Category: Lumber

27 Nov 2023

Leonard Lumber Update: I Will Continue to focus on the technical side of this market

Recap:

I will continue to focus on the technical side of this market. There are two takeaways from the weekly chart below.

The first read is that when a market goes through an extreme volatility event, there tends to be a corrective phase. You can see just how flat the market has become. In 2021 and 2022, the market experienced record prices and volatility. In 2023, the market has been flat. I wonder if the excess volatility has been sufficiently drained yet. The chart shows that futures can run another $50 higher and still be in the flat range. That brings me to read number two. This is a flat market working along its bottom. Rarely does a market break out down from this type of trade. The breakout is usually a retracement of the last move. So, this market has some room to run higher. I made a case in March, more than once, that the potential distance up is far greater than down. That math has stayed the same, but the timeline is in doubt.

The fundamentals are getting better as time goes on. The market is getting used to higher rates and higher home prices. A slight downtick in either stimulates more activity. I expect a continued start and lag with the buyers for another year, but the good news is the actual decline was marginal at best. My other soapbox rant continues to be the excess capital in the system. Massive capital injections are still coming into the market. There is also enormous capital sitting on the sidelines. And finally, 2024 is an election year. Enough said there.

Last week’s futures trade was a good read of the market. The recent Sept-Oct trend to new lows was more a sign of frustration than weakness. The bounce off those lows is a rebalancing, but last week’s positive trade showed underlying strength. The breakthrough of the 100-day average and the 200-day average indicated new strength. Two other keys are that Elliot Wave is calling the excess volatility gone. This is not a bottom call. It is a warning not to discount the possibility of some large spikes higher. If true, the other key factor could be a market exiting the focus of the 2020 to 2022 data and reverting to pre-2020 data and fundamentals. As we remember, that was an underbuilt sector with lessening production.

This week’s focus remains on the algo buying versus the premium. This is a very disciplined premium/discount trading market. It will have to meet somewhere in the middle. A good indicator of potential January weakness will be if the spread goes further. The upcoming roll might be enough to bring January closer to the cash market.

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

20 Nov 2023

LEONARD LUMBER REPORT: THIS MARKET IS STILL A GRIND, BUT THIS TIME A GRIND HIGHER

Recap:

This market is still a grind, but this time a grind higher. The January futures contracts were up $3.50, while the cash print was up $3. It did feel better than that all week. There may be better confidence building up with the recent cash trade. Also, the projections set in January are coming into play. The expectation was a reduced supply coming out of Canada and a slowing of Euro wood coupled with less demand.

The last estimate I saw was an 11.7 shipment number expected for 2023 out of Canada. We were looking for a 12+ number but could get less than expected. The Euro issue is under control. Coming into 2023, the docks were flooded with Euro. It was pretty easy of a call for that problem to subside. The surprise has been the steady demand. It is off YoY, but not at the pace expected. Most were prepping for the next shoe to drop in the economy, only to be forced back into the market. That is where we are at today.

Technical:

The best read for the next eight weeks will be entirely technical. The algo’s, funds, and support/resistance points will be the feature. Why is that? As futures neared the 200-day moving average, the funds started to liquidate. With less fund selling, the algo/long fund has started to buy. There are no fundamental drivers. It is all futures related. If you keep pushing futures higher, the industry can buy cash with a place to go for protection. Every rally for the last 5 years started with the ability for the trade to sell the board for protection. It is a tough time of year to get that firmly in place, but it is trying to form.

This rally is going on 18 sessions, and with an RSI of almost 70%, I believe it needs to be corrected. Hedging or basis trading a percentage of buys is the risk management play. The 200-day is sitting at 555.50.

The pulse of this market is the computer trading in futures. If has not yet switched from the short fund leading to a long fund taking over but it is different.

 

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

13 Nov 2023

LEONARD LUMBER REPORT: January gained $10 for the week, but it felt much better than that

Happy Veterans Day!

One of our own, a World War II veteran, is celebrating this weekend. I believe he was in the Army-Aircorp and served with the French underground. Jack Hall from Hall Lumber Sales in Middleton, Wis, is 99 years old. If you are wondering what he likes, he is a big proponent of owning more precious metals and less cash.  

Happy Veterans Day to all who served!

Recap:

January gained $10 for the week, but it felt much better than that. Momentum is getting created just by the fact that sentiment is less bad. While the upside is limited to fund liquidating, there is still that positive note. If you look at open interest, it is apparent that the market is up because of liquidation. Cash, on the other hand, is testing the market’s ability to accept higher prices. The mills still don’t have pricing power back. It gets the win here solely because of how underbought the market has become. If the starts number comes in around 1.4 on Friday, this market will be undersupplied after all the Christmas shutdowns. If it comes in closer to 1.3, then the shutdowns won’t have an effect. That is a general assumption because of the report’s vagueness, but sticking with the dot plots is meaningful.

In 2024, there is less chance of a debacle in employment. The prospective buyers have gone into the weeds with rising rates and primary home prices. They have not gone away, and numbers are growing. That is the main support for holding prices up. There will be spikes up and down in the futures market, but the general economics is that these levels work. Turn demand up some and we are off. Keep demand at its current levels, and it is then more of the same. 

Technical:

The technical picture has been very informational for this last run. It is now pushing its limit on a market that is only filling in. This week, November is expiring. The chart pattern in Jan could begin to top and slowly roll over by the end of the week. 

If the funds show up, I’m wrong. 

