Home > General, Markets > A bonfire of two-by-fours

A bonfire of two-by-fours

May 8, 2009

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

Lumber prices since 1986

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  1. ld
    May 8, 2009 at 7:17 pm

    Rocky – someone searched for “rocky humbert lumber” and came to my blog – imagine that…

  2. May 10, 2009 at 12:30 pm

    Ld: That’s unusual… Perhaps the explanation is this old post from your site:
    http://legacydaily.com/2008/08/haste-makes-waste/

  3. masteroftheuniverse
    May 13, 2009 at 2:22 pm

    The last time I traded lumber, I sold it and it went limit against me for four days in a row:)

    Jeff

  4. May 13, 2009 at 2:43 pm

    Jeff:

    Well said.

    Hence Rocky’s comment about “gaps” and “graceful entry points” …. not to mention graceful exit points 😉

  5. allocator
    May 17, 2009 at 2:11 am

    Hi Rocky,

    As you don’t give investment advice, I don’t take it, but, let’s just say your observations on lumber have “inpired” me, and I have made a position in my portfolio for the Claymore timber ETF CUT. I haven’t pulled the trigger yet, but plan to soon. It has had a run and may (no read WILL) go down when I buy it, but, that’s OK since if I have to average it will be into an increasing yield. It yields about 3% now.

    Man, those lumber floor traders must be a starving pack. I remember once they ran the market up $10 and back down again to shake me out of a single contract! Not surprised it ran limit on you for 4 days, Jeff. You were probably the entire sell side of the market for a week. 🙂

    Cheers,
    George

  6. May 17, 2009 at 11:24 am

    George:

    The lumber locals still behave like the grain locals of old (with no offense to Jeff intended). Rocky usually holds “structural” positions for weeks/months so these sorts of swings represent countertrend trading opportunities around an accumulating long position.

    Just FYI — there is less than a 0.10 correlation between price changes in CUT and price changes in Lumber…so statistically speaking, they are not the same bet.

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