Tag: lumber report

01 Feb 2023

THE LEONARD LUMBER REPORT: The futures market ran $95 higher last week and is now up $165 from its lows

Recap:

The futures market ran $95 higher last week and is now up $165 from its lows. The cash market also had a good week, rallying $55. It is up almost $90 from its lows. While the previous week’s rally was mostly fund buying this week was very well rounded. My thoughts of a tight ranged slog are out the window. The industry is settling into the thick of the economic issue and finding that it isn’t that bad. Many had to enter the cash market sooner than expected to lock in jobs. The market would typically digest after a sharp move, but what we saw in futures on Friday may prevent that. There were two 100 lots bid within a dollar bid. That raises numerous issues and red flags.

Economics:

The completion chart I showed last week indicates a topping housing market. Most would agree that home building has slowed, but would also agree that the rapid pace of construction was not sustainable. The economy as a whole will spend the rest of the year bouncing from sector to sector with bad news. This type of economic cycle will lower home prices and pressure interest rates. That’s a plus for our industry. With a better outlook, less Euro wood and Canadian production we can see the lumber market finding some type of balance. Add in a China opening, and the US supply and demand curve is closer to equilibrium. I can’t stress enough the fact that any indication of an over bought or oversold market equates to a big move today. This market is no longer conditioned to move $70 on news. It’s conditioned to move $300 or more. The reason being is all the consolidation the industry has gone through over the last 20 years.

Technical:

The focus last week was on the looming gap below the market. Today it is still the focus but this time with a positive spin. The gap was created by an expiration and not better business. (At least I thought) Today that gap is still in place and has created a very supportive trend line. It comes in at $397.70. It’s not often we see a pattern reversed from negative to positive on a long-term chart in just one week. That’s what happened here. The long-term pattern is now showing a possible V bottom. The issue today is the short-term pattern. With an RSI of 88% and the slow stochastics turning down there should be some type of correction coming. A $50 pullback would not influence the cash trade. It will be a technical correction in futures. Basis traders need to be aware of this possibility to liquidate the trade.

Note:

If you created a simple math equation in 2000 for the breakeven price of lumber by 2020 it would come out to be roughly $380. Now add the fact that from 09 to 11 the industry did not build enough to offset teardowns and you get closer to $420. Add covid logistic nightmares and the number is higher.

Summary:

The market broke out a month earlier than the industry wanted. The higher wages are going to allow buyers back into the market. As I said before, inventory is an investment not a liability. Buy it. You can always sell the futures if you don’t like it.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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 Jan 2023

THE LEONARD LUMBER REPORT: The open interest in fund shorts dropped almost 30% for the week

Commentary: 

The open interest in fund shorts dropped almost 30% for the week. That answers where the robust buying in March came from. It also shows that the funds are outright liquidating. They did abruptly stop buying as of Wednesday dulling the futures trade. Without the fund buying the futures premium to cash comes into focus. I’ll talk about the chart formation when I write the technical piece, but I would suspect a sloppy week is coming.

Economic:

The positives of the housing industry need to be mentioned often to reenforce the potentials. The chart below is of housing completions since 1968. It shows a modest uptrend for the last 8 years. A mild pullback in construction will smooth out the covid spike but also keep the trend in place. Housing isn’t dead. It just got ahead of itself. The chatter out there is that if rates were 6% 8 years ago and wages were rising at today’s pace demand would have stayed the same. That’s interesting. Today it is all about affordability. The market priced the buyer out of the game. We now have to wait for convergence. Existing homes are down $50K since June. Rates are down to 6.15%. There is still a way to go, but it is going in the right direction.

Technical: 

That’s one hell of a gap below the market. This upcycle has extended most of the momentum indicators enough to warrant a correction. Those two factors indicate a pullback is coming. The question is how much? As far as futures go any selloff is met with good support. The futures quickly become oversold whereas the overbought side takes time. I’m sticking with the current range projection of $392 to $456 with $411 now representing a pivot area.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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 Jan 2023

The Leonard Lumber Report: The market continued its drift lower as the cash market was silent

Commentary: 

The market continued its drift lower as the cash market was silent. At this point I think you need to begin the process of determining value. March futures sit at $370. That is the lowest price seen since April of 2020. $370 is not low if you compare it to the last 50 years. It is low if you compare it with the last 5. So, the question today is whether the recession is going to be deep or mild? If you answer the recession question, then you also answered the value question.