 

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

06 Nov 2023

LEONARD LUMBER REPORT: I would not call it the Great Reset, but there was definitely cash trading last week

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

30 Oct 2023

Leonard Lumber report: The immense tension in the lumber industry is lower mill costs and less demand versus a new face of the pent-up market

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

23 Oct 2023

LEONARD LUMBER REPORT: We are all trying to shape this market not with clay but with wet sand

Recap:

We are all trying to shape this market not with clay but with wet sand. Each negative seems to overwhelm the positive. While the housing pace continues on its post-COVID run, there are signs of fatigue. As we measure ongoing business, we continue to get hit with bad news. The 8% mortgage was expected. The fact that it went from 8 to 8.10 in less than 24 hours wasn’t. We are seeing the fatigue factor mixing in with lousy economics. The next six months will be a street fight. The good news is this industry will stop buying, leading to higher prices. The question is when we will get back down to dirt.  Friday was a significant volume roll day. The roll has been orderly. The pressure came from accelerated liquidation. No spec long is a winner.

Macro:

We’ve been talking about how rising rates will break something. It is going to be housing. Now, the extent of the slowdown will lessen as time goes on and the marketplace adapts. Going back to January, construction was expected to be lower heading into the fourth quarter, but production and supply would also be down. That is where we sit and why the futures are stuck at $500. The challenge will be the short-term pressure the market will feel for the next few months as rates find a level. Core inflation is stuck at 4.1%. That won’t be to 3% anytime soon. In 2024, it is estimated that the US will spend $800 million to finance the debt. The Fed needs to sell a record amount of bonds. The hope is for the market to absorb all the bad news over time and not overnight hysterics.

Technical:

Technically, the market broke out to the downside and is now a sell with a 36.90 RSI. The market has seen these sell signals this year but with a very low RSI. This one has some room to go lower, and with all the under-the-table deals offered out there, it just may.

 

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

16 Oct 2023

LEONARD LUMBER REPORT: The housing market is entering into a “great pause.”

Recap:

The housing market is entering into a “great pause.” That will show up as less buying, selling, and construction. The lumber side of this industry has already been in the great pause mode for most of 2023.

Housing has a typical pause nearing year-end, clearing the decks and creating a good spring. Some now are projecting the slowness to be carried through the spring. The futures market has been the best form of price discovery this year. The last few weeks have been a good example of that.

Futures rallied about $17 last week while the cash market collapsed. Futures had already made the low of $478 four weeks ago. The futures price is the “bid.” It is the market. That price is value. From here, we wait for cash to drift to the “bid.” If print followed the futures market, it would be much more efficient.

Last week, the futures trade indicated a bottom in the cash market at some point. The usual bottom is set when you can buy cash and sell futures. That is getting close but could lag. This is not a supply and demand issue. If the futures market at $506 is too high, then sell it. Forget the silliness of the roll or funds. $506 is a good hedge against that pine you just bought with a $2 handle.

Macro:

The housing sector is getting forced into a slowdown. This is not supply and demand. If rates were at 3%, we would be at 2 million starts. The underlying demand is there. The macro factors are too great today. The question becomes whether those factors increase or subside. Until that is answered, lumber inventories will be kept at a minimum and lumber contracts will be canceled. Cash is an investment that can be hedged today.

Technical:

Futures have a positive tone. The momentum indicators are positive. The RSI at 60% is neutral and finds buying on breaks. What it also has is major resistance every $6 higher. It has no room to run technically. Speculators can expect more upside from the roll while the industry has to form a plan to start hedging or creating a basis trade.

 

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

09 Oct 2023
lumber-header

LEONARD LUMBER REPORT: “Everyone is worried about everything.”

“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

02 Oct 2023

LEONARD LUMBER REPORT: The market rallied $17.50 for the week before the turnaround on Friday

Recap:

The market rallied $17.50 for the week before the turnaround on Friday. Futures went from a discount to par. The bounce was not unexpected. A correction was needed after the longer-than-expected down leg we just sat through. With JIT inventory management, the buyers are near fumes after about four weeks. What was surprising was that most of the future’s upside was driven by speculative or fund buying, not the industry. Those in the industry could continue to pick off deals all week. That was the catalyst for the selling on Friday. Some of the spec side didn’t see the follow-through needed in the cash market to stay long. The week was either a month-end correction or a return to normal levels. As of now, it has yet to move the needle to support things.

Monday begins a new month and a new quarter with all its history. It is all irrelevant this go around. My mantra all year was that $380 mill is too low and not sustainable for the industry. Conversely, the market has been telling us what is too high and not too low. At this point, the fourth quarter will be when the market tests the recent highs and lows and tells us what is too much. In the meantime, let’s stick to the basics. An upcycle in the cash market is created when futures reach a sufficient premium to cash. If you can buy cash and sell something, we turn.

Macro:

The facts are that neither the housing nor the stock market has yet to feel the effects of higher rates. Yes, most markets gave up a lot of value in anticipation but haven’t felt the impact. At this point, we need to get past it. The quarterback is out for the season. Let’s focus on the backup. We will see less construction, less production, and fragile inventories. Buy breaks.

Technical:

Since April 2022, the monthly RSI has hovered in the low 40s percentage-wise. Even in the flat year of 2019, the market saw better volatility. A $100 move wouldn’t even move the needle. Something to think about. The market remains generally married to the technical read. Two weeks ago, the RSI hit 20.40, the stochastics crossed, and the low rested on the lower Bollinger band. Those three indicators have been consistent all year. The RSI hit 62% on Thursday. That was up 42% in a week. The rally may be limited with the upper Bollinger band sitting at 511.60 and narrowing. When the profit availability is as low as it is today. These little indicators are essential.

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

26 Sep 2023

LEONARD LUMBER REPORT: The market is dropping subtle hints of extended weakness

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