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Jan 2, 2019

Markets: Lumber Prices Collapse After Record-Breaking Rally

The Wall Street Journal.
Markets Bear logo.
Markets
Happy New Year. I'm Amrith Ramkumar, chatting with you about the latest in markets with many investors hoping stocks rebound from a brutal December.
U.S. futures are sinking, after stocks rose Monday to finish off their worst year since 2008. Investors kick off 2019 waiting to see if the U.S. and China will reach a trade resolution. We'll also get a reading on U.S. manufacturing activity later this morning, after weak Chinese manufacturing data dragged markets lower across Asia and Europe. 
With a number of assets coming off their worst quarter in several years, our Ryan Dezember looks at 2018's epic collapse in lumber prices. 
 

Markets in a Minute

Markets Data
 

Overnight Developments

 

Behind Lumber’s Collapse: A Perfect Storm of Housing and Trade

By Ryan Dezember, markets reporter
Lumber futures reached a record in May that was 30% above the old all-time high set in the early 1990s. Still, lumber ended the year as one of the worst-performing commodities.
It’s not like other commodities had a great year. The Bloomberg Commodity Index, a basket of 22 raw materials, declined 13%.

But lumber suffered an epic collapse. Since hitting $639 per 1,000 board feet on May 17, futures lost nearly half their value. Lumber closed at $333 on the Chicago Mercantile Exchange on Monday, down 26% on the year.
A variety of factors had sent prices soaring in the first half of the year. Tariffs were placed on imports from Canada in late 2017, raising the price of much of the softwood that is used to build U.S. homes. Wildfires and wood-boring beetles in British Columbia crimped wood supplies while deliveries were delayed by rail bottlenecks and shortages of truck drivers at a time when U.S. home construction seemed to be taking off.
At the time, homebuilders said the unprecedented rise in lumber prices was adding thousands of dollars to the cost of new homes. Shares of big timber companies Weyerhaeuser and PotlatchDeltic hit all-time highs.
Then the wheels began to fall off the rally. Wood ordered in a panic early in the year began arriving by summer, filling lumber yards just as the housing market began to cool. A pair of devastating hurricanes slowed construction activity in swaths of the Southeast while the wettest autumn on record in Texas stymied builders there.
Meanwhile, rising interest rates and surging home prices in many of the hottest job markets strained affordability. Housing starts, which had reached a post-recession high in May, slid lower.
The trade dispute with China sharply reduced U.S. exports, eliminating a big outlet for oversupply. U.S. mills revved up to take advantage of a historic glut of pine trees in the South.
Lumber dealers now find themselves trying to sell wood that they piled up at high prices earlier in the year, which is preventing many from stocking for the spring building season with lower-cost wood, said Stinson Dean, managing partner of Kansas City lumber broker Deacon Lumber.
“We’ve got a lot of lumber we have to chew through before we can think about higher prices,” Mr. Dean said. “Sawmills have to cut production.”

Market Facts

  • The last time the Dow ended the year in negative territory after being positive through the first three quarters of the year before Monday was 1978, according to Dow Jones Market Data. The year was 1948 for the S&P 500 and 1987 for the Nasdaq.
     
  • In December, analysts cut their earnings forecasts for 2019 on more than half the companies in the S&P 500, according to FactSet, the first time that had happened in two years.
     
  • On this day in 1915, Wall Street had its slowest trading day of the 20th century as Europe's armies mired themselves in a bloody standstill. Only 23,505 shares traded hands on the New York Stock Exchange. This was also one of the best times to buy in the entire 20th century: By the end of 1915, the Dow had risen 82%, its largest annual climb ever.

Key Events

Markit's U.S. manufacturing purchasing managers index for December is out at 9:45 a.m. ET.
 

Must Reads

Alok Subbarao of San Mateo, Calif., is staying calm during the recent market declines. JEFF ENLOW FOR THE WALL STREET JOURNAL
Investors are trying not to panic over stock volatility. For stock-market investors, times of heightened volatility can sometimes be a godsend—“as long as you can stomach the headlines.” But a new sense of wariness has taken hold after stocks in 2018 suffered their biggest yearly loss since 2008.
U.S. stocks face a rocky path ahead in 2019. Expectations for U.S. stocks are waning as the global economy shows signs of slowing and monetary policy continues to tighten. With the longevity of the bull market in doubt, many fund managers say they are expecting more volatility ahead.
Crypto investors are looking for a rebound after a sharp decline. Bitcoin slumped about 70% in 2018, erasing $160 billion of digital wealth in a move that exposed the cryptocurrency market’s shaky footing.
The money managers to watch in 2019. Hedge-fund managers once again lagged behind the broader market and will have to show they are worth their high fees. Those that don’t deliver this year might have to make difficult decisions.
Chesapeake Energy, a fracking pioneer, bet on oil. Then prices plunged. The company shifted its focus to oil from natural gas just in time for oil prices to tumble 40% since October.
Rewards credit cards gained a fantatic following, but now banks are pulling back. Major perks like airfare and cash back were meant to lead to higher returns. But consumers figured out how to game the system. Now banks are trying to figure out how to keep customers happy while cutting extras.
 

What We've Heard on the Street

“The eurozone can’t help but perennially disappoint investors. Weakness in its Franco-German core suggests that 2019 won’t be an exception.”
—Heard on the Street columnist Jon Sindreu
 

Stocks to Watch

Ford: The auto maker fell 2% Monday, placing it among the S&P 500’s worst performers with shares around a fresh nine-year low.
Deere: The seller of heavy machinery has climbed at least 2.4% in three of the last four sessions, swinging as investors eye the latest developments in trade talks between the U.S. and China.
JPMorgan Chase: Bank stocks have rebounded lately, with the S&P 500 financials sector rising in four consecutive sessions—its longest streak since Nov. 8. The group is up 6.9% over that span.
Freeport-McMoRan: Shares of the copper miner slumped 1.5% Monday, falling alongside metal prices after data showed China’s manufacturing sector contracted in December, with an official measure of factory activity hitting its lowest level in nearly three years. China is the world’s largest copper consumer.

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