A recession is slowed by infusing the system with capital. We have never had so much available capital in the marketplace in history. That money sitting there needs to be used. Is that enough to soften the recession? I don’t know. I’m guessing that the recession doesn’t need to be that deep, but the trickle-down funding process could keep it dragging on. That won’t kill the housing market. If the recession is going to be mild, then this industry needs a buy round. There hasn’t been a good buy since October. One is needed today just to get the players back in the game. It will be short and not cause much of a rebound but is needed. Buying wood at $330 or lower is a low-risk investment. It’s hard to believe the pushback. I’m not looking for a reversal in the trend. With supply and demand going in opposite directions the clean-up will take time.

Technical: 

The fundemental and technical picture is one in the same today. The RSI in March is at 34% at its contract low. That is not bullish. It keeps making new lows and not getting oversold. If you look at cash it also keeps trading lower and not finding any interest. While both are due a bounce, the bottom building process is just that a process. A good visual is if you draw a line from the high in Feb of 2010 at 327.50 straight accross till today. The market has some downside potiential and a hell of a lot of upside. The shortside of the trade is difficult from now on. Tell that to the funds.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

03 Jan 2023

LEONARD LUMBER REPORT: 2023 Lumber Market Outlook & Affect on Housing

2023 Lumber Market Outlook & Affect on Housing

The following report summarizes today’s lumber industry and housing. I use past data to project future scenarios. What can’t be measured is the buyer attitude, cultural norms, and trends. The data is going to paint a troubling picture while in fact the housing market has tremendous underlying strength because of the cultural shift to homeownership. There is a whole generation out there of new home buyers. Today they are just waiting for it to be affordable again. Hopefully by the end of this report we have some type of idea whether that will happen in 2023 or not.

Interest Rates:

“The Fed wants housing dead.” If you want to curb inflation you attack the largest segment of the growth wheel. Powell is laser focused on our sector. The is no reason to enter into the debate of whether it will be a “50 or 25” move. Our focus should be on the ratio of wages, home prices and rates to get a better read of trajectory. The average mortgage rate over the last 50 years is 7.76% according to mortgagerates.com. The current rate of 6.30% seems manageable. Weekly wages jumped 6.20% last year. The is the highest rise in wages since the early 1980’s. The dominant factor is home prices. The explosion of prices post covid has taken many out of the game. Home prices and the CPI tend to track well together. A cooling CPI will not necessarily cause a fall in home prices but will lead to home value erosion. It will be purely a mathematical change. The prices will be forced to relate to the marketplace. Today the math adds up to a marketplace will accept rates close to 5.5%, median home values are under $400K and wages that are consistent with inflation. Those points are closer than most think. The issue, as always, in 2023 is if the Fed overshoots. This is the key factor for housing in 2023. A stagflation model will keep demand and construction underwhelmed.

Cost of Production:

The cost to produce, from logs to transportation and also wages has gone up substantially over the past few years. What we have experienced in other commodities after their spike was a return to a level about 35% over their 30-year average. There is a strong correlation here. Those markets found costs higher after the fact. Doing the math that puts the low end of lumber prices to be near $420. Over time that number will be a feature and should be factored into your business plan. Our all-in and all-out cycles make it hard to buy value.

Starts:

Home construction is slowing with expectations of it continuing. From the forward-looking statement coming out of the builders to the reports from those who feed the home builders, things are going to get slower. If you look at the chart below the analysis shows the starts number to close in on the 1.1 mark. The defined business plans in 2023 from the home builders is fluid. It is going to be developed quarter by quarter. The structural decade plan was for a 1.4 pace. Covid accelerated that number and now it is pulling back but construction can be turned on in a short time period given many plans are already in place. In this scenario the longer the pullback the quicker the rebound.

Import/Export:

Here is a component of pricing that has never had as much an impact as it does today. The sheer number of traders in the Euro space is a factor in overall pricing today. They can drive the market. That has never been the case before. We are currently seeing how much downside pressure it is putting on the market. The question now becomes as we move into 2023 and shipment are curtailed will that boost prices? The other positive is the fact that Asia exports are off substantially. There is a lot of capital available to build in China. The increase in exports overseas will at a minimum tighten up certain markets. There are some possible green shoots for the market in this sector.

