I'm Going to Double My Money on a Railcar Full Of...
By Tom Dyson
March 12, 2008
If you laid all of the 2x4s that make up a railcar full of lumber end to end, they would stretch 32 miles.
I know this oddball fact because I want a railcar full of lumber.
You see, I'm planning to buy a lumber futures contract. The standard contract of lumber on the Chicago Mercantile Exchange is 110,000 board feet. This is the capacity of a standard lumber centerbeam railcar. (I traveled on top of a lumber car once... out of the BNSF Spokane yard... but that's a story for another day.)
I'd love to have this wood in my front yard. But I don't have a warehouse, and I don't have a railroad spur to my door. That's what's great about the futures market. I can buy lumber now for delivery in the future.
A railcar of lumber sells for $20,000. A November delivery of lumber, however, costs about $27,000 today. I'm okay with the extra cost (the $7,000 over the current spot price). Lumber spoils. Storage is expensive. I'll pay the premium for a future delivery.
And in fact, I won't take delivery of my lumber. What would I do with 32 miles of lumber, anyway? I'll sell it to someone else before the delivery date in November.
I want to buy this lumber because, in my opinion, it's too cheap. As a long-time lumber broker and trader told me on the phone just now, prices are "economically unsustainable."
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Let me explain:
Even the largest, most efficient producers of lumber in North America cannot fill a railcar full of 2x4s for $20,000.
Take Canfor for example. Canfor is the largest producer of lumber in Canada. It made a profit in 2006 and a loss in 2007.
|
Railcars Shipped |
Average Price of Lumber
per Railcar |
Profit or Loss |
2006 |
40,500 |
$32,450 |
$471 million |
2007 |
38,000 |
$27,500 |
-$360 million |
|
These numbers are very rough, buy they imply that for Canfor to break even, the company needs to sell a railcar of lumber for around $30,000. It's nowhere near that now.
With the market price for a railcar of lumber at $20,000, every lumber producer in Canada is slowly going bankrupt, including Canfor. The Vancouver Sun did a survey. It found the Canadian logging industry shut down 34 lumber mills and fired 10,000 workers in 2007.
Lumber is down in part because the housing industry is in a slump – homebuilding and remodeling make up two-thirds of U.S. lumber consumption. Right now, the major Canadian producers are trying to raise cash and ward off bankruptcy, so they're dumping their inventories on the market. That's pushed lumber prices even lower. But soon, there's going to be a shortage of lumber.
Contractors will notice how cheap lumber is and will decide to start building houses again. But they'll find the forest industry has shuttered all the mills, fired all their workers, and sold all their lumber.
This will cause lumber prices to rise. I expect they will double within two years... to around $40,000 a railroad car. I plan to buy my lumber with 50% borrowed money, so I'll double my money if I'm right. The risk is if prices stay low longer than I expect, I lose $7,000 in storage costs.
If you want to play this idea without using futures, consider buying stock in one of the large Canadian forest-products companies like Canfor (Toronto: CFP) or Western Forest products (Toronto: WEF). But there's risk here, too. These companies have enormous debts and are at a high risk of bankruptcy...
So what's holding me up right now? As much as I'd like to buy, lumber is still in a downtrend. I'm waiting for the price to turn around and prove my thesis. So before I buy my railcar of lumber, I'll wait for a 10% rally in lumber prices.
More to come when I see that rally...
Good investing,
Tom
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FOUR YEARS OF GAINS DOWN THE TOILET
Wall Street was in heaven three years ago... Interest rates were low, credit flowed like water, and the "backstop" of rising stock and real estate prices made loaning money to speculators a great business. Your borrower can't make the payments? Just put the foreclosed property up for sale and recoup the loan.
From 2003 to 2006, this was a wonderful party... the iShares Financial Fund (IYF) doubled in four years. This ETF is a who's who of Wall Street... Citigroup, Goldman Sachs, Morgan Stanley, and Bank of America are large holdings. As you can see from today's chart, however, this party has ended with a great many people vomiting in the bushes.
Now IYF is a perfect illustration of the old Wall Street saw, "The bull climbs the stairs, the bear jumps out the window." The ETF has fallen 35% from its high and wiped out four years of gains. Just as we advise lumber traders in today's essay, we encourage investors to let Wall Street shares start an uptrend before investing. The bear hasn't hit the sidewalk yet.
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Lehman Brothers will lay off 5 percent of its workforce amid the deepening crisis in the mortgage markets – a move that could set the stage for wider job cuts across Wall Street, insiders say.
The New York banking giant's layoffs, which will affect about 1,400 employees through all divisions and regions of the company, come as it is expected to report a nearly 50 percent plunge in first-quarter earnings next week.
With losses soaring due to the global credit crunch, Wall Street employees have been bracing for layoffs to accelerate. Early last year, employment in the securities industry had hit levels not seen since the dot-com bust in 2001. But last spring, Citigroup announced it would cut 17,000 jobs.
Lehman already has laid off about 3,900 employees in an earlier round of cuts that focused mainly on its home-lending businesses. Earlier this year, Morgan Stanley said it would cut about 2,000 staffers. |
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Bear Stearns Cos. plunged for a second day in New York trading as after Chief Executive Officer Alan Schwartz denied that the firm lacked sufficient cash and analysts predicted more writedowns.
Bear Stearns fell $4.68, or 7.5 percent, to $57.62 at 12:57 p.m. in New York Stock Exchange composite trading, bringing the stock's two-day decline to almost 18 percent.
Bear Stearns, the second-biggest underwriter of mortgage-backed bonds, said yesterday that "there is absolutely no truth to the rumors of liquidity problems" and Schwartz said the company's finances "remain strong." The New York-based firm will probably have $1.9 billion more writedowns in the first half, Deutsche Bank AG estimated in a report today. The Federal Reserve's announcement today that it would lend banks $200 billion failed to buoy the company's shares. |
– Bloomberg |
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