As Hedge Funds Endure Rocky Year, | Stock Market News Today


Investments in private companies are saving the year for stock-picking hedge funds.

Prominent managers that invest in both public and private companies in the same funds have seen their portfolio of public investments flail, weighed down by losses from January’s meme-stock rally and a retreat by fast-growing technology stocks. But soaring valuations of private companies and a hot U.S. IPO market have boosted their private wagers. That has helped mask their poor performance in public markets and driven up their overall returns.

Dan Sundheim’s $25 billion D1 Capital Partners, for example, is down 4% in its public bets for the year through September—but up 71% before fees in its private investments, said people familiar with the firm. The S&P 500 had a total return of 15.9% for the period.

D1 clients opt into share classes that offer varying levels of exposure to private investments. Clients in the share class that can invest up to 15% in private companies have seen gains of about 4.5%, after fees, for the period. The gains stand at 14% and 21% for clients in share classes that can invest up to 35% and 50% in private companies.

Meanwhile, Boston-based Whale Rock Capital Management was down 11.2