Lumber And Copper Are Leading My “Super-Cycle” Prediction…
Last week, a gusty thunderstorm blew through our neighborhood. Couldn’t have happened at a worse time. With lumber prices continuing to skyrocket, I may need to sell a kidney to have this 100-foot section replaced.
Yes, I’m being facetious. Still, the materials will easily cost two to three times more than they would have a year ago. Over the past 12 months, benchmark framing lumber prices have spiked from $350 per thousand board feet to around $1,600 — a 350% surge.
My colleague Brad Briggs weighed in on this subject here.
Of course, there are many different grades and types of wood products out there, from 2X4s and plywood to beams, joists, and rafters. Regardless, none of them is getting any cheaper.
You might have seen one of the many memes circulating the internet poking fun at the situation. But if you’re at Home Depot buying a stack of pressure-treated pine for a backyard DIY project, it’s no laughing matter. The escalating prices are really starting to worry homebuilders who fear rising costs may pinch margins and discourage construction.
According to the National Association of Homebuilders, the tripling of lumber prices has already added $35,872 to the cost of an average new home.
And it looks as if prices may shoot even higher. Futures contracts are running $1,400 per thousand board feet, well above current spot rates. That’s what lumber yards and other large buyers are willing to pay just to guarantee adequate supplies in the months ahead.
The Commodity Boom Takes Off
Of course, this is all good news for companies like Weyerhaeuser (NYSE: WY), a former High-Yield Investing holding. As a leading wood products manufacturer that also owns 11 million acres of timberland, it’s sitting right in the sweet spot.
Lumber mills haven’t exactly been operating at full capacity over the past year, in part because of state-mandated lockdowns. So they’ve had trouble filling the voracious appetite of buyers. Stuck at home with nothing to do, millions of quarantined homeowners have decided to remodel the kitchen, add another bedroom, or maybe put in a deck.
Meanwhile, thanks in part to record-low mortgage rates and a severe inventory shortage, residential construction has been booming. Housing starts jumped 19% last month and are now running at an annualized pace of 1.74 million units — the fastest pace in 15 years. And if building permit applications are any indication, we could get even busier.
There is a current backlog of 124,000 single-family homes just waiting for materials and work crews — the highest number since 2007. That’s a lot of lumber that will need to be delivered.
But it’s also a lot of copper (nearly 500 pounds per home). As I discussed back in March, the supply/demand imbalance for this versatile raw material has been widening and we could be headed for a “super-cycle.”
Since then, copper prices have climbed another 15%.
And these aren’t the only two commodities we’re going to see boom. Back in February, I said that a “green wave” of spending fueled by Congress would send prices for everything from lithium to cobalt to zinc.
I’ll reiterate what I said in yet another piece back in February:
The evidence is mounting. Commodities are back. And 2021 could bring even stronger returns for many of these stocks. In fact, some of Wall Street’s best and brightest are forecasting this to be the beginning of a new golden age for natural resources that could last well into the next decade.
That’s partially what drove my recommendation of BlackRock Resources & Commodities Trust (NYSE: BCX) over at my High-Yield Investing premium service. This broad-exposure fund has already given us a healthy 14.5% return. But it could be just the beginning…
Action To Take
As I’ve said before, I think the commodity “super-cycle” is just getting started. So there’s still time to adjust your portfolio accordingly.
As for the broader market in general, my outlook has turned more neutral. Many sectors just posted the strongest earnings season in over a decade. Yet, the market reacted with little more than a yawn, suggesting that stocks are fully valued — if not priced for perfection in some cases.
This could be one of those years where the old investing adage “sell in May and go away” proves to be good advice. For now, I am staying the course, but also keeping an eye on the super-cycle and will be looking for ways to gain further exposure over at High-Yield Investing.