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Crude oil, gold, steel and commodity stocks have all taken it on the chin to varying degrees so far this year.
But not every commodity has suffered this same tough fate. In fact, there's even been a major standout. It's a commodity that most investors rarely think about.
I'm talking about lumber.
Raw lumber prices have zoomed more than 25% this year, even though the home construction business - its main use - has been scrambling along at record lows. This is a rather stunning development. But there's a solid explanation: Production has dropped in the face of weak demand - and dropped so much that prices have moved much higher (Please see chart below).
In other words, because there has been so little demand for lumber to build houses, timber companies have cut back on their harvesting and cutting. So now that home production is picking up a little - as was suggested in some earnings and economic reports last week - marginal new demand is pushing up the price of this surprisingly scarce commodity.
This is actually very good news, says Tom McClellan, a veteran technical analyst who has studied the lumber-housing relationship in great detail. He recently published a report that showed if you push a chart of the price of lumber futures one year forward, its lows tend to coincide with relative lows in the construction of new single-family homes. In essence, lows in home construction follow lows in lumber prices by 12 months.
This is important because we can now see that a major low in lumber prices was set a year ago - on Jan. 29, 2009, to be exact. With that knowledge in hand, you can extrapolate that single-family home construction is right now at a relative low.
This idea coincides with the Feb. 2 report of builder D.R. Horton Inc. (NYSE: DHI), which stated that every aspect of its business was improving in the wake of low mortgage rates, lower home prices and a federal tax credit. The revelation shocked Wall Street and sent most homebuilder stocks sharply higher for the first time in months.
The SPDR S&P Homebuilders (NYSE: XHB) Exchange-Traded Fund (ETF) has doubled from its March 2009 low, but has flat-lined since, waiting for the economics of the business to improve. Value funds are patiently buying the group with the expectation that the downside is now limited, as well as the belief that the upside could be substantial from these levels.
The ETF closed Tuesday at $15.45, and has stabilized above its 10-month moving average line. With a monthly close above $16.50 a share, the stock would be poised for a breakout. Watch out for this, but don't hold your breath - it may take awhile. Employment trends are still weak, and homebuilders have disappointed investors for four years running.
[Editor's Note: As this analysis demonstrates, Money Morning Contributing Writer Jon Markman has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find.
It will take a seasoned guide to uncover those opportunities.
Markman is that guide.
In the face of what's been the toughest market for investors since the Great Depression, it's time to sweep away the uncertainty and eradicate the worry. That's why investors subscribe to Markman's Strategic Advantage newsletter every week: He can see opportunity when other investors are blinded by worry.
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After just reading the article this morning and learning about Form 13F and its requirement to file if you own 100 million in US stock, poses the question to me of how many people in China own only 99 million and are not required to file. This could be a large cumlative number.
Why do you keep this guy on staff? Doesn't Markman ever read the news or even listen to the news on TV? He continually misses the big picture. I've started reading his articles purely for a laugh.
Jon, pay attention. HAITI. HAITI.
Shipments of lumber have already been booked for the reconstruction in Haiti. There is going to be a huge demand for building materials for the next 2 to 3 years because they are building modern, earthquake and hurricane proof buildings.
Remember, Money Morning Editor, a chain is only as strong as its weakest link. Your publication is weakened by the narrow minded view that Markman seems to continually express.
Haiti??? What does Haiti have to do with lumber futures? It may have a significant importance in construction/building materials, but not so much in lumber. Earthquake proof and Hurricane proof structures use steel and concrete and very little lumber, thus making them more earthquake and hurricane proof. 3rd world contries use concrete as their main building componet because it is readily available evne though it is of poor quality. Steel is not as readilly available which is why most concrete structures in these countries are not reinforced sufficiently to withstand any eathquake of substantial magnitude. This is why you see widespread devistation to structures post earthquake. If you look at the photos of the devistation after the Haiti earthquakes, how much lumber do you see? Virtually none compared to the unreinforced concrete and block that is used everywhere! I believe if you check lumber futures after earthquakes in 3rd world countries, you will find the impact of those events to have very little impact on the lumber commodities market.
The reason timber prices are higher can also be tied to the wet weather. The ground is so wet the timber companies can't get their equipment in or out of the woods which has stalled production.
Sounds like Jeff would like Jon's job, in any event he has a very good point on why lumber stock prices are on the rise. Is it the American Republican of Haiti yet? I can't wait to read this story which I have predicted from day 1. Maybe I can get a job writing here too?
Interesting article and true that production has been cut back in the US. Lumber prices are due to the following: (yes Haiti but that isn't the whole picture.) Decreased production due to evironmentalists, continued low housing numbers, downturn in commerical real estate. Then last but not least, inflation. Inflation will play a role in all commodities sooner or later, but are at work in lumber and at the gas pump now. As to a rebound in housing stocks, there will be no rebound in housing stocks or in demand. Where are prospective buyers going to come from? Lenders not lending, unemployment up (true unemployment pushing 15-18 percent), incomes down, jobs scarce. Throw all this into the mix and add in the proposed legistlation by HUD to prevent owner financed deals unless the owner lives in the property, and it all spells continued downturn. I believe the worst is yet to come. Batten down the hatches!
owen k., your missing the main point. any gov. statistic is going tobe,a) skewed,b) an outright lie to hide the true desperation of our current situation. If the real numbers were to be released without tweaking and spin, devastating!