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Gold And Lumber Surge

Date: Monday, April 17, 2017 12:21 AM EDT

As if you need more proof that inflation is finally starting to pick up, lumber prices rose to a 12-year high this week, supported mainly by expectations that steep duties will soon be levied on cheap softwood imports from Canada. Lumber futures rose to nearly $415 per thousand board feet on Monday, a level unseen since March 2005, soon after homeownership peaked here in the U.S.

lumber logs a 12 year high

At issue is a mini-trade war between U.S. and Canadian loggers. For some time now, the American lumber industry has blamed its Canadian counterpart of unfairly dumping lumber in the U.S. that’s far below market value. Now, several factors are pushing timber prices higher. Chief among them are the likelihood of duties being raised at the Canadian border, possibly as early as next month; President Donald Trump’s calls to renegotiate NAFTA; and growing demand for new homes following the housing crisis as consumer optimism improves and millennial buyers finally seem eager to enter the market.

Shares of Canfor Corporation and Western Forest Products, Canada’s number two and number five lumber producers by annual output, have had a good three months, advancing 25.5 percent and 16.8 percent respectively as of April 12. Timberland-owner Weyerhaeuser has also impressed lately.

canadian loggers surge on higher lumber prices

Gold Glimmers Brightly

As I told Daniela Cambone during this week’s edition of Gold Game Film, this is all very constructive for the price of gold, which has historically been used as a hedge during periods of rising inflation. The yellow metal closed above $1,270 an ounce this week for the first time since soon after the November presidential election. A “golden cross” has not yet occurred, with the 50-day moving average still below the 200-day, but such a move appears likely in the next few trading sessions if upward momentum can be sustained.

gold surges to a five month high on inflation and geopolitical risk

Fueled also by geopolitical tensions associated with Syria, Russia and North Korea, gold demand is on the rise, with Tuesday’s trading volumes on gold calls surging 10 times Monday’s amount on the New York Mercantile Exchange. As I already shared with you, investor sentiment of gold during last week’s European Gold Forum was particularly strong. A poll taken during the conference showed that 85 percent of attendees were bullish on the metal, with a forecast of $1,495 by year’s end.

With the U.S. ramping up military action overseas, including its dropping of a devastating bomb in Afghanistan today, many investors are lightening their risk assets in favor of “safe haven” instruments such as gold and Treasuries. The S&P 500 Index dropped below its 50-day moving average this week, signaling a slowdown in blue chip stocks. This is yet another example of the wisdom of crowds.

Stock Market Tumbles 50 Day Moving Average

Financials were among the biggest laggards as investors have begun to question President Trump’s ability to deregulate the banking sector. After several disappointments and setbacks, including a failure to repeal and replace Obamacare, renewed military involvement in Syria and Afghanistan might provide a welcome boost to Trump’s sluggish job approval rating.

Gold also responded positively to recent comments by Trump on U.S. dollar strength and monetary policy. Specifically, he said the dollar is “getting too strong” and later supported a low interest rate policy, suggesting he might keep Janet Yellen as the Federal Reserve chair.

Millennial Homebuyers Finally Entering the Housing Market

April is New Homes Month, and to celebrate, the National Association of Home Builders (NAHB) shared some of the significant contributions housing provides to the U.S. economy. According to the Washington, D.C.-based group, “building 100 single-family homes in a typical metro area creates 297 full-time jobs and generates $28 million in wage and business income and $11.1 million in federal, state and local tax revenue.” The sector currently accounts for 15.6 percent of U.S. gross national product (GNP).

Indeed, housing has a phenomenal multiplier effect on the economy, as I’ve pointed out before, and I’m pleased to see its recovery after nearly a decade.

Not only is consumer confidence up, but homebuilder confidence, as measured by the NAHB, hit a 12-year high in March, supported by an improving economy and President Trump’s pledge to roll back strict regulations. In February, new housing starts hit 1.29 million units, beating market expectations of 1.26 million units.

