Tag: Lumber

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

18 Sep 2023

LEONARD LUMBER REPORT: This market has been flat, is flat, and will remain flat in the near future

Lumber Weekly

Last Week:

This market has been flat, is flat, and will remain flat in the near future. Every truck and every car bought out there is a battle. The gloves are off. The struggle is how to pull out a profit from a market so flat. The only possible mover to this market is the funds. If they decide to add more, then the market goes down. Absent that selling, the market has scaled down interest to own it and scaled up selling to hedge it. Everyone claims they don’t have wood to hedge, but those last few cars have taken a hit. Least resistance remains down.

The one aspect to note is that the downcycle is getting older now. With JIT inventory management, most need to show up more often. A buy round is coming. The question is if futures will hold long enough to get it rolling. Any negative pricing in September will push the buy round out to Thanksgiving.

Thought:

Last year, our reports from the builders were of a slowdown going into the first quarter. This was not a bearish projection but more of a digestive move. As we have seen, this readjusting benefited the single-family builders. They created a pace and maintained it for most of the year. Today, we are in the thick of their year-end push but expect a similar pullback going into the end of the year. We heard about it last year. I don’t think we will this year. Orders are good, and any slowdown won’t be readily noticed. While the home builders have a good handle on the business, they are still aware of possible headwinds and will slow down to discuss. Going a step further, we are starting to see the lofty stock levels of these companies start to fall off. Wallstreet wonders if the builders’ frothy profits this year can carry forward. Most believe that even the homebuilders will need to sharpen their pencils, cutting into profits.

Summary:

The weekly 100- and 200-day moving averages last cross was up in December 2020. They are now getting close to crossing again. That would be a negative cross. While that is a very substantial indicator, it is skewed because the market moved a record $1200 since the last cross. This cross could confirm a lesser trading range and lower volatility rather than a sell signal. That is how I look at it. $30 up is a big move, as is $30.

Short run: I’ll give November till Thursday to close under 494.50. If it doesn’t, the bounce will begin.

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

11 Sep 2023

LEONARD LUMBER REPORT: WAS THERE A KEY TAKEAWAY LAST WEEK?

Lumber Weekly

Last Week:

Was there a key takeaway last week? No. It was a holiday-shortened week that saw liquidation and rolling. The focus was on moving positions and not price discovery. There was a slight erosion in the cash market as the week ended. I’m unsure if it was a lack of interest or a rebalance. I do know that expecting a sharp sell-off in cash hasn’t been a good strategy. It’s always a grind. Today, there is a forward sales value under $480 in November and a basis value over $530. Those tight parameters could keep futures flat.

Thought:

If there is one word that sums up this market in 2023, it would be “resilient.” If you made a mistake this year, you were not punished. Entering the market too early or too late didn’t end up in the catastrophic spiral it did in the last few years. The market has stayed within its value parameters for the whole year so far. Let’s face it: This market deserved to go much lower. After a run on mortgage rates from 3% to over 7%, it should have broken the market, but it held up. Any sell-off from here will be more mental-driven than physical. We were looking for September to start indicating less supply and less demand all year. If that is the case, expect more of the same trading and opportunities.

Summary:

The 200-day moving average of 548.40 and the 100 day at 535.40 are beacons of light for this market. They are also beacons of hope. Seldom do lumber futures have such prominent technical highlights and do not reach then exceed them. It will again, just not yet. A very strong downward channel comes in at 516.60 in November. This market could ride that trendline lower for the next few weeks. The industry yearend has frozen trade. The typical lows in October may be the case again.

 

Note: it looks like the funds are getting shorter.

 

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

05 Sep 2023

LEONARD LUMBER REPORT: Futures and cash took different paths last week, but neither blazed a trail

Lumber Weekly

Last Week:

Futures and cash took different paths last week, but neither blazed a trail. The cautionary flags are out en masse throughout the industry. The time it takes to replenish the system can be measured in days, not weeks. The reason for the quick turnaround lies in the marketing of wood today. There are a lot of sellers out there with one goal: to sell. Items never seem to get tight despite some very good business. Cash last week found the last of the participants while futures saw the “deals” again. The key takeaway for the week was that the market remains in a sideways trade. The minor blips up and breaks down have nothing to do with the overall trend.

