Opinion 6/26 - The big question today is what constitutes value?
June 26, 2017
Leonard Commodities Inc. Market:
To keep it simple we have to believe that the market is under bought and there are needs out there. So that is Point A. Point B is that there is a substantial amount of wood throughout the US in reloads that can be called upon to fill in needs. Add free shipping for a few months in the fall to the equation. This all tells me that this market is getting ready for a drastic pullback.
The big question today is what constitutes value? Obviously to the buyer is the place where they can market a profit and obviously to the seller is it is the place that maximized profits. Since the lows of 2015 the market has had a steady climb with minor pullbacks. At the same time the dynamics has changed little. We can pull apart some of the changes, but they don’t make cause for a market that went up $200 or almost a 100% increase. This market has spent 8 months between $300 and $340 and 6 months between $340 and $400. That is too long a period of time accepting the higher levels with flat demand. I don’t think the lack of bug kill or allowable cut numbers are a cause. It seems as if the industry lacks the ability to expand product capacity which might be causing the higher numbers. The market pulls back and then stays in one area. It no longer “rolls over” where there is no value. Just a theory.
The market pulled back roughly 38% from its highs on the monthly. The pattern tells me that the critical area is between 338 and 340. If the market fails that area then it will set up a range trade lower. If the market stays weak then the Sept futures will be sitting right in that area around July 15th expiration. Food for thought.
The movers of the market both up and down have been the funds. They are neutral long and short and most likely just going to roll the small positions for the next few months. I can see the market gaining enough momentum to push through $338 or $388.
I purposely left the dumping and duty out as once defined it becomes a cost of doing business to the mills and not a dynamic of value.
Opinion 6/18 (The trade was very lackluster in futures)
June 19, 2017
Leonard Commodities Inc. 6/18/17
The trade was very lackluster in futures with it giving back most of the gains from the week before. Volume was very low and most of the trade was liquidation. Open interest in futures is nearing the lower end of the range as the funds have moved to the sidelines. Friday’s starts report was weaker than projected, but pretty much confirming why our industry is now only hand to mouth. The need to buy has been reduced because of one’s general needs more than inventory levels. This type of buy pattern could catch the market short if there is a sudden spike in activity.
There was more interest at the mill level towards the end of the week. Many buyers were commenting that they are down to the dirt and need to buy something. This is typically a seasonal buy time. What isn’t typical is the few number of items getting bought at this point.
There is basis wood getting shopped out there at lower levels. There still seems to be a gap between the mill asking prices and the trades going on. The lower level buys don’t last long indicating a need to buy.
The allowable cuts number that came out Friday indicates that over time there will be less wood available to certain areas in Canada. This is no surprise, but it is a factor that will be an issue at some point if demand ever picked up. This industry has had only minor expansion of capacity for an extended period of time. Losing cut may keep that trend in place.
So, what if we are going to stay around 1.1 million starts for the rest of the decade?
We were expecting the illiquidity issue to move the market higher last week not lower. The objective is still $375 and the $35 move. Momentum is positive. The 358 to 362 area is very supportive. I don’t think there is a number out there that is a big factor with all the current uncertainty. Hedge based off of risk.
First of all, in the next 10 days we will see either higher mill prices or substantially higher mill prices. Will that affect the futures market is anyone’s guess. It is a great form of price discovery and may not react at all given the overall demand. The risk/reward for being spec short isn’t good….
With the low open interest, it now becomes a follow the money market. The direction the market is moving when open interest begins to increase will be the direction of the next trend. It looks as if there is a possibility of the funds beginning to get short the market. That will take a few months to trickle through, but it could be an early heads up. Watch the numbers.
U.S. imports 16 percent less lumber from Canada
June 16, 2017
Lumber Early (Opinion) - June 15th, 2017
June 15, 2017
Yesterday's session was quiet with prices working lower. We still have the 23rd hanging over our heads.The cash market looks to be in the $370 area so the futures are at par. The trading itself has been pretty supportive of the higher prices. We saw a good amount of selling show up yesterday that in the past would have broke the market. July held up despite of it. My guess is that there should be a pick up in cash interest going into next week. Maybe not generating sales, but at least interest. There are some deals out there on many items that seem to be going away so there is business going on. That could help support futures....
Brian V. Leonard
Leonard Commodities Inc.