Tag Archives: Operation Twist

Lumber Hits A New Multi-Year Today

Don’t believe the hype about the housing market.  I have proof that most of the buying is coming from small investors/flippers and vacation home sales.  I will be writing about this soon.

Oh, let’s not forget that Cramer recommended going long three homebuilders right as the DJUSHB (Dow Jones Home Construction Index) was peaking at 600.   I have research reports on two of them that show he’s a complete moron.

How do we know that the housing market – especially new home sales – are collapsing.  Well, nothwithstanding the fact the big homebuilders like Lennar are trying to lease out new homes in communities in which sales are approaching zero (LINK), the price of lumber has hit a multi-year low today:

LUMBER

I don’t care what kind of spin the bubble-promoters put on that lumber data, the only reason the price of lumber is falling is because demand is falling.  And demand is falling because homebuilders are not ordering lumber for new homes being built.  And new home are not being built because – I’ve detailed exhaustively in my homebuilder reports – new homebuilders are sitting on all-time record high inventories AND debt.

Lumber is now lower than it was when the Fed implemented “Operation Twist.”  To review: Operation Twist was disguised QE in which the Fed sold a big portion of its short Treasury debt (because the banks needed repo and derivatives collateral) and bought longer term Treasuries, specifically targeting the 10-yr maturity bucket.  Why 10-years?   Because 30-year fixed mortgages are priced off the 10-year Treasury.

Yes, Operation Twist was designed specifically to help re-inflate the housing bubble.   As I’ve shown in previous articles, the Fed did a better job inflating prices than volume.  In fact, I pity the real bona fide buy-it-and-live-in-it homebuyer  because they will soon discover that they overpaid for their American Dream home by at least 50%.

Now the price of lumber is below the price at which this economic signal triggered QE/Twist.  What, if anything, can the Fed to now?  Once enough small-time investors/flippers get stuck with homes they can’t rent out or flip, there will be an air-pocket of demand and both sales volume and the homebuilder stocks will experience an “air pocket” drop.

I have added to my homebuilder short positions today.  I caution that the sector is oversold right now and will likely bounce.  But I’ve left room to add if that happens.  My research reports show why and how to short the homebuilders.   Currently the homebuilders are more overvalued in relation to their underlying financial metrics than they were at the housing bubble peak in 2005/2006.   This is a grand-slam home run short-sell opportunity akin to shorting the sector in 2005 and shorting tech stocks in Jan 2000.