Timberrrrr! -- Lumber prices hitting the ground.

A few months ago I commented on rising lumber prices and how in my opinion they were due to short term supply problems instead of demand.   It appears now that between winter rains ending and the home buyers tax credit expiring, the supply/demand situation has reversed itself.   Lumber futures prices peaked in mid April and are now below when I first posted on Feb 8, 2010.

The full impact of the tax credit's expiration is not yet known but home mortgage purchase application data is not promising.  Calculatedrisk (2010 June 9) states:

Purchase and refinance applications dropped this week, even after an adjustment for the Memorial Day holiday. Purchase applications are now 35 percent below their level of four weeks ago, as home buyers have not yet returned to the market following the expiration of the home buyer tax credit at the end of April.

A longer term graph from Calculatedrisk does not show any sort of bottoming in the trend either.

The elevated level of mortgage delinquencies and real estate owned by the GSE's provides a very clear glimpse at 'shadow' inventory that may appear in the comings months.  (Data from May 12 posting) Add it all up and existing housing supply looks to increase and demand continues dropping.  

Disclosure: Short PCL (Plum Creek Timber)

Fast Money needs to do their homework -- High lumber prices are due to a temporary supply shortage not demand

I was watching Fast Money on CNBC tonight and their Prop Desk blurb on lumber and by implication Plum Creek (PCL) caught my attention.  The Fast Money speaker posited lumber prices had risen dramatically and this was a sign of a lumber and housing recovery.




I recently listened to the Plum Creek earnings report and management specifically commented upon weather conditions in the southeast US creating supply problems.  To quote from a SeekingAlpha article:

A lot of this lumber is filling inventories; it is concern over wet weather. As we mentioned, lot of these mills especially in the southern United States are very short inventory, and therefore there is not a lot of lumber inventory in the system.


I was down in Mississippi, Louisiana, and Arkansas last week, and what my guess is that half the forests are inoperable, and I don’t what it was like two months ago. I know they got some 9 inches of rain in one day. It’s a severe problem, and most areas you can’t operate in today. They need two or three or four weeks of dry weather so that we can get into a lot of these areas. That’s why inventories are so tight in that region. So it’s a huge issue.

Furthermore quite a few directors and officers of Plum Creek sold some of their holdings a few days after the earnings report:

CROWE BARBARA L 591

JIRSA ROBERT J 224

TUCKER DANIEL L 251

HOLLEY RICK R 4,376

BROWN DAVID A. 611

HOBBS JOHN B 178

LINDQUIST THOMAS M 2,097

RICKLEFS HENRY K 582

Wilson Nancy L 254

KRAFT JAMES A 604

LAMBERT DAVID W 1,076

KILBERG JAMES A 1,275

NEILSON LARRY D 776

REED THOMAS M 655

FITZMAURICE JOAN K 624

For a total of 14,174 shares.  No one purchased shares, all were sales. (Source)

I'm not disparaging Plum Creek or their officers / managers for selling off a small portion of their shares, but doesn't the comment about a short term weather phenomenon spiking lumber prices and quite a few officers unanimously selling their shares cause you to reconsider the short term valuation of the company?

I have followed Plum Creek on and off for several years and right now have a very small (just one contract) short call spread position on the company.  It is a company I may very well own in the future if the price is right.  Right now I do not foresee a strong housing rebound and my position is due to valuation issues. The price of both lumber and PCL have already had their run in my opinion.

My beef is with Fast Money.  Do your homework.  PCL may continue upwards for a little longer but it is riding high on a short term phenomenon.  The price rise is due to weather and a short term supply disruption. Once the forests dry out they are going to cut cut cut and the relatively high prices of lumber will come crashing down.

p. s. I would not call lumber futures a 'secret sauce' unconventional indicator. It is a publicly traded futures contract available on stockcharts.com and everywhere else.  The implication you are revealing your sekrets is vaguely insulting.