Lumber--a failed market

    I always get a kick out of people who say the market is a discounting mechanism that anticipates things 6-9 months ahead. My opinion is the market is nothing but a bunch of people trying to predict the future. Sometimes they are right and sometimes they are wrong. The market is not always correct as some market aficionados claim. This is evident in the recent action in the lumber market. As you can see from Nov 2009 to mid May the price of lumber surged from 190 to 320. To a casual observer this would indicate that the housing market would do well over the next 6-9 months. Some pundits even used this as evidence of an improving economy. But as we all know the housing tax credit expired in June, so the idea that we are going to see a dramatic turnaround seems unlikely. The government simply pulled demand forward which will depress home sales after the expiration of the credit. But the question is why did lumber surge in the first place? Does it mean anything? If you believe in the efficient market hypothesis this would be proof of a rebound in the lumber market. If you are like me it means almost nothing. During the price surge in 2010 the market was betting that there was a real rebound in the housing market which would be bullish for lumber.  The market was wrong and quickly corrected this mistake by sending prices down $140 in less than 2 months.

   The reason I bring this example up is because it is important to remember that the market is not always forward looking, so don't obsess about what the market is telling you. The only way to make money is follow the trend even if it goes against fundamentals.


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