The Lumber Chronicles: Margin Up, Limit Down

Tyler Durden's picture

If the CME's mission with its Lumber margin hike last night...


...was to make lumber more affordable and thus force it into the hands of homebuilders who otherwise wouldn't touch it 10% higher, it has succeeded: lumber just dropped by the daily 10% limit.


The disconnect continues...



Charts: CME and Bloomberg

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beaker's picture

In a place far away and long time ago, they used to reduce margins when the price of a commodity dropped.  Someone didn't get the memo....

Pladizow's picture

Does'nt morning wood normally point in the opposite direction?

krispkritter's picture

Not at my age...I wish it was like the markets; up and being blown(higher) every day...

Divided States of America's picture

oversupply of lumber DOES NOT EQUAL oversupply of this fucked up world.

silverserfer's picture

they still make houses out of wood? thought it was all plastic now.

OutLookingIn's picture

Bundles of tightly packed fiat paper, faced with cement stucco.

BKbroiler's picture

"I own a lumber company?  That's news to me.  Wanna buy some wood?" - Dubya during the Kerry debate

Quisat_Sadarak's picture

Maybe I am missing something...

Home builder stocks and lumber stocks (commodities) are not necessarily correlated.

The fact that housing starts have been dampened way below normal trend for nearly a decade now since the housing bubble popped, and that there may be pent up demand for people buy their first home, or move to a different home, or whatever could mean that the future potential for builders has greatly increased.  Whether you think it is real or not, housing prices (in the US) have been rebounding due to low supply.   Remember that old "supply and demand" chestnut?

So if (big if) sale prices of existing homes exceed the cost of building a new home (irregarless of current lumber prices) then that is the market signal to home builders to start building new homes to capture some of that price differential.  

My point is, home builder stock prices increasing are all about expectation of future profits, and judging by the rate of price increase in my area, it actually seems like the cost to build a house is at break even or less that the cost of the average existing home sale.  

Mugatu's picture

I am buying a paper house - from the same people who came up with the "paper gun" that shoots real bullets.  You print it out on your printer and viola!

SAJ's picture

Your statement has not been true since 1989, when the CME went to the SPAN margining procedure.  SPAN was derived from the work of Fischer Black, Myron Scholes and Robert Merton;  the 'model' CME use is similar to the well-known Black-Scholes model.  It is not, however, identical.

The lumber margin increase, despite the decline in price, is due to the fact that the statistical volatility of the lumber market has increased considerably more over the past couple of months than the %age decline in the value of the contract.  Both measures, SV and CV (contract value) are components of the SPAN model.  When (not if) lumber's SV declines (which it will, shortly), the spec margins will be correspondingly decreased, bar possibly in the case of CFTC meddling.

SPANand PC-SPAN are registered trademarks of the Chicago Mercantile Exchange, Inc.


max2205's picture

Just means moar margin relief for builders.....?

Dr. Engali's picture

Clearly bullish. The home builders can take that 10% savings straight to the bottom line In this roaring almost overheated economy.

nugjuice's picture

Laughing at what? He's least in the short term.

Wait until you see the data when the results of the most recent interest rate spike are seen. Everyone, and I mean everyone, is getting scared by the recent rise in interest rates and is RUNNING out to buy a house.

The data will be laughably bullish, and homebuilder stocks will continue their assent.

That doesn't mean it won't eventually blow up as all bubbles do. But it won't be blowing up in the next few months, I can promise you that.

The market is a joke. I wouldn't be surprised if the rise in interest rates was on purpose to force some fence-sitters into the market. Rates will drop again before the music plays.

Navymugsy's picture

They can build moar housing as they need 10% less money to build them!

disabledvet's picture

Absolutely. "see below." how much lumber content do I need to have avoids be called "house"? I would argue "very little."And can I make money on it even though I sell for say...15,000 bucks "with delivery, warranty, and all permits pre approved"? I'd say HE'LL yeah.

IamtheREALmario's picture

I am thinking that if you want to fix things then go back to keeping the entities that create money from being able to buy commodities. Take the TRADERS out of it and get back to direct relationships between producers and consumers. Too much friction and manipulation in the pipe.

disabledvet's picture

All I need is one ACRE of land...yes, yes?

jerry_theking_lawler's picture

good. i will sell you one of my 50+ then...for the right price.

Herd Redirection Committee's picture

I think the problem is that there are entities creating money, through a process other than mining and refining (which requires substantial work, thus creating a barrier to entry for would be money printers and counterfeiters)

EscapeKey's picture

I thought drooping prices of anything is an indicator of MOAR SUPPLY.

At least, that's supposedly how the Baltic Dry works...

