITC rules U.S. industry was injured, CVD/AD orders would be issued about a week later when it publishes in the Federal Register. At that point, the final CVD would be collected and the gap period would end. Canada requested the gap period be extended by 60 days which is unlikely. The "AD" in CVD/AD refers to "anti-dumping." Preliminary reports suggested that Canadian softwood was sold in the U.S. at 4.59 to 7.72% less than fair value The suggestion is that the Canadian Government is subsidizing producers.

The Governor of Maine, a Trump-supporter, told Canada that Trump believes in free trade and that he is seeking exemptions for Maritime trade from Quebec. But the Republican president has argued that Canada unfairly subsidizes its softwood lumber industry which includes spruce, pine and fir used for everything from home construction to newspapers. Maine's Governor LePage said that softwood lumber tariffs would lead to layoffs and shutdowns of operations in Maine.

Canada's lumber industry seems more concerned about raging wildfires in Canada than trade tariffs.

Home Depot is threatened with lawsuits for selling undersized "4 X 4's" which actually measure 3-1/2 X 3-1/2 inches. This has resulted in some structural failures using that lumber. Home Depot dismisses the suit as a nuisance because anyone familiar with the lumber industry knows that "4X4" is not the actual size. But the case could set a precedent.

In April, the Trump Administration threatened to impose a 20% tariff on Canadian lumber imports. The U.S. imported $5.7 billion worth of lumber last year alone, mainly for residential homebuilding. In the U.S., forestry lands are primarily held by lumber companies. In Canada, they are owned by the government, and that government charges low rates for cutting trees. A study by the National Association of Homebuilders last year found that a 15% tariff would increase new home prices by 4.2% and cost 4,666 full-time jobs.

A possible victim of the U.S. Government's determination to slap the 20% tariff on Canadian lumber imports is the possible loss of $550 million worth of dairy products shipped from the U.S. into Canada, if Canada retaliates.

A contract, treaty, or trade agreement remains in force only as long as both sides continue to honor it. When one side breaks the agreement, it is no longer valid and the faith and credit for making any further "deals" is damaged or lost. Canada maintains it has steadfastly been compliant with NAFTA, but the U.S. disagrees in relation to some dairy exports.

Other reports suggest Canada's softwood industry actually faces average duties of about 27% after the U.S. Dept. of Commerce slapped it with an additional 6.87% in preliminary average anti-dumping tariffs. The U.S. lumber lobby is intent on reducing Canada's market share in order to drive up prices. The combined tariffs have already impacted jobs in Canada and the federal government there responded with a $867 million financial aid package. The Trump Administration also has to deal with a sugar trade spat with Mexico.

Meanwhile, Canada is nearing deciding upon a free trade agreement with China. It is sending a strong signal to the U.S. that while NAFTA is important, Canadian exports can go elsewhere. Canada's trade minister Stockwell Day said "To not be dealing with the fastest-growiong economy in the world, in tems of sheer volume, would just be folly." If Canada launches trade negotiations with China, it wold be the first G7 country to do so. Chinese negotiators are considered very good and very tough. A Trans-Pacific Partnership without Trump is shaping up in earnest, spearheaded by Japan and Canada. Such a deal would take months, not years to complete. A rejigged version of the TPP would give Canada access to markets of Japan, Australia, and New Zealand, Mexico, and six other countries. Canada is also nearing the conclusion of a foreign investment protection agreement with India.


Point & Figure Chart

410.0I                                                                  T  9/ 7
     I CME - Nov-17 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38  Lim.= 9.5
     I
     I
     I
390.0I_________________________________________________X_______________________
     I                                                  O
     I                                                  O
     I                                                 XO      X
     I                   X       X     X           X   XO  X   X
370.0I___________________XO______XO____XOX_________XOX_XO__XOX_X_______________
     I                   XO  X   XO    XOXOX       XOXOXO  XOX X
     I                   XO  XO  XO    XOXOXO      XOXOXO  XOX X
     I                   XOX XO  XO    XOXOXO      XO OXO  XO  X
     I                   XOXOXO  XOX   XO OXO      X  OXO  X  OX
350.0I_____X_____________XOXOXO__XOXOX_X__OXO__X___X__OXO__X__O________________
     I     XOX           XO O OX XOXOXOX  OXO  XO  X  OXOX X
     I     XOXO          X    OXOXO OXOX  OXO  XO  X  O OXOX
     I     XOXO          X    OXOX  O OX  OXO  XO  X    OXOX
     I     XOXO          X    OXO     O   OXO  XO  X    OXO
330.0I_____XO_O__________X____OX__________OXOX_XOX_X____OX_____________________
     I     X  O          X    OX          O OXOXOXOX    OX
     I   X X  O          X    O             OXOXOXOX    O
     I   XOX  O          X                  OXO O O
     I   XOX  O        X X                  O
310.0I___XO___O________XOX_____________________________________________________
     I   X    OX   X   XOX
     I X X    OXO  XO  XOX
     IOXOX    OXO  XO  XOX
     IOXOX    O O  XOX XOX
290.0IOXOX______O__XOXOXOX_____________________________________________________
     IO O       OX XOXOXOX
     I          O OXO OXOX
     I          O OX  O OX
     I          O OX    O
270.0I__________O_OX___________________________________________________________
     I          O OX
     I          O OX
     I            OX
     I            O
250.0I_________________________________________________________________________
     I
     I
     I
     I
230.0I----I----I----I----I----I----I----I----I----I----I----I----I----I----I---
                    11111                   11111
      4455666778899911112233334455556667788901112112223346677888
      1201002110111301122012220200120120201210110120120210213002
      4455243056107021709282481535961041098239578341372106611275
The above chart is giving a conventional buy signal.


