3 reasons why lumber prices will tumble 30% by year end, according to a veteran portfolio manager

A crane lifts logs onto a stack at the timber terminal in the seaport of Wismar.
  • The price of lumber has yet to bottom – and will fall as much as 30% off by the end of the year, Micheal Gayed says.
  • Gayed is an award-winning portfolio manager for Toroso Investments who has long touted lumber as a powerful indicator for the US economy.
  • He gave three reasons why lumber could fall to $357 per thousand board feet by the end of 2021.
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The price of lumber has yet to bottom and will shed as much as 30% by the end of the year, veteran portfolio manager Micheal Gayed said.

This means the commodity could slip to as low as $357 per thousand board feet, from around $510 per thousand board feet lumber was trading at on August 27.

Gayed, an award-winning portfolio manager for Toroso Investments who has long touted lumber as a powerful indicator for the US economy, said there are three reasons the commodity will see a protracted slide.

First is the slow down in housing construction as elevated prices dissuade buyers and sap demand, he said. The market is set to reverse, and if housing cools, so will construction, he added. Various data show that the housing crisis is getting worse in the US.

“Lumber is sort of your closest real-time gauge of housing activity,” Gayed, who also runs the ATAC Rotation Fund, told Insider. “Housing activity is probably just due to slow down aggressively.”

Lumber prices have slipped 70% from record highs of $1,711 reached in May. Prior to that record, prices had skyrocketed more than 500% during the COVID-19 pandemic amid supply-chain disruptions.

Gayed’s second reason is an oversupply in lumber as sawmills rushed to meet demand, he said. Lumber production, which starts in the mills, was severely disrupted when much of the economy shut down.

But now, many analysts see North America’s biggest lumber producers set up for a rebound following an immense blow during the height of the pandemic caused by lockdowns and raging wildfires.

The third reason, Gayed said, is that the market will soon realize that inflation is indeed transitory. Lower inflation typically results in lower Treasury yields, and yields, he says, generally move in the same direction as lumber.

Gayed is well known for his 2015 report on the relationship between gold, lumber, and the economy, and when to play “offense” and “defense.”

If lumber is outperforming gold in roughly four months, Gayed said, investors should take a more aggressive stance as this indicates economic strength. If gold is outperforming lumber in the same time period, he advises investors to do the opposite.

A final reason lumber could see a further downturn – one which Gayed says is less talked about – is the looming crisis related to the debt ceiling, which US Republican lawmakers have recently signaled they will not lift.

“The implication is that if S&P and Moody’s downgrade US debt like they did in 2011, and the reaction is the same, it … would broadly hurt economic activity.”

Gayed pointed to the massive correction in 2011 when the US stock market crashed after a credit rating downgrade by S&P – the first time the country was downgraded.

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Why lumber prices have already bottomed, but will see upside capped at 15% over the next 2 years, according to an investing chief

A lumber yard
  • The price of lumber has already bottomed, says Mace McCain, the chief investment officer of Frost Investment Advisors.
  • But he also doesn’t expect prices to surge anew. McCain expects rangebound trading capping out at the $600 level over the next two years.
  • “[Lumber] is reaching a state of equilibrium because housing is reaching a state of equilibrium,” he said.
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The price of lumber has already bottomed, according to Mace McCain, chief investment officer at Frost Investment Advisors. But he’s not expecting a runaway rebound either.

Instead, McCain sees lumber trading rangebound in the $500 to $600 per thousand board feet range for the next two years, reflecting just 15% upside from current levels over the period.

The relatively sideways trading will be a result of two conflicting forces, according to McCain. First is the ongoing housing shortage in the US, a positive driver for lumber prices that should keep them well above pre-virus levels, no lower than $500.

But McCain also notes that surging home prices are also dissuading buyers and sapping demand, hence the $600 cap on how high lumber can go over the next 24 months. It’s a middle ground he refers to as “equilibrium.”

“We’re out of the panic buying. We’re out of the massive industry shortages. We’re out of the extremes,” he told Insider in an interview. “[Lumber] is reaching a state of equilibrium because housing is reaching a state of equilibrium. We’re going to see a stabilization.”