Spitzer's picture

Yes and you get moar supply when you use less of it.

krispkritter's picture

Local paper says foreclosures are down by 25% in this county for the year.  The neighbor who builds for Pulte says they're still stamping out the new houses.  I took a drive through some of the local subdivisions and probably 1/3 of the homes look empty, most look like they've never been lived in at all.  Unemployment is supposed to be running north of 12%.

Herd Redirection Committee's picture

Foreclosure sales or foreclosures processed, or foreclosure imminent is down 25%?

They (banks) are intentionally keeping a lot of foreclosures off the market, in the hopes of minimizing the flooding of the market (by banks).  But the houses are depreciating whether they put them on the market or not!  They might be pushing up the price for the houses they sell, but what about the unsold ones?

whoopsing's picture

I'll tell ya, no reduction in price on the retail level . I have noticed quality sucks though, total crap

StychoKiller's picture

I thought it was "Lumber up, limbo down."  Someone changed the script without telling me! :>D

walküre's picture

I'm salvaging a variety of lumber this year. Pressure treated deck torn apart and recycled into a green house structure. The new deck will not be built from lumber. Concrete, steel and vinyl look like good options. I live in the Pacific NW where lumber "grows" like wildfire. Still, the prices are completely insane and there is NO demand for any of it. Gotta be resourceful.

Professorlocknload's picture

Dodge Report? Infrastructure wood products? 

Not all lumber goes to housing, just the higher cost small dimension material.

Most product I've seen shipping out of this area is structural lumber such as used in infrastructure form work.

Like a bridge in every town and a new high speed rail boondoggle between them.

Wonder what happens to prices when the new WPA gets going full on?   



walküre's picture

Apparently it's nothing compared to the lumber we're shipping to Asia. The mills are busy and the guys have gone back into the woods. I've lost farmhands, landscapers, trades and so on.

Most of the demand is not from here. Like I said, out here we see the good quality stuff getting shipped overseas and they put the crap in the yards and into the new builds and renos.

Locals are salvaging scrap and/or putting everything major on hold. It's not going to get cheaper when speculators have driven the prices up. The Asian market gets preferred pricing and the best materials.

Overfed's picture

I hear ya'. Between 2009 and 2012, engineered lumber (OSB, T1-11, plywood, etc.) went up by 100% at least, while dimensional lumber, insulation, and roofing materials went up at least 50%. It has come down by maybe 5% in the last few months. It's really putting a damper on my home improvemnt projects.

Stuck on Zero's picture

Clearly homebuilders have switched from lumber to straw.


orangegeek's picture

Philly Housing Index daily is down over 1% so far today.


Currently sitting around 191 - channel support is broken.

lunaticfringe's picture

One of the great mysteries of the last four years is how homebuilders can be up with neighborhoods full of vacant homes- underwater homes- homes where the bank has not taken possession because the Fed has backstopped their losses.

Lumber down amidst this great building recovery. People cannot get loans with damaged credit ratings and lost jobs. 

I think it's all bullshit personally. We'll see how high the builders go once QE ends. My guess is that the bottom will drop out like a wet paper bag.

ShrNfr's picture

The volume of lumber futures is only slightly higher than egg and butter futures.

ThisIsBob's picture

Old joke:  Phone rings in the lumber pit and all three guys break out laughing.

firstdivision's picture

Vix is getting bid pretty hard yesterday and today.

mattdubz86's picture

wouldnt this be good for homebuilders? they get cheaper lumber, so should help margins....

haskelslocal's picture

Margin Up, Limit Down. Can someone explain these two terms please?

I'm assuming if amount you are allowed to buy with margin goes up, that would increase price, not lower it.

I'd also assume that the amount you are allowed to margin is limited down, making it the opposite of margin up.


disabledvet's picture

Margin is the amount of cash you have to put down in order to buy or speculate. There is also a "margin interest rate" much interest you have to pay while you "buy" only to watch prices fall. So while these rates are very low....the lowest ever eactually....prices fall since "there is no cash in the market." I do agree...seems a little odd. "washing out the paper pushers" I guess. Forcing delivery of lumber? Huh. Must be more demand in Texas, North Dakota and Mexico than I thought.

Herd Redirection Committee's picture

Margin requirements up, means more collateral is required for the same position, or, in other words, with the same collateral, the position must be reduced (i.e. you have to sell a position that is already down a lot)'s picture

"Give me some wood and I'll build you a cabinet"  -Beastie Boys

cpzimmon's picture

Up is down and down is up. That's all you have to know.

BraveSirRobin's picture

We will not need lumber for houses in the future, indeed. There is already an oversupply of sidewalks and public parks for people to lay on. . . at least for now.

Quantum Nucleonics's picture

The drop in lumber is more a China story than a US housing story.  China has been the important marginal buyer of US (and Canadian) lumber for a while now.  Look at the shipping data from ports in the Pacific Northwest and Canadian west coast as confirmation.