Cyclical and Seasonal Factors

We are headed toward a cyclical low and a seasonal down 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 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 $3,190. 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 except for a small blip at the most recent.

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 a change in major trend to down is imminent near a volatility low point.

Range/Volatilitiy Chart


Possible Future Prices

Random Chart


Option Recommendation

Our option trade recommendation is to Buy (1) Lumber November 375 Put and Sell (1) Lumber November 380 Put @ 2.10 to the sell side or better.


o 1 o 2 o 3 0 4 o 5


Calendar Spread

What the Nov. - May 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. The best time to enter or leave the above spread is when it is at -3.00 or narrower buying the far as prices are rising and then selling the near, and exiting or entering when it is at -16.00 or wider selling the far as prices are falling and then buying the near. At this time, we appear to be at the buy the far, sell the near point.





Level Table:

Level Table

The path of least resistance is up.
400.0|                                                                  R  9/ 7
 CME - Nov-17 Lumber, 110,000 bd. ft. $/kbdf Cm.=0.38  Lim.= 9.5
     |
     |P
     |P
390.0|P________________________________________________________________________
     |PP
     |PP
     |PPP
     |PPPPQZ[[
380.0|PPPQQQZ[[   <<<
     |LPPPQQQWWZ[[
     |LPPPQQQWWZ
     |LLPPQQQQWWWWZZ
     |LLMQQQQQQWWWWWXZZ
370.0|LMPQQQQQQRRRWWWWWXXZ_____________________________________________________
     |CLLMMPQQQQQQRRRRRWWWXXZ
     |CCLLLMMMMPQQQQQRRRRRRWXXXXXZZZ
     |CCLLLLMMMMMPPQQRRRRRRWXXXXXXXZZZ
     |BBCLLLMMMMMPPQQRRRRRRWXXXXXXZZZ
360.0|BBCCCLLLMMMMMMNOOPPPQQRRRWXXZZZZZ________________________________________
     |BBBCCCCLLMMMMMMMNNOOOOPPPPQRWWXYYYZZZ
     |BBBCCCCLLMNNNOOOOOPPPRWWWXYYYYYYZZZ
     |BBBBBCFLLNNNNOOOOPPRWWWXYYYYYYZZ
     |BBBBCFLNNNNNOOOOPRRSWWXYYYYYYZZZ
350.0|BBBBCCFLLNNNNNOORRSSWYYYYYZZZ____________________________________________
     |BBBBBCCFGLNNNORSSSSSUYY
     |BBBCCCFFGLNNNNOOORSSSSUUVY
     |BBCCFFGGLLNNNNNOOSSSSUUUUUUVV
     |BCCFFFGGGGLNNNNSSSTTUUUUUVVVVV
340.0|BCCFFFGGGLNSSSSSSTTUUUUUUUVVVVV__________________________________________
     |AABCCCFGSSSSTTUUUVVVVV
     |AACCCDFGLSTTUUVVVV
     |AAACDFFFGJLSTTTUVVV
     |AAAAAACDDEEFFFFFGGJJLSTTTTVVVV
330.0|AAAAAAACDDDDDEEEFFFFGJJKKKLSTTTTTTVVV____________________________________
     |AAAACDDDDDDEEEFGGGHJJJJKKKKKTTTTT
     |AAADDEEEEEGGGGHJJJJJJKKKKKKTT
     |AAADDDEEEEEEEEGGHJJJJJJJJKKKKKKKKTT
     |ADDDDEEEEEEEHHHHJJKKKKKKT
320.0|DDDDEEEEHHHHHHHJJJKKKKT__________________________________________________
     |DDDEEHHHHHHJJKKT
     |DEHHHHHK
     |DHH
     |D
310.0|_________________________________________________________________________
     |
     |
     |
     |
300.0|-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= 0.243
           1 1 1 1 1 1                                                
       9 9 0 0 1 1 2 2 1 1 2 2 3 3 3 4 4 5 5 6 6 7 7 8 8 9           9
       0 2 0 2 0 1 0 1 0 1 0 1 0 1 3 1 2 1 2 1 2 1 2 0 2 0           0
       9 2 6 0 3 7 2 6 3 8 1 5 2 6 0 3 8 2 6 2 6 1 5 8 2 6           7


Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary


Here's an intraday chart for a previous day ( 9/06 ).

Intraday Chart


                 Risk Versus Opportunity Report
                ________________________________

                   LBX7    November Lumber

                      High Price:  410.8
                   Current Price:  382.9
                       Low Price:  369.2

                            Risk:  0.070
                     Opportunity:  0.143

                    (O/R) Ratio =  2.036


Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart + 1
Nirvana Chart + 1
News + 2
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 + 1
Place 4 November Lumber on a Buy Watch with stoploss @ -12.60 below the get-in point when recent price is represented as "151.52".
____________________________________________________________________________________________________________________________________________W.Y.