by Ivan Martchev

September 9, 2020

Last week, I went into the largest Home Depot in the world, in Vauxhall, N.J., and stopped at the head of the pressure-treated lumber aisle and stared in shock. The same 4×4 8-foot beam that is used in most deck construction was selling typically for around $8 two months ago; it was now selling for almost $18.

“This is some inflation”, I thought, “It must be a mistake,” so I called one of the guys with orange vests over and asked him what was going on. “It’s been that way for 6-8 weeks. That’s what happens when everyone wants to build decks at the same time, what with COVID. It’s absolutely crazy.”

I never thought I would see Home Depot running out of lumber. After all, lumber is a commodity. As the price rises, so does supply;but the problem is that one cannot make trees grow faster, so there is only so much lumber available. It turns out that the shortage is predominantly in pressure-treated lumber (chemically treated so that it does not rot), but that demand was diverting supply from dimensional lumber for home construction, where prices were rising too, but not at the same rate.

Navellier & Associates does hold Home Depot, in managed accounts. Ivan Martchev does not hold Home Depot in private accounts.

Lumber versus Dow Jones Industrial Average Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is an example of how a limited supply meets rising demand, creating inflation. There was simply a boom in home re-modelling and landscaping, driven by 2020’s stay-at-home shelter-in-place orders.

Lumber is an economically sensitive commodity, but this is a different type of recession. Since the pandemic shutdown hit less fortunate Americans (mostly renters) harder, many homeowners are responding to record low interest rates with mortgage refinancing and home improvement projects.

House prices have been affected positively by several factors. Supply has been constrained as many people that wanted to sell misread the demand for housing in March-April and pulled listings from the market, so there is lower inventory for sale. Second, homebuilding got impacted due to work shortages and high lumber prices. Then, mortgage rates hit all-time lows, boosting demand for borrowers, and then suburban housing demand grew due to more people wanting to leave inner cities due to risk from rioters.

Monthly Supply of Houses in the United States Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In a typical recession, the supply of housing rises (as in the chart above), but in this recession, the supply fell. The national data, charted above, is clear; but regionally the market is much tighter on the East and West Coast, causing the price per square foot for building lots to go to an all-time high. In the New York area, prices of homes in nice suburbs are surging while the prices of apartments in Manhattan are falling. Some moving companies are turning away requests in New York, as they can’t keep up with the demand.

The NASDAQ “Whale” is SoftBank

Just as there has been an explosion in building backyard decks, there has been an explosion in retail trading activity in 2020. People have time on their hands at home, so some fancy themselves being day-traders. Options volumes are up 300% on average and stock trading volumes are up a lot too, but there has also been a boom of mega trades that can only be handled by a large institutional investor.

It turns out that that mega-trader was Softbank.

The Financial Times on September 4, 2020 elaborated on those mega trades (“SoftBank unmasked as ‘Nasdaq whale’ that stoked tech rally”), although such peculiar trading activity has long before been reported by ZeroHedge  (see “Connecting The Dots: How SoftBank Made Billions Using The Biggest ‘Gamma Squeeze’ In History”). As fringe as it may be, credit must be given where credit is due.

Navellier & Associates does not own Softbank in managed accounts. Ivan Martchev does not own Softbank in private accounts.

NASDAQ 100 Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The only thing that makes stocks stay up after they go up is a commensurate rise in earnings and sales. We know that from the 1999-2000 experience. Back then, NASDAQ stocks went up a lot without rising sales and earnings, just based on investor mania, but they didn’t stay up. To be fair, the FAANG stocks in 2020 have a lot more sales and earnings than their equivalents had in the year 2000. But record highs in stocks, not only in the tech sector, with record shrinkage in EPS for a single year can only carry a market so far.

I think it would be normal to see an intermediate-type correction between now and Election Day, and I don’t mean the two days of aggressive selling we saw in the tech sector last week. But the year 2020 is anything but normal – a year when news of a COVID vaccine and/or treatment is met with a stock surge.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Why Lumber and Stocks Dance Together

Sector Spotlight by Jason Bodner
Timing Your Next Buying Points

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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