Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15
Inflation, Central Banks, and Business Cycles - 18th Apr 15
Stock Market Correction May be Nearing End - 18th Apr 15
UK Housing Crisis, Immigration, Population Growth, Election Forecast 2015 - Video - 18th Apr 15
Q1 Corporate Earnings Risky for Stocks - 17th Apr 15
US Stock Market Getting Scarier by the Day - 17th Apr 15
Stock Market Watershed Day - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
Gold Price Has “Hallmarks Of Market That Is Bottoming” - 17th Apr 15
Chinese Stock Market - Men Go Mad in Herds - 17th Apr 15
Two Stocks Offering Investors High Yields and Profits - 17th Apr 15
King Dollar Hurting Stock Market Corporate Earnings! - 17th Apr 15
Production Declines Hide Bigger Crude Oil Storage Issues - 17th Apr 15
Top Three Takeaways From Today’s OPEC Crude Oil Report… and How You Can Profit - 17th Apr 15
How to Profit from Australia's Healthiest Biotech Stocks - 17th Apr 15
What Is Really Driving Gold Price? - 17th Apr 15
Will Ever More Boomers Selling Retirement Assets Change Investment Prices For Decades? - 16th Apr 15
Won't Be Contagion with 'Grexit' Greece Euro-zone Exit - 16th Apr 15
Sharp Decline in USD/CAD and Its Consequences - 16th Apr 15
Blackstone is like Apple, Google, Hermes, Boeing - 16th Apr 15
The Most Dangerous Financial Headline I've Seen Since the 2008 Crisis - 16th Apr 15
Is Legal Tax Avoidance Extinct in the UK? - 16th Apr 15
Why Russia Will Send More Troops to Central Asia - 16th Apr 15
More Thoughts on the Current Crude Oil Market - 16th Apr 15
U.S. Treasury Secretary Warns Greek Exit Will Cause Enormous Disruption and Hardship - 16th Apr 15
The Hottest New Place to Find Stock Dividend Income in Q2/2015 - 15th Apr 15
How to Escape the Pensions Squeeze - 15th Apr 15
Water Crisis Game Changing Water Revolution - 15th Apr 15
The Drying of California - Corporate Farms Control of Water - 15th Apr 15
OPEC Going Broke, Dumping U.S. Dollars. Is That Good Or Bad? - 15th Apr 15
OPEC Just Confirmed It’s Losing the Oil War - 15th Apr 15
Four Uranium Companies Poised to Profit from the Growth of Nuclear Power - 15th Apr 15
Stock Investing Tread Softly… and Carry a Big Risk-Management Calculator - 15th Apr 15
Crude Oil Price Technical Outlook - 15th Apr 15
Important Bitcoin Price Action - 15th Apr 15
UK House Prices, Immigration, Population Growth and Election Forecast 2015 - 15th Apr 15
Peter Schiff on U.S. Dollars, Drachmas and Debt - Video - 14th Apr 15
The Ultimate Middle East Dilemma: Time For Us To Stop Intervening? - 14th Apr 15
Greece Debt Default and Drachma By End of April? - 14th Apr 15
Coming to Terms With the American Empire - 14th Apr 15
The Ball is in the Stock Market Bulls Court - 14th Apr 15
Tech Stocks Bubble: Different this time? - 14th Apr 15
Stock Market Sixth Sense - 14th Apr 15
Separating Gold and Silver Stocks Saints from the Sinners - 14th Apr 15
Conservatives Bribe Labour Voters by Extending Right to Buy to Housing Association Tenants - 14th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Historic Bubble

How “Correction Catalysts” Could Derail The Stock Market

Stock-Markets / Stock Markets 2010 Apr 30, 2010 - 03:26 AM GMT

By: Kent_Lucas

Stock-Markets

Best Financial Markets Analysis Article“Correction Catalysts” are everywhere, but the stock markets keep going up as investors don’t seem to care. You don’t have to get off the rising market train, but be wary of a looming correction.

Hindsight is 20/20 and, unfortunately when it comes to stock markets, bad history repeats itself. Investors and economists tend to have short, selective memories. In most cases, major crashes or corrections shouldn’t come across as a surprise, but still can be quite painful, as most market participants typically can’t get out of the way in time.


After every bubble or meaningful market correction, there are always stories of those who successfully predicted the events behind such collapse – and stories of those who profited from it, even while most lost their shirts.

By now you might know that prominent hedge fund investor John Paulson made a killing off the subprime mortgage crisis. And in the news today is how firms like Goldman Sachs ended up profiting nicely while their clients took the knife.

And you probably know that a few government bodies, including Alan Greenspan and the Federal Reserve, essentially ignored and missed clear calls for concern and reform of the mortgage industry.

A 2007 New York Times article, titled “Fed Shrugged as the Subprime Crisis Spread,” talks about all the warnings that were given to officials and basically ignored:

Mr. Greenspan and other Fed officials repeatedly dismissed warnings about a speculative bubble in housing prices. In December 2004, the New York Fed issued a report bluntly declaring that “no bubble exists.” Mr. Greenspan predicted several times – incorrectly, it turned out – that housing declines would be local but almost certainly not nationwide.

