Category: CME

Recap:

I would not call it the Great Reset, but there was definitely cash trading last week. What started as traders covering cash turned into a global buy. We also saw a mill go up $18 in less than 24 hours. That was reminiscent of the 21-22 trade when they threw a dart each morning. Let’s face it: the mills need to get prices higher, and their marketing for the last 18 months hasn’t done it. The marketplace was extremely underbought, and they took advantage of it. Is it a tighter market? Most likely not, but like futures two weeks ago, it is a “shot over the bow.” This spike results from the lack of buying and will be how the market trades in 2024.

Futures were up $28 for the week, with most coming on Thursday and Friday. The prominent driver in our market is whether the funds are selling or buying. They are the mover of the market today. Friday’s high volume and drop in January open interest could signal a slight exit by them. Their trip number to exit is closer to the trade going into the end of the year. It is a double-edged sword as the liquidation will then show up as new selling on the next break. More liquidation will show up early in the week.

Technical:

This rally has created a strong upward chart trend. In January, we are sticking to the gap area as the objective. The gap sits from 533.50 to 545.50. A futures run to that area equates to a $410 cash market. The problem is that this type of run can’t stop, pull back, and then go again. A slowdown will bring the market back down and send the trade to the sidelines. The short-term technicals are slightly overbought. The RSI in Jan is 77% so there is room. What is worrisome is the upper Bollinger band is sitting at 522, putting January well over that band. A pullback or sideways trade is needed to correct it. The other item on the radar is the small gap left Friday from 512 to 511.50. Fill it and you’ll shut the market down.

I like the chart trend and the renewed enthusiasm in the cash trade. My issue is how quickly the market finishes an inventory build and then hibernates. The market will give us that answer early this time.

Daily Bulletin:

https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf

The Commitment of Traders:

https://www.cftc.gov/dea/futures/other_lf.htm

About the Leonard Report:

The Leonard Lumber Report is a column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.

Brian Leonard

[email protected]

312-761-2636

Recap:

The immense tension in the lumber industry is lower mill costs and less demand versus a new face of the pent-up market. No better example of what lies ahead from this tension is the way futures traded on Thursday. A pattern of voids is developing that will cause higher prices as the industry now gets long futures and is no longer hedging. In the short run, the industry’s one-sidedness will continue to create downward pressure. The makeup will look like an overbought condition, with prices going lower.

Time has been good to the mills. We are going on 20 months of a bear market. At the beginning of the cycle, production costs were estimated to be around $600. One year later they were down to $500. And today they are closer to $400. We can argue about the exact cost, but the net end result is that time has lower production costs. Time has not lowered the pent-up demand.

The trend of owning a home started to pick up around 2017. Home buyer confidence soared. By 2019, the employment of many minority groups had hit records. With low rates and consumer confidence in all groups throughout the US, the hope for a home was high. Then Covid hit. My point is that the pent-up players are still around. Higher rates have slowed but not reduced the need. The home builders know that at a price point, there is good demand. They are going into 2024 with the same strategy and 2023 and that is to wait and see. Statistically, they are carrying the same high inventory of what is called undesignated starts on the books as last year. They can turn the building spigot back on quickly if the economics warrant it.

The macro picture projects the lumber market to the bottom and moves out of the bearish cycle. The norm is to have a few big buy rounds that go south. It will take time. The micro picture is to put all the chips on black. Vegas is beautiful this time of year.

Daily Bulletin:

https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf

The Commitment of Traders:

https://www.cftc.gov/dea/futures/other_lf.htm

About the Leonard Report:

The Leonard Lumber Report is a column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.

Brian Leonard

[email protected]

312-761-2636

“Everyone is worried about everything.” That was a quote from a Morgan Stanley person regarding the overall economy Friday. Worry is the emotion driving our industry today. I’ll attempt to temper that despair. Let’s face it: the market has been flat for almost 18 months. The profit margins have shrunk to pre-2000 levels. Every dollar earned is hard work. Welcome back. Could this type of market be with us for another 18 months? I hope not, but it will be here for a while more. The greatest attribute of the lumber industry is the trader’s ability to make lemonade out of lemons. That is where the marketplace sits today.

