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Published: February 8, 2010
So far this year, the S&P 500 has fallen around 7%. European
markets are down, too. The Germans are down 9%. And in Spain,
they've lost almost 16%. The latest news is, Greece is about to
default on its debt and plunge the European Union into a new
debt crisis...
It's even worse in commodities. Copper is down 16%, oil is down
10%, and silver is down over 20% from its peak in December.
But there's one commodity that's absolutely soaring right now.
It's lumber. Lumber trades on Chicago's commodity exchange. This
chart shows spot lumber prices. Lumber rose 50% last year. And
so far this year, it's up another 39%...
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I've said before that lumber is my favorite
economic indicator...
Lumber is the raw material of the homebuilding industry. Lumber
prices rise when America builds houses and it falls when America
stops building houses. So lumber is a great leading indicator of
economic expansion or contraction.
You can measure economic activity with other commodities, like
oil and copper. But lumber has an advantage over other
commodities: No one pays attention to it. Oil and copper prices
get distorted by millions of investors and their crazy mood
swings. Lumber's price is set entirely by professionals dealing
with other professionals. It's a "pure" reflection of economic
fundamentals, in other words.
Take the last cycle as an example. If you
had been watching lumber prices, you would have had three years
advance warning that a collapse was coming in real estate, the
stock market, and ultimately the economy. (Lumber prices peaked
in May 2004.)
Here's the thing, normally, I'd tell you this big recent spike
in lumber prices is a signal the economy is going to start
improving and stocks are going to start rising again.
Not this time.
The current spike in lumber is a result of a one-off event,
caused by the earthquake in Haiti on January 12 and the sudden
massive demand for lumber. This demand shock – coupled with
extremely low inventory of wood, logs, and lumbers in the
American lumber industry – created a massive spike in the lumber
price.
In sum, while lumber is usually a fantastic economic indicator,
don't be fooled by the recent activity in the lumber markets.
The earthquake in Haiti created a one-time distortion. So I'm
not reading anything further into this. I'm advising my paying
subscribers to maintain a maximum defensive position in their
portfolios, and I suggest you do the same.
-- Tom Dyson
Editor
Daily
Wealth
Note: This article originally appeared on
Daily Wealth. |