The trouble now is that, once again, “correction catalysts” are in plain view. My point is that a lot of us believe something will upset this train ride, as there are potential global problems lurking. These “correction catalysts” include:

  • an expansion of Greece and European debt problems
  • implosion of U.S. commercial real estate
  • the ill effects of a fragile jobless consumer
  • the bursting of China’s bubble
  • simply overvalued U.S. equity prices

We know of these, and there are several others. Could events like these cause a market crash or correction, or at least hinder more upside? Yes, they certainly could.

Walking down memory lane, we see that many events like the subprime crisis were visible and most, in hindsight, I would argue were “predictable.” In the 1920s, many economists even saw the Great Depression coming. They probably didn’t get the magnitude right, or the profound effect it would have on the market and our country, but the signs were out there. The same holds for global events such as Japan’s lost decade, or the Internet bubble and subsequent crash at the beginning of the last decade.

Of course, not all major events are predictable or contemplated in advance. Some major events are wholly unpredictable. These are defined as “Black Swan Events” by scholar Nassim Taleb, based on the 16th-century historic idea that black swans didn’t exist or were impossible to find.

These black swan events are a surprise, and count as major events that are understood only after the fact (although that doesn’t do investors much good). Taleb cites World War I, Sept. 11, 2001, and the impact of the Internet as examples.

But for the most part, we should worry more about events that we have a clue about, and less about potential black swan events. And as I hopefully have pointed out, the hardest part isn’t finding the “correction catalysts” – I listed a few that you’ve heard of already. The hard part is knowing if, when, and to what extent these events will hit us and our portfolios.

Corrections are a “natural” part of the cycle, and the market doesn’t just keep going up without taking a breather. So don’t be surprised; be prepared for a possible derailment. I’m just not sure which “correction catalyst” it will be.

Lumber Prices Going Through the Roof

One looming “correction catalyst” is the U.S. housing market. It’s hard to imagine that the U.S. demand for housing can truly rebound strongly, given very high unemployment rates and foreclosure levels.

But most recent data says it is. New home seasonally adjusted sales jumped 27% in March and building permits were up close to 7% – solid results even after factoring in the impact of tax credits and mild weather.

But the surge in lumber and timber prices is due more to supply issues than to the renewed demand for housing.

That chart below looks at Oriented Strand Board (OSB), which is an engineered composite wood board product, produced largely in North America, and is a substitute for plywood. Thus, it is a good proxy for lumber prices, which have similarly shot up to the highest levels since 2006.

The chart shows how OSB prices have more than doubled from 2008 lows, but are still short of 2005-2006 peak prices.


Source: Madison’s Lumber Report

Don’t let the news fool you – the high price for lumber is supply driven, not due to increased demand.

You see, when the housing market was headed toward disaster in 2008-2009, new home sales and the market came to a halt. Input demand was set to drop. Just as demand for appliances shut down, demand for the wood used to make houses also shut down. Timber plantings and mill production came to a screeching halt. For example, softwood timber production in 2009 was 50% less than levels in 2005, and over a hundred North American mills have shut down over the past few years.

Also, forest products companies, timber owners and mill producers dramatically cut their inventory, had to sharply cut prices and in many cases were forced to close or go bankrupt.

But now, as the housing market is showing signs of recovery, there isn’t enough timber and wood materials to go around to meet renewed demand. It will be a few quarters before wood products supply and inventories recover and bring down prices.

The consequences will be felt by homebuyers and construction companies. It could mute any housing recovery, given the extra costs being passed on to the homebuyer. In the meantime, imagine adding 20% or more to the cost of a new home – that has to deter or delay potential buyers. Another concern to keep an eye out for as the equity markets continue to defy gravity.

Source: http://www.taipanpublishinggroup.com/taipan-daily-042710.html

By Kent Lucas
http://www.taipanpublishinggroup.com/

Kent Lucas is the Editor of Taipan's Safe Haven Investor and a regular contributor for free market e-letter Taipan Daily. He has a Bachelor’s Degree in Economics from Harvard University, his Master’s from Stanford University and over 20 years of financial and business experience. His background includes seven years as a research analyst and portfolio manager for a leading investment management firm. He has also actively managed $1 billion worth of equity assets, with particular attention to multi-industrial companies along with auto, construction and farm equipment-related companies. Kent has also worked in leading financial institutions’ divisions including tax-exempt derivatives, corporate trust, and equities sales and trading.

As the Editor of Taipan’s Safe Haven Investor, Kent uses his stock market investment system and the 13F Disbursement Plan to uncover the most profitable opportunities found in the SEC 13F Disclosure Form. Kent extensively combs through thousands of stocks, managed securities, and the total market value of companies listed on Form 13F, and then isolates the one or two stocks that are poised to deliver the best gains with the least risk.

Copyright © 2010, Taipan Publishing Group


© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014