LEONARD LUMBER REPORT: Did it turn into a battle when it should have been a rout?

Did it turn into a battle when it should have been a rout? The cash market is very active with less supply. Things are tight, and some mills are OTM for a day. We are where we expected to be except for the issue of $100 crude. No one could have projected it. Without the Iran issue futures would be $50 higher and blowing out the funds, but instead we have to scratch and claw for a few bucks. The question today is if we missed the acceleration move or not?  We have the rally but now can we get the run?

Crude is becoming “more of the same.” It isn’t going back down, but the likelihood of larger crude restriction is lessening every day. In the same vein, the US has made clear that higher crude is a small price to pay. The end result,  a long drawn out fight sending the spec longs in crude elsewhere. That begins more of the same.

So, what does the battle look like?

The Tight Market:

Companies large and small are using the same strategy of limiting Cap X to keep costs down in 2026. Inventory is the largest cost so cut it and you cut costs. Sound economics to me except for the fact that when your business is a commodity, you need that commodity to remain in business. What we saw last week was a push by many firms to at least fill in.

It is spring. We see a natural tightness to the market every year. Demand numbers are already set. It becomes a time to buy.

The Demand Struggle:

The housing data is weak. New and existing home sales have pulled back even with the multiplier. Months of inventories are up sharply. Even Canadian starts are projected to be off for the next few years.

There are two debates going of when the housing market became broken. The first was the obvious 2008. Many economists believe that by the mid-teens that problem was fixed. They believe that it again happened after 2018 when the housing market broke and never recovered. We are talking about the typical economic forces, not covid, etc. My point is that in either case we had an employment fear for the first time home buyer. Today, looking at the projection of a 30% unemployment rate for new graduates, I would say nothing has changed since 08. Employment and employment sentiment are the key drivers, not rates, not affordability, just employment.

Finally, open interest continues to erode. We are seeing a sharp drop in industry longs as the market rallies. COT showed a 898 decrease while the fund shorts exited 588. The industry is putting money in the back. The funds are forced to lighten up with large rallies. It is true textbook trading.

Technical:

I can’t say this very often, but the technicals are neutral at best when the fundamentals are strong. Another lower session will force a cross of a few oscillators to negative. This isn’t a sell signal as they tend to go back and forth before it becomes a sell signal.

The focus is on 618.50. The market needs a close over it. On Friday the high was 614.50. We are very close to gaining some momentum again. I believe it is going on for 5 weeks that 618.50 was the objective. The hitters are getting tired and the winds are blowing in. We need to get through it this week.

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