One outlier scenario McCain sees dragging lumber prices below his stated range would be the Federal Reserve starting to aggressively hike interest rates. But it’s not his base case.

“The main thing that usually will soften a real estate market is when the Fed decides to tighten and interest rates go up,” he told Insider. “I don’t think the Fed is going to be aggressive. I don’t think the Fed is going to do anything to destroy the mortgage market.”

Lumber futures slipped as much as 5% on Wednesday, to $502.30 per thousand board feet. They’re currently 70% below their record high of $1,711 reached in May.

Prior to that record, lumber prices had skyrocketed more than 500% in the 15 months after the COVID-19 outbreak as supply-chain disruptions collided with a renewed acceleration in homebuilder growth.

With the emergence of a more contagious Delta variant, McCain remains optimistic the industry will not see a repeat of what happened in 2020 when most sawmills halted operations amid a pandemic lockdown.

“I don’t think the lumber industry is necessarily going to be shut down,” he said. “I think they’ve learned to cope with it. We’re not going to see barriers to supply.”

Read more: Investing legend Laszlo Birinyi shares how to cash in on a bullish stock-market trade that’s already earned him 250% this year – and explains why he’s not worried about an imminent correction

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Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting record highs is an ominous sign – and shares what investors can do ahead of the eventual crash

Read the original article on Business Insider

Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, a lumber trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

Read the original article on Business Insider

Lumber prices decline for a 6th straight day even as supply bottlenecks persist

Saw mill.

  • Lumber futures fell to $1,327 per thousand board feet on Monday.
  • Prices are still up more than 85% year-to-date and 280% in the past year.
  • The National Home Builders Association told NBC if lumber prices don’t continue to fall “you will see the homebuilding sector slow down and grind to a halt.”
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber prices fell for the sixth straight day on Monday, even as supply bottlenecks at mills across the US and Canada persist.

Specifically, lumber futures fell to $1,327 per thousand board feet and are now down roughly 20% from May 7’s record high of more than $1,670.

Of course, despite the recent fall in prices, lumber futures are still up more than 85% year-to-date amid supply bottlenecks at mills and rising demand for home offices, renovations, and new homes.

Looking back a little further, lumber futures are up an incredible 283% over the last year alone.

Lumber’s rise has been so significant that NPR reported DIYers have begun to cut out the middlemen by creating their own sawmills to cut timber.

Typically, when demand increases, suppliers will increase the number of mills available to process timber. But Chad Hesters, a forest-product advisor and managing partner of the consulting firm Korn Ferry, told the Wall Street Journal that’s not an option for many suppliers these days because of how long it takes to create a modern mill and the significant capital investment involved.

“Trying to build capacity and make investments that have a lot of lead time at the top of a cycle is historically a good way to lose money,” Mr. Hesters said, per WSJ.

On top of that, semiconductor and rural labor shortages make it almost impossible for mill owners to build new operations profitably.

However, according to Stinson Dean, the owner of Deacon Lumber Company, there has been some reprieve for lumber pricing of late due to the end of a lumber short squeeze.

Dean told Bloomberg’s Joe Weisenthal and Tracy Alloway on the “Odd Lots” podcast at the end of April that lumber’s historic price run-up was a “de facto short squeeze.”

The squeeze was caused by commitments lumber yards made to homebuilders prior to a run-up in lumber prices and a tightening of the market, which forced them to buy at any price to meet obligations to customers.

Now, Dean says those conditions have abated, leading to some breathing room in the lumber market, according to a report from Bloomberg.

That’s good news considering Jerry Howard, the CEO of the National Home Builders Association, recently told NBC that if lumber prices continue to climb, “you will see the homebuilding sector slow down and grind to a halt.”

“This problem with lumber and other building material costs is sort of setting another potential perfect storm for housing to lead us into a recession,” Howard added.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting a record high of $1,600 is an ominous sign – and shares what investors can do ahead of the eventual crash

Read the original article on Business Insider