Thought:

The fiscal year-end for many in this industry comes in around the October time frame. By then, the focus becomes the 2024 building season. The industry has already moved on to next year. There are many of the same issues to contend with. Let’s take a look. The US economy, and for that matter, any country on earth, has never experienced such an influx of capital into the system. There are no models or equations to guide us. Every business today has to react instead of plan. That creates opportunities. It also causes many firms to be far more cautious.

Right now, the homebuilders have the goose and its golden egg. Rates and existing home sales remain sticky. One high and one low. There is no way they will over-accelerate construction. They will continue to feed the system but at a pace of plus 5 to 10%.

The multifamily sector is starting to have an inverse effect from the high rates. The ROI is just not there for many.

Today, lower lumber prices would not accelerate building, nor would rising prices slow it. It is all about sales momentum, which remains steady. Many are beginning to wonder if an economic slowdown, i.e., higher rates and higher unemployment, won’t slow construction. Most need to realize that between the Chips Act and the Inflation Act, there will be 2 trillion dollars entering into the system on top of what is already there. That spigot will not slow. 2024 could end up being very lucrative.

Summary:

The futures market has done a good job of trading in between the goalposts. The time after the roll tends to see the funds adding. That will lead to new lows and widening goalposts in today’s environment. No momentum indicators call for a steep decline. The lows will be fund-driven and a grinder. One trade to watch is if the industry gets short here. There are no spec shorts in the market. The industry shorts have been here for months. Will others jump in? Next week should be a carbon copy of last week. Let’s hope we don’t test the circuit breaker system…..

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

28 Aug 2023

Leonard Lumber Report: The week was mixed as the futures market gave back half of its rally while cash continued higher

Lumber Weekly

Last Week:

The week was mixed as the futures market gave back half of its rally while cash continued higher. The futures market is in the middle of a rebalancing for the month’s end, so their dynamics are different. What is troublesome in this environment is that while the spread works, the second month gets clobbered. The risk management selling is in the next month. Also, the futures correctly projected a slowing cash market. Today, a slowing cash market doesn’t indicate lower prices. The futures will be the one making the new lows if all remains the same.

Factors:

The current trade is all about economic outlooks. No one is complaining about sales. The problem lies in the fact that there is no follow-through. The industry will not add to inventories and that is based on their projects. That won’t change anytime soon. The buy side will only step in when forced. The sell side is always $20 too high. There are bands established, but that isn’t anyone’s focus at this time.

Thought:

As we finish the third quarter many are starting to realize that covid aberration is behind us and we are back to a grind market fighting for dollars. The difference, I believe, is the ability for the market to go up. Just last 8 months ago the futures were trading at $627 mill. A complacent marketplace will cause strong rallies. My fear today is that we have to make a new low to make a new high…

Technical:

Where did the bull market go? Now that we are back in the $35/$70 mode again the 100-day moving average is the focal point. It traded back and forth on it only to fall apart by Friday. Thursday, the stochastics started to turn, as did the longs wishful thinking. The psychology of the market is not to get caught long and last week’s trade highlights that concept. Exiting and rolling could weigh on November next week.

Daily Bulletin:

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

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

22 Aug 2023

Leonard Lumber Report: The futures market had a $39 trading range last week, all up

Lumber Weekly

Last Week:

The futures market had a $39 trading range last week, all up. Once we crossed the halfway point in August, the short side had to start rolling or exiting. It is usually a two-week process that works well for the spread but does little for the out rights. The difference this time is that the futures market has been sitting near the bottom for a long time. The next move was up, and the exiting got it started. I have noticed the extreme level of scrutiny held by the industry. Few views this as a supply and demand rally. The focus is on the futures and the typical positioning volatility, me included. This reluctance could keep upward pressure on the market.

