Don carries a tape measure on his belt. A yellow pencil lives behind his ear. And to get from one end of his yard to the other, he drives a forklift truck...

Don entered the lumber business in 1979. In his 30-year career in the lumber-distribution business, he has worked for both the huge national lumber distributors and the small regional suppliers. He's also worked through two major construction busts... in 1979-81 and 1990-91.

 

Today, Don is general manager of a $100 million lumberyard based near Orlando, Florida. 

 

I figure, if we're going to see evidence of inflation, it's going to show up first in building products. This was the first industry to crater back in 2005. It should be the first industry to complete the cycle.

 

Also, the Fed has aimed its printing press at the real estate market. The government thinks the falling real estate market is driving the recession and the credit crunch. If it can get the real estate market rising again, it thinks it'll be able to beat deflation and solve all our problems. So any signs of life in the real estate market will validate the Fed's strategy and generate a burst of optimism in the stock market.

 

Every month, Don tells me what he thinks is going on in the industry and updates me on the prices of lumber, sheet wall, concrete sidings, and other building products. These prices come straight from the manufacturers. Prices peaked in October 2005. Since then, many materials have fallen in price over 50%. I just got Don's latest e-mail last week. It's shocking how prices have jumped...

•	Plywood rose 9.9%.
•	Pine lumber was up 5.8% to 15.7%.
•	Most metal connectors were up 5% to 20%.
•	Truss prices fell only 2.9%, but the strength in pine will push those prices upward in January.
•	Molding prices were up 12.5% to 13.6%. Door prices were mixed.
•	Concrete siding was up 9.4%, and vinyl trims were up 4.8%.
•	Vinyl siding trim was up 14.5% with a reduction of manufacturers.

(Some prices declined, too. Roll foundation plastic fell 6.7%, rebar dropped 3.4%, spruce lumber gave up 15%, studs fell 10%, and drywall products all fell between 6.7% and 9%.)

Don creates a Whole House Commodity Price Index with this information. It's the price of materials to build a 2,250 square-foot wood-frame house. It doesn't include labor, decor, plumbing, electrical, or mechanical materials. In November, Don's Whole House Commodity Index was up 1% percent, to $23,773.

 

"Every major supplier in drywall, roofing, insulation, insulation board, steel studs, cement board, and most of the miscellaneous building material categories have announced increases in cost from 7%-10%," says Don.

It's still too early to make conclusions on Don's pricing data. I suspect many companies realize they'll go out of business if they keep selling their products at a loss. So they've raised their prices out of desperation. In other words, these prices aren't a reflection of demand and supply. They're a sign of capitulation in the building materials industry... and we're about to see some major bankruptcies.

Let's give Don's building prices three more months. If they stick, it's a sign the Fed's strategy might be starting to work. And that should mark a bottom for stocks. If building prices don't rise, we'll be in for more deflation...

 

Good investing,

 

Tom

 

P.S. As I've been reminding you over the past month, the Fed's strategy is absurd. The best way to get prices rising again is to let them fall. The housing market needs to find the price where buyers and sellers meet. The more money the government throws at the market, the longer it'll take for prices to find their true equilibrium... and the more time we'll be stuck in a recession.

Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.