A bonfire of two-by-fours

Goodbye: Gasoline. Hello: Lumber.

Rocky today bid adieu to the last of his position in the June gasoline crack spread. He entered the spread in January (click here) when gasoline prices were below the marginal cost of production (“a free lunch”). Since refineries are ineligible to receive TARP funds, they needed to produce less, raise prices, or go bankrupt. All three things happened, and his position returned an improbably successful unleveraged 765%.

(As a humble speculator, Rocky admits that he didn’t buy the exact low, or sell the exact high — and he admits that anyone who bought the exact low in Bank of America did nearly as well!)

Rocky now sees a similar situation unfolding in Lumber. Lumber currently trades at its lowest price in 25 years — below its marginal cost of production. The US and Canada are locked in a bitter tariff dispute, and Weyerhaeuser, among others, are closing mills and curtailing production. This interview with the CEO of the world’s largest lumber company summarizes Rocky’s view. (Rocky hopes this CEO’s clairvoyance is better than Ken Lewis’ at Bank of America.)

Rocky is confident that lumber prices will eventually rise…and perhaps double or triple from the lows. But he’s less confident about his timing and entry point because the recently shuttered lumber mills are dumping their excess inventory into the wholesale channel. Once this inventory clears (30 days or 300 days?), he expects prices to gap importantly higher — and because lumber has a tendency to gap violently, there probably won’t be a graceful entry point.

[Disclosure: Rocky NEVER gives investment advice, and he is frequently wrong on the price direction, the timing, or both. If Rocky is wrong on lumber, and oil prices continue to rise, he'll replace the oil furnace in his home with a wood stove -- and will heat his house next winter by burning two-by-fours.]

Here’s a 25 year picture of lumber prices:

Lumber prices since 1986