Wages/Employment/ Money:

Wage growth is currently sitting at 6%. As we try to compare that growth to years back, we must recognize that most families are dual income today so 6% is a big number. The buyer isn’t too far off affordability. There is that natural drift away from buying after such a spike, but incomes will allow home buying. It will take time to accept the higher level. Employment is the key to all this analysis. If unemployment takes off the housing market will go into a freeze mode that takes months to thaw. My analysis calls for a continued rise in unemployment but leveling off at some point in the 3rd quarter. Most will be comfortable with their employment status. And finally, with have a very large amount of excess capital out there. From infrastructure to chip building the dollar amount is enormous. That capital spending will trickle into housing.

Summary:

A drag across the bottom could be unsettling in 2023 to all who haven’t lived it. Not just in the lumber industry but in most others. There will not be an all-good signal until the cycle plays out and that won’t be for many months. That said, any signs of a turn in the market will bring in a robust buying environment that will fail. What is needed is a guarded deliberate buy program to build a value area. Inventory will become an investment not a liability. There won’t be a perfectly timed buy. It must be ongoing. There also won’t be the volatility we are used to. This will be a grind year with spikes higher. Grind is good.

The recession is the key to the 2023 housing market. Gold and silver, yes those old men investments, are showing a inclination to a heavier recession than what is projected out there. The other side is talking about copper and its positive tone indicating no recession. None of this will help our current issue of liquidity but could project the distance of the problem.

 

Happy New Year!

 

Brian Leonard

[email protected]

312-761-2636

19 Dec 2022

THE LEONARD LUMBER REPORT: The liquidity issue in the marketplace seems to be getting worse not better

Weekly Lumber Recap 

12/18/22

Happy Holidays!!

The liquidity issue in the marketplace seems to be getting worse not better. At this point in the cycle, we should start to see a few green shoots. None were to be found last week as futures hit a new low on Friday. The outside markets are having a bigger than normal effect on our trade. Mostly due to the lack of news here. I’m confident that overall production on January 1st. will be less than the amount produced December 1st. The market seems to agree but throws in the fact that there will also be less homes starting on January 1 than started on December 1. The question becomes of how long the drifting lower will remain in place.

Look at the chart below. It has a Fibonacci measurement from the contract low during covid to the highs in 2021. Look to the left and 2019. The sideways price channel for the year was developed with an average of 1.29 starts. If that is the number, we are looking for 2023 then a sideways trade for a year could be expected. I’m not sure if that will develop but it does look like the current futures market wants to test that theory.  I’m in the camp that next year will be somewhat subdued, but at a higher level. Next week will be more of the same unless the short funds start to cover. It hasn’t shown up yet so that is even a limited wish.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

12 Dec 2022

THE LEONARD LUMBER REPORT: What a difference a year makes

Weekly Lumber Recap 

12/11/22

 

What a difference a year makes. This week 12 months ago saw a $170 trading range with a high of $1069. Last week we saw a $50 trading range and a high of $436. Last year the market was in a full panic. Today it is not. The reason I bring this up is that it has been one hell of a run and now we are suffering from the hangover. No one can argue that we are in full stop mode that has pushed prices to the lowest level since the covid shutdown. Is it sustainable? Probably not. Will it go lower probably. All that said, this market is going to start working itself out of this spiral lower trading. What are those indicators?

This market has sold off sharply because of two issues. The first is the drastic slowdown in construction on the horizon. The other is an industry with no appetite for inventory. The first is a known value. The estimates of a 30% reduction in building are getting announced almost daily from builders large and small. The distribution side of the industry is in for some real pain and is drastically trying to curb supply. That brings us to the other issue and that is the fact that everyone is curbing inventories. Everyone is off at least 30% of volume by now. That is a formula for the downward spiral to end. That does not indicate a turn but shows a limited downside from here. If you add in the technical read, we get the same conclusion.

The weekly outlook shows a pattern of limited downside. The futures market has traded between the moving averages and the lower band since June of 2021. Today the spread between the lower band and the averages is $100. That spread was over $300 for almost 2 years. The lower band sits at 374. The averages sit around 473. The market could take the 373 band out, but history tells us that it will recover. That band will lower but it isn’t indicating that today. This pattern also shows us how much resistance there is at the 473 level.