Inventory is viewed as a negative again. I hear repeatedly that buying a car is like trying to catch a falling knife. If you have contracts, you get to start with a loser and work your way down. The VMI programs are beginning to feel excessive to most participants. A black cloud hangs over the market for many, but not all. The futures market sits at $500 month after month, which tells me that we have a trading level for this demand. The problem is that the trade faces a flood of negative news daily, which is hard to navigate.

The trade needs to get past the news at this point. As I said last week, we lost our starting QB (rates) and now have the backup in. Those who have consistently bought three months out since September of 2022 have done very well. The fact that they return to the market each time tells me that construction remains steady. The fact that many long futures remain tied to forward pricing also tells me that business is going on. And finally, the fact that the commodity funds continue to sell and do not reap any benefits tells me we are balanced. Single and multifamily construction had been carried forward. We will see a slowdown. The futures market indicates that housing is slowing but not on a cliff. Is it a further slowing or a cliff? With rates close to 8%, some see a cliff, but I’m not so sure with the 50-year average at 7.45%. Higher rates have not caused the demand destruction most had expected. It has slowed things but not stopped it. The higher rates are a function of flooding the system with capital. That money is here to stay. I don’t think people have that understanding yet. Here is a simple example. The President spent millions of dollars building more of the wall yesterday. That was millions of dollars sitting since 2019 needing to be spent. Billions of dollars allocated since 2020 have not yet hit, and it is estimated to be 3 to 5 years before it is all in. That massive excess my friends take projecting in this environment from an Econ 101 drill to an Econ 401 estimate. Throw an excellent employment environment and growing family units into the mix, and I would say this isn’t a cliff.

This market also has an internal issue. There are only so many dollars available in this industry. You can’t project an increase in profits when there are more players to bid on fewer cars. This doesn’t mean business is bad but indicates a too-crowded space. It also doesn’t indicate that inventory is a negative. On the contrary, it is becoming an investment again as most push back. The market needs time to evolve. The chances of demand or supply making an impact any time soon are slight. Hedging after a pop or locking in a basis trade will remain popular for the following year. At this point, no one wants to do all the work to lock in a $20 winner. The facts are it may be coming back to the historic norm.

Daily Bulletin:

https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf

The Commitment of Traders:

https://www.cftc.gov/dea/futures/other_lf.htm

About the Leonard Report:

The Leonard Lumber Report is a column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.

Brian Leonard

[email protected]

312-761-2636

Lumber Weekly

Recap:

The market is dropping subtle hints of extended weakness. A few months ago, I confidently said that $500 September futures held value. That may be different for November this time around. The marketplace has gotten in front of their remaining 2023 needs. Obvious deals out there are getting ignored. This side of the trade is never complacent. Rather they are always aggressive. In any case, they were the ones putting in the bottoms this year. Another quandary is that the 4th. quarter numbers, while expected to be down, will be just that. The fluidity of the marketplace all year has saved it. Many are turning cautious.

Friday was the perfect correction. We came in with a 20% RSI and the shorts were up $18 for the week. That is a significant gain in today’s market. Add to it the discount and the feature was shorts taking profits. Open interest does not reflect it, making me wonder if as the specs exited, the funds added. The spread may be the way to go again.

Macro:

Throughout the system, no one seems concerned about the rate issues. We heard a frustrated Fed governor telling us that there may be a couple more hikes. Now, the key to rate stabilization is to drain all the excess QE with QT. The Fed has been trying to pull $100 billion consistently. What we heard on Thursday was that the defense department received $258 billion from the Inflation Act. The Fed’s frustration comes from the added QE. 

Summary:

Friday the market corrected the RSI to 28.20% with a rate of change of 2.3 to 1. The correction would have been much more significant if November held its intraday gains. That leads me to believe there is more correction to come. I mentioned last week that the 100/200-day cross down would not accelerate selling. We will keep a close eye on it after the bigger-than-normal move-down last week.

Daily Bulletin:

https://www.cmegroup.com/daily_bulletin/current/Section23_Lumber_Options.pdf

The Commitment of Traders:

https://www.cftc.gov/dea/futures/other_lf.htm

About the Leonard Report:

The Leonard Lumber Report is a column that focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.

Brian Leonard

[email protected]

312-761-2636