Rising mortgage rates and home prices are also likely encouraging buyers to enter the market. With the 30-year rate having recently fallen to a fresh 2017 low, we might see an even stronger surge in mortgage applications.

us home prices and mortgages headed higher

Declines in homeownership among lower-income, nonwhite and young adults were especially dramatic following the housing crisis, as subprime lending, which many homeowners had previously relied on, all but dried up. Homeownership rates in the U.S. steadily fell to a 50-year low, which only lengthened the recovery time of the Great Recession. According to Rosen Consulting, a real estate consulting group, the U.S. economy would have been $300 billion larger in 2016 had the housing market fully returned to its long-term level of construction and homebuying.

did us homeownership just bottom

Millennials, or those generally born between 1981 and 1998, have been the biggest holdouts, but we’re finally starting to see that change. The cohort—the largest group of homebuyers in the U.S. right now—represented around 45 percent of all new home loans in January of this year. It’s likely we’ll see this figure rise as more millennials become better established in their careers and tire of renting.

Invest in Gold

Index Summary

  • The major market indices finished down this week.The Dow Jones Industrial Average lost 1.01 percent. The S&P 500 Stock Index fell 1.21 percent, while the Nasdaq Composite fell 1.26 percent. The Russell 2000 small capitalization index lost 1.41 percent this week.
  • The Hang Seng Composite lost 0.07 percent this week; while Taiwan was down 0.62 percent and the KOSPI fell 0.19 percent.
  • The 10-year Treasury bond yield fell 10 basis points to 2.24 percent.

Domestic Equity Market

SP 500 Economic Sectors

Strengths

  • Real estate was the best-performing sector of the week, increasing 0.73 percent compared to an overall decrease of 1.13 percent for the S&P 500 Index.
  • Whole Foods Market was the best-performing stock for the week, increasing 9.30 percent.
  • JPMorgan Chase reported first-quarter earnings and revenue that easily topped estimates, lifted by better-than-expected loan growth and trading sales.

Weaknesses

  • Financials was the worst-performing sector for the week, falling 2.65 percent compared to an overall decrease of 1.13 percent for the S&P 500 Index.
  • Fastenal was the worst-performing stock for the week, falling 9.34 percent.
  • Snap slid below $20 after Instragram’s Snapchat clone said it has more users. The Facebook-owned Instagram announced on Thursday that Stories has more than 200 million daily users, ahead of the 161 million reported by Snapchat.

Opportunities

  • BCA’s U.S. equity strategists are upgrading machinery stocks. The firm’s Global Capital Spending Indicator has climbed back into positive territory. That primarily reflects the firming in global purchasing manager’s indexes. When global output growth recovers, machinery demand tends to demonstrate its high beta characteristics. BCA’s global ex-U.S. machinery new orders proxy has jumped sharply in recent months, consistent with the global machinery exports proxy. While the previously strong U.S. dollar threatened to divert this demand to non-U.S. competitors, the playing field has leveled: U.S. machinery new orders have also accelerated.
  • Despite rising interest rates, there is positive momentum for U.S. earnings per share growth this year due to improving pricing power and stronger global growth.
  • The outlook for business sales has brightened with corporate pricing power recovering and the global economy improving. This is critical to absorbing the increase in labor costs and cushioning the profit margin squeeze. If the U.S. dollar were to weaken, especially if it occurs within the context of better economic growth abroad, then the revenue upside would increase.

Threats

  • The rally in infrastructure stocks has stalled. Infrastructure stocks soared after Trump’s election win, with the S&P 500 Materials Index gaining nearly 13 percent before topping out at the beginning of March. However, all of these stocks have given up a portion of their post-election gains.
  • A former Snapchat employee is accusing the social-media company of falsifying its growth metrics. Anthony Pompliano filed a lawsuit against the company in January, accusing Snapchat of firing him after he raised the issue with senior leadership.
  • Trump told manufacturing CEOs during a White House event that he was going to release something “phenomenal in terms of tax” in two or three weeks. As of April 10, eight and a half weeks later, no tax plan has been released by the White House, and, based on reports, it doesn’t appear to be coming soon. The Associated Press’ Josh Boak and Stephen Ohlemacher report that administration officials have scrapped the outline for tax reform Trump released during the campaign and are writing a new plan. According to the report, the White House is writing a version of a tax plan rather than signing onto one from congressional lawmakers, as it did with health care. The American Health Care Act failed to pass the House last month, and the misstep has left analysts concerned about the future of Trump’s agenda. A failure to pass tax reform would likely cause a market selloff.
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