Factors:

The trade is reverting back to its historical norm. A $35 move is good, and a $70 move is great. This type of trade allows the industry to make money, or at least it should. Today we face a tremendous cost of doing business throughout the industry. In the past five years, small companies have morphed into significant players with all the costs associated with playing in the big leagues. They now either need higher prices to allow for better revenues, or they need to par costs. If the outlook for 2024 is of steady starts and steady supply, then the $35/$70 model is here for a while.

Thought:

I’m still in the camp that this commodity should trade higher. All commodities have run up and settled higher than their norm. Lumber trading sub $400 is too close to the norm. There have been steadily added costs to subscribe to a higher norm. There is an issue. The higher price of the finished product in most other commodities was due to the higher cost of production. None of the finished products faced a 30% Federal regulation charge. Salad dressing is not higher because of the Federal regulations put on soybeans. You cannot expect the commodity to carry that added cost. And that is most likely why the price is in the $400’s and not $600.

Makeup:

It looks like the industry is going for the Texas hedge while the funds continued to add. That should mean the spread goes $10 over to $20 under again.

Technical:

The chart formation calls for trade through the $550 area. This is a grind and most likely will take work to get there. The wildcard is if the funds liquidate outright. For now, the points are:

  • 542.80
  • 547.20
  • 555.30

RSI 65%

Daily Bulletin:

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

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

14 Aug 2023

LEONARD LUMBER REPORT: INCREDIBLE LACK OF MOVEMENT IN THIS MARKET

Lumber Weekly

Last Week:

The market had a $29 range but only closed 50 cents lower for the week. What is incredible is the lack of movement in this market. I keep searching for the correct equation to find value and have missed that a flat market has no value. Deals aren’t deals in a slow trading market.  The conversations today are either about the massive underbuilt conditions out there or the numerous economic headwinds the industry could be facing. Let’s take a look at a few issues.

Factors:

Euro wood:

What once was considered a transitory issue is now becoming much stickier than expected. It almost has a bug-kill timber feel to it. That shit would never go away. That seems to be Euro today. While they have been able to reduce the amount at the ports, it won’t be enough when the next ships arrive. Will the euro mills keep shipping at a loss? The answer is yes. The slow European and Asian markets are forcing the cash flow issue into the equation.

*The supply of euro does not dictate prices in our industry, but it adds pressure to the buyer.

Lumber buyer patterns:

The “great run-up” in 2021 and then again in 2022 change the amount of risk the buyers would take. It went from the industry standard of 3 months to 30 days. In a bull cycle, the shorter term keeps upward pressure on the cash market. They are forced to be in all the time buying. In a down cycle, it adds to the weakness because while they are in to buy more often, the quantity isn’t significant enough to tighten up the entire market.

Demand:

Demand is good out there, no doubt. The problem is between VMI programs, contracts, and the wacky and wild euro wholesaler; the lumber buyers can only get in trouble if they become aggressive. Without building momentum, the market is range bound. Don’t expect that to change anytime soon.

Housing Dynamics:

Points:

  • 2008 to 2012 was a housing depression. Equity in homes hit a 30-year low.
  • From 2012 to 2022 the industry saw record-low mortgage rates.
  • 2020 saw covid and a major shift in the homeownership trend.
  • 2016 to present the industry suffered from a labor shortage and logistic issues. That kept the pace of construction well below the growing demand. It also could not keep pace with the growing number of household formations.
  • Today there is a record amount of $$ in the system and now we see most of it headed toward wage increases.

The key takeaway is that this is a great industry to be in today. It should stay statistically underbuilt and underbought for years. That doesn’t mean prices will go up. It just means that there will be trading.

Market Make Up:

The futures open interest is closing in on 8000 as the funds are up to 2600. That is the highest number of shorts they have held in the new contract. The other side was picked up by the industry and the spec buying. Even the swap dealers got involved. They added most of the shorts in the hole. One would think there could be a bounce once they begin to roll.

Daily Bulletin:

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

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