To sum it up the call is for a bottoming action followed by a sideway trade. Most of our headwinds are not supply and demand related anymore. They are driven by outside economic issues. This week’s Fed announcement could upset our market, but regardless we have started the process to find equilibrium. The lack of the roll has been surprising.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

05 Dec 2022

THE LEONARD LUMBER REPORT: IF YOU HAVE BEEN AROUND LONG ENOUGH YOU HAVE SEEN TIMES WHEN THERE IS NO MARKET

Weekly Lumber Recap 

12/4/22

If you have been around long enough you have seen times when there is no market. It was always caused by some event. This time the focal point is on the free money causing an overbuilt/overpriced housing sector. The market now has to digest the run up. Commodities in general will have extended swings as traders are either 100% in or totally out. The issue today is that the buyside continues to add cheap product to the pile for the first quarter. This could be a Peter and Paul moment. We are going into a critical week for the market. There needs to be a shift in interest level going into the end of the year. We shall see.

I talked about the futures market starting with a 3 handle back in late July. It took over 4 months to get there. Except for a few corrections the futures market has traded sideways. Only when the cash market accelerated down did futures finally sell off. Futures were building the bottom end of the range. Today they are just following an unhinged cash market. My point being that futures is looking at the low $400 as a tradable level. That is not a buy recommendation, just a value area. I have been around too long to think the mills will find a bottom anytime soon. Firms today really believe that all this will end soon, and things will be back to normal. There is little planning going on to limit exposure. It will take time.

The technical picture could be friend or foe. On the friendly side the whole momentum complex has come together. Rarely has a market continued its trend without some type of correction. With the RSI at 29% there may be more downside but with the pattern and going into the holidays I expect a little pop. Now on the foe side the Bollinger bands are moving sideways but January futures closed under the lower band. Futures tend to bounce right back into the band area. If futures continue down, it will take time and distance for the bands to catch up. Doing the math today that level would be $307.80. There is the shock.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

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

21 Nov 2022

THE LEONARD LUMBER REPORT: With this abrupt pause in our industry it may be a good time to do a review of 2022 and projections for 2023

Weekly Lumber Recap 

11/20/22

With this abrupt pause in our industry it may be a good time to do a review of 2022 and projections for 2023. The reason for an early start is that any movement from here will be the result of first quarter planning. There are three focus areas that will drive prices. The first is the decline in demand and new forward guidance. Next is the cost of production and lastly is the equilibrium equation. Let’s go last to first.

I now call the equilibrium equation a numerical defense. The focus in the last decade was just how underbuilt the housing industry had become. I call it a numerical defense because we continue to use an old formula to get this rather high number. It is based on a husband, wife, two kids and a dog. That isn’t the typical household today, so the underbuilt number is high. In the mid 2000’s we took starts up to 1.6 because of spec buying. If fell to 500 once the spec homes were empty and for sale. This recent hysterical run was fueled by 401K borrowing or buying among other factors. The point I am making is that at 7% mortgages and a 385K starter we are overbuilt.

Next is the cost of production. Does anyone think it could be in the $400’s? Nope. We are all looking at a $600 number. I know I am and can defend that number. That is for 2×4 2&B spruce. I think the entire basket of products may just be cheaper in some respects than we think. A good example is SYP. 10 years ago, that would not play into the mix as much as it does today. The cost of production is a non-defined factor in pricing today. It will be dragged into it eventually, but for today a mill trading spruce under $400 speaks volumes.

Finally, another difficult statistic to follow is demand and construction. We are seeing the expected push in building for yearend. The builders are getting it done while also looking for at least a 30% drop in construction for the first half of the year. This strategy to build and then abruptly stop seems counter intuitive. They are increasing available homes in a falling demand market. What this will do is extend the period of easing until the excesses are cleaned up. It isn’t an economic strategy but more of an accounting move. My first thought is to be careful of the home builder stocks in the short run.

The expectation from here is to look for the shock to the system that turns the market. Until the market experiences it the trade will be one of floating into a buy round that lasts for three days or two weeks. In either case new lows can follow. This market remarkably looks like the lumber market of old. Can that be possible?

