Realestate
Lumber is Sinking – Is Housing Next?Earlier this month, the idea of lumber being a signal for economic data was brought to the table (here). Lumber is not necessarily a trader’s first go-to for evaluating economic forecasts, but there is a striking resemblance in trend for lumber and the ISM manufacturing PMI data. As lumber prices dive, manufacturing data tends to do the same (and vice versa). Lumber, reasonably so, is also correlated to housing; and the US cannot have a recovery without housing participating.
The housing data over the last few years has been lackluster, and today’s data is no exception. Housing starts contracted a whopping 17 percent. That’s 14.5 percent lower than general forecasts. Weather was cold, and it is always to blame.
However, analysts were already discounting the weather issue. Wall Street’s best and brightest were looking for a drop of only 2.5 percent, so clearly it is not just the weather. According to the US Department of Housing and Urban Development, privately-owned housing starts were seasonally-adjusted at an annual rate of 897,000, or 17 percent below the revised January estimate. Single-family housing starts in February were at a seasonally-adjusted annual rate of 697,000, or 14.9 percent below the revised January estimate. Not good.
Housing completions of privately-owned housing fell came in at a seasonally-adjusted annual rate of 850,000, or 13.8 percent below the revised January estimate of 986,000.
The “recovery” bulls will harp on the permits data which was three percent higher than the general consensus. But, let’s be objective. Permits do not particularly matter much because builders cannot sell permits. Building permits are also cyclical. They tend to rise to elevated levels on optimistic outlooks but then completely collapse right be for the next recession. Permits could continue to rise, but it is not indicative of a healthy housing sector, or economy for that matter.
umber has closed well-below the massive ascending channel created when prices bottomed in 2009. Currently trading at $270.90, lumber prices are down almost 14 percent since first bring more attention to lumber a month ago. The basic assumption is that low prices are great for builders and the housing sector in general, and they are at the margin. However, a trend shift in prices indicate that homebuilders are not purchasing lumber. Homebuilder confidence fell for a third consecutive month in March.
Prices saw a bit of support at $265 but could easily hit $245 on trend continuation. To illustrate the correlation of lumber to housing, check out lumber prices relative to the iShares DJ Home Construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB). It’s not a perfect match, but it grasps the overall trend quite well. Notice the prices of lumber, ITB, XHB leading into the housing crisis – they collapsed. This time should be no different.
The two popular ETFs now trade at a premium to lumber prices, but the upward trajectory is stalling; and this is far likely contributed to Fed-induced buying (similar to the XLE and future prices). It is only a matter of time before housing ETFs begin to rollover, too.
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Market Themes: NO chance of rate hike, NO Deflation - USD This is a year-to-date chart scaled on a percentage basis that outlines the relationship between the US Dollar, 20 yr+ Treasuries, Gold, Energy (think oil, gas etc), the Euro, and the US Real Esate Index. These represent the different investment classes in the market (rate-sensitive instruments, earnings sensitive instruments, and hard assets).
As you can see there is a huge disparity with US Dollar, Treasuries, and Real Estate at highs while Gold, Energy, and the Euro is quite low.
What this implies thematically is clear: The market currently believes there is NO chance of a rate hike (see treasuries, real estate), that there is NO chance of deflation (see EURO and Dollar relationship, and Gold / Energy underperformance) and, although it is not shown since the chart was getting cluttered, there is no indication that corporate earnings are at risk.
Follow this chart because these themes are where you should be focusing your asset allocation.
