Last Week’s Frightening Housing Data and
the Opportunity It Offers to Traders
By Al Martin
(10-01-07) (Note to Position Traders: the information we have published in these weekly articles has worked out very well for people that did them. People that were already subscribers to Insider Intelligence.com but were position traders, not day traders, because they had other jobs or whatever, actually took the recommendations and made money.
In a sense Insider Intelligence also is appealing to the position trader because every position trader wants to be a day trader but can’t -- because of time and money constraints. Day trading is a dream to many people.)
In last week’s Aug. new home sales data, we saw the sharpest 1-month decline in prices in 40 years. We saw unsold inventories build to 8.2 months. That is the highest unsold inventory of homes since the break of the dot-com bubble in 2000.
We saw month-over-month median price declines of 7.3%, the largest month-over-month decline in new homes in 40 years. We have reached all of the ‘trip wire’ numbers, that is, numbers that start to become frightening in terms of their economic impact for the nation.
The new home sales data compared with consistent declines in its companion statistic, the existing home sale numbers, which, by the way, were released last week and showed, for instance, unsold inventories of existing new homes rose above 10-months’ supply. This is simply an enormous number, with as many as 5 million unsold existing homes on the markets now. The implication for future price declines, which we’re seeing in housing, is still dynamic.
What we want to point out here is that the lumber and the copper contracts – more specifically, the Nov. lumber, or LBX contract, and the Dec. copper, or HGZ contract, which normally react to housing data, did not react and, in fact, by end of week had moved higher.
We believe currently that the Nov. lumber contract, the LBX contract, exiting the week at 248.30, is a dynamic shorting opportunity.
The contract has only 32 regular trade sessions left before it goes off the board, and is currently trading at about $65 above the underlying cash price in an era where lumber demand is already at the lowest level since the Great Depression of the 1930s, continues to fall, where lumber processors – to wit, Georgia Pacific’s announcement not long ago – have taken to just burning supplies of it because it’s useless.
You can’t sell it. You can’t pledge to banks anymore. There aren’t any. Traditional bank lending against lumber that existed within the industry, that’s all gone.
Anyway, we believe the LBX contract at current levels represents a dynamic shorting opportunity for position traders, and we think the contract is going to give up another $25 from here before expiry.
Furthermore, we think that the HGZ contract, which has recently run up on renewed fund bidding, in ever increasing negative fundamentals including a likely 400,000-to-600,000 ton, year-end surplus.
We think that the December copper contract at current levels also represents a great shorting opportunity, as we expect the 350 area in the copper to be revisited.
At any rate, lumber and copper prices did not soften, as they traditionally do, on last week’s bad housing data.
This left the LBX contract, which actually rallied in Friday’s session, to close at 248.30 with the copper contract also having rallied due to renewed fund action.
The lumber and the copper, in particularly the LBX contract we shorted, in that the contract is already trading at current levels at about $65 above the cash prices (this is a November contract) and we think this contract can give up $25 in a hurry from current levels.