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

 

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

14 Nov 2022

THE LEONARD LUMBER REPORT: TODAY YOU CAN’T LOOK AT THE HOUSING MARKET OR THE LUMBER INDUSTRY WITHOUT LOOKING AT THE MACROECONOMY

Weekly Lumber Recap 

11/13/22

Today you can’t look at the housing market or the lumber industry without looking at the macroeconomy. There are no longer sectors, but one big unit of trade and we are married to that fact for a while. Thursday the markets reacted favorable to a better that expected CPI. Equities went higher and rates fell. The best quote I heard was that the market can finally see a bottom. It isn’t close but can be seen. What that means is that we know there will be a bump in layoffs. There probably will be a few companies that go under, but that is all part of the fix. Since the housing industry has such a long timeline new construction planning could be on the horizon. The industry can handle higher rates if in place and expected. A break in home prices will bring about a market again. Low home inventories, less supply of wood, no inventories in the field these are all positives. Things will slowly get better unless there is a blowup, and the fact is that rising rates breaks something. It always happens. Could that be bitcoin?

A $38 billion company with ties to hundreds of firm’s files for bankruptcy. The CEO says, “sorry my bad.” WTF…. I’m not sure that is enough to shake the entire global economy but will do some damage to many sectors from advertising to net worth of a generation. The generation we need to buy homes. It is too early to tell how much damage was done.

This downturn will take time to play out. Prices have to come down. These high prices for homes are unsustainable. With all this wait and see we could expect a sideways lumber market for some time. Rallies will come from a buy round followed by the slow pull back. The buys are only a temporary fix for the mills. They can’t build momentum off of them. Out in the trade price isn’t the driving factor. It is more based on need and as we have seen there isn’t much difference between $430 and $530 if it is needed.

Buy January calls and take the rest of the year off….

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

 

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

31 Oct 2022

THE LEONARD LUMBER REPORT: THE KEY TAKEAWAY FOR THE WEEK WAS A FALLING FUTURES MARKET AT A TIME WHEN THE SHORT FUNDS WERE COVERING

Weekly Lumber Recap 

10/30/22

The key takeaway for the week was a falling futures market at a time when the short funds were covering. The quietness in the cash market was the feature. We are seeing a sharp drop in open interest as the funds exit. While expected it still is worrisome to not see any support from it. What is apparent is the fact that the industry is in drift mode. It is a buy only what you need market. No one can project what impact the rates doubling in 6 months is going to have on the entire industry. This guarded tempo is warranted. If this last rally was caused by the election bubble we expected then it could be a long cold winter. Let’s look at a few issues.

This is an industry with rapidly changing dynamics. The key driver is the Fed. We know they are out to slow the housing market and will do a good job of it. What we are now watching is the big ones. The first indication of a slowdown is liquidity. Most believe that something needs to blow up but that isn’t the case here. What we will see is companies looking inward and slowing most activity. This is the quiet bleed. The other major issue will be when companies start to put the “lists” together for layoffs. This is really the telltale sign. It took almost 15 years to get labor back to a stable level and now they may have to let people go. So, at this point we expect a liquidity crunch followed by layoffs. So that’s the macro picture. What is the micro picture?

As said earlier, we may have pulled forward business expected from the election bubble. We have seen a draw down in inventories to a level that keeps the trade in the market. Granted housing is eroding but the on-hand inventory will always be limited. I did expect to see much better basis business in the last few weeks. What we saw was a very big push back to build inventories or make margin calls. This looks like a one up and three weeks down marketplace. Those are very tradable. Going into next week I think there are three dynamics to watch. The first is that rates have doubled in 6 months and are now called to level off and hold through 2025. That’s not a typo. Next is expectations. Forward-looking reports indicate a slowing of both production and demand. 2023 could look a lot like 2019 as far as the trade goes. Is 402 the low? Lastly is the housing market itself. Some are calling it a meltdown, but it looks too busy to me to call it that. This looks more like a bear market that trades. Use the sell offs to own cheap wood for next year.

NEW CONTRACT:

Lumber Futures Volume & Open Interest

https://www.cmegroup.com/markets/agriculture/lumber-and-softs/lumber.volume.html?itm_source=cmegroup&itm_medium=friendly&itm_campaign=lbr&redirect=/lbr

CFTC Commitments of Traders Long Report

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

Lumber & Wood Pulp Options

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

 

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