Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Fundamentals for Uranium look great; is the Uranium Market ready to soar? - 29th Aug 16
3 Ways to Profit from the Stressed-Out American Consumer - 29th Aug 16
Have The Markets Become Too Big to Fail? - 29th Aug 16
Pakistan Booming House Prices Housing Market Mania Kabza Mafia Warning! - 29th Aug 16
Post Yellen = Market Confusion - 28th Aug 16
Theresa May Instructs Police, NHS Gp's, Public Sector To Stop Racial Discrimination in Service Delivery - 28th Aug 16
Ignore Yellen and Buy the Dip in Precious Metals - 27th Aug 16
SPX Downtrend Should be Underway - 27th Aug 16
Unraveling the Secular Economic Stagnation Story - 27th Aug 16
The Precious Metals Sector and the Fed. . . - 27th Aug 16
Stock Market - All Is Calm, All Is Not Right - 27th Aug 16
Gold Junior Stocks Q2 2016 Fundamentals - 26th Aug 16
Buy Gold’s August Dip? Gold’s Monthly Sweet Spot In September - 26th Aug 16
The IMF’s Internal Audit Reveals Its Incompetence and Massive Rule Breaking - 26th Aug 16
Commodities Are the Best Bargain Now—Here’s What to Buy - 26th Aug 16
Why I Left Canada and Became A Citizen of the Dominican Republic - 26th Aug 16
The GLD vs GOLD - 26th Aug 16
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy - 3 Secret Charts

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


© 2005-2016 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

Catching a Falling Financial Knife