A Great Divergence?

Just throwing this chart out there for everyone to chew on.  Look at lumber prices relative to the homebuilders stock index.  Talk about a divergence!



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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Stephen

    Would guess your homebuilders are implicitly domesticly oriented whilst Lumber s global and also I suppose be impacted not only by global demand ,but also by FX dollar strength.
    In other words I don’t think a falling price in lumber necessarily has much to do with US homebuilders anymore than it does with say UK homebuilders. Do we know what the correlation is anyway?

  • Nils

    Well if Cramer upgrades the Bluth Company from “Risky” to “Consider” I know we are in dangerous territory. Lumber doesn’t worry me much, how big of a component of house construction costs is it really?

  • http://brokenmarkets.wordpress.com Incognito

    Is Lumber rolling over in line with the developement of the NAHB-Index (National Association of Home Builders) (?) Or is it the ultimate proof that the market doesn’t care about the the underlying anymore. All that counts is cheap money and easing and stimuli from Central banks?


  • Digitking

    I think background information is more important than just looking at the graph. The mountain pine beetle has absolutely devastated the west coast lumber stock. Also, since lumber and forest products has been such a grave yard, most of the firms either shut down or laid off so many employees 5+ years ago that there’s now a real shortage of lumber and skilled labour to harvest it. Now demand is picking up but supply hasn’t been able to respond.

  • LRM

    Similar to the Baltic Index, I think increased supply of lumber is a factor. If formerly shut down lumber yards have finally come back on stream, the supply increases and even though demand may have increased, the supply of lumber has increased at a greater pace.

    Hopefully for the recommissioned yards, there were not any false signals to them from unusual interventions in the building market that will end up costing them money if they have read the tea leaves incorrectly?

  • Indignado

    And industrial production and producer prices just took a big drop. Together with dropping lumber prices and slower rail traffic this does not seem like an economy on the mend and the U.S. exiting the BSR. However, as you point out, definitely bullish for the market as more QE to come.

  • Indignado

    Then why are lumber prices dropping? More demand and limited supply should have this chart moving in the opposite direction, right?

  • Anonymous

    Long lumber short corn.

  • David

    The lumber contract is a good indicator but a bit misleading, there’s only 4100 contracts of open interest on the front month and it’s not easy to take delivery if you want too. Compare that to around 295,000 for oil and not to mention the other contract months in oil that have over a 100,000 contracts opened up. There were also a lot of mills that closed down during the downturn. This made it difficult to get certain cuts that are used for apartment buildings and the like.

  • Mr. Market

    Time to go short forestry stocks ??

  • LRM

    A technical analysis for lumber via dshort


    He calls it a leading indicator so maybe worth following over the next while.

  • Up side Down

    @ Cullen

    Useful post, thanks. Confirms at US level what commodities prices are saying at Global. Global growth tepid at best so demand muted but equities remain totally disconnected while serious risks seem remote and money cheap.

    I’m reminded of the old line about the State Room on the Titanic (i.e.read equities), it was a fabulous place to be, in fact there was only one time when it wasn’t! Party on SP500, no “icebergs” in view right now.

  • John A

    It appears that’s mostly what’s happened. Or, more precisely, lumber mills got a bit ahead of the housing market and produced more lumber than was actually needed. Once inventories are drawn down some, prices should go back up or at least stabilize.

    Reality Check Lumber Prices Off Highs Aftr Supply Surge

  • http://brokenmarkets.wordpress.com Incognito


    I happen to know someone who is in to detail on the subject what’s going on with the rice of Lumber. I just found out that, apperently the Chinese stepped out of the market completely. They are big buyers of Canadian material.

  • Anonymous

    Could you take that to be a negative for china housing ?

  • Pingpong

    Could this be a negative indicator for china house prices?