The Leonard Lumber Report: The Three “C’s” of the Industry



The Leonard Lumber Report: The Three “C’s” of the Industry

Introducing the Three “C’s” of the Industry: 

The best way to recap the market is to look at its tone. To sum it up, we will introduce the 3 “C’s” or confusion, congestion, and consternation. We’ve heard repeatedly, “how could this have happened so fast?” The trade was not looking for an early start to the yearend run. It also believed that there was enough supply. That proved to be incorrect. Most of the supply issues are related to the congestion at transportation points caused by COVID and weather. Things are fluid but at a pace that allows shipping to stay fluid. That is not at a pace to fill in the needs. 

This leads us to the third “C,” or consternation. Concern and anxiety about future wood deliveries have trickled back into the marketplace. All have been caught in that nightmare this year and the nightmare that followed. Most are now working towards not being there again in 2022. So, we are ending the year with a more aggressive buy pattern than usual at a time when things are moving slow. 

The issue plaguing this industry is its overall weakness in defining value. At $600, 50% of the industry went hand to mouth. At $900, 80% of the industry is hand to mouth. There is no investment in between. The buy-side has to scale into the market as it falls, and that will take the volatility out of the market. Waiting for the bottom is not a business strategy. We think we are seeing more of that today, but after the fact. When everyone owns $1,200, it will be a long way down again. This commodity fits well between $650 and $750.

Let’s Get Technical:

There is a lot of noise between here and 1,000 in January. Trying to gauge the trend during the holidays is fruitless. We’ll say that January futures were up $20 for the week, but the RSI fell 13%. The market is technically very friendly, but trading during the quiet holidays with some big gaps below takes some enthusiasm away from the long side. The Fibonacci points below could be the range to finish out the year:

38% 929.80

50% 1079.00

61.8% 1228.20

 Weekly Round-Up:

This push higher had a lot of energy, and in this industry, the earlier the energy, the quicker the end. We think this market needs to cool some for the holidays, but we, including Rick Santelli, Kramer, the Fed, and everyone else, have never been here before. Today the consumer is accepting higher prices as the norm. There isn’t any pushback; builders are paying up, multifamily guys are paying up, homebuyers are paying up. Next year, we have no actual data to track for possible outcomes. Buying futures here could be the best trade of 2022.

 Open Interest:

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

Commitment of Traders:

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

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