Three Investment Lessons from the Trees
The Delmarva Peninsula has historically been a strong timber market and home to large timber owning companies and families. In the past few decades the timber marketplace has been witness to vast changes in ownership and restructuring of the industry while much of the demand from local timber mills atrophied. The Delmarva has seen investment funds enter the marketplace to purchase significant acreages seeking steady long term returns. Here are a few trends to watch in the timber market…
I. Lumber prices are a good predictor of stock market volatility.
This may sound farfetched, but it’s the subject of an award-winning paper titled “Lumber: Worth Its Weight in Gold – Offense and Defense in Active Portfolio Management,” by Michael Gayed and Charlie Bilello of Pension Partners. In a nutshell: When lumber outperforms gold over the previous 13 weeks, you should be more aggressive in the stock market, and when gold outperforms, you should be more defensive.
Why lumber? Lumber prices are a good indicator of the housing market – which, in turn, is a good indicator of the economy as a whole. And unlike most housing indicators, lumber isn’t lagged by weeks or months, as are things like housing starts and home prices. Nearby lumber futures prices are available throughout the trading day.
While home construction is a relatively small part of overall economic growth, it has an enormous ripple effect. When you buy a new home, you not only employ dozens of workers and purchase lots of raw materials, you also make work the folks at Home Depot and Nuts 2 U Nursery.
Gold, on the other hand, is a good measure of fear. People buy gold when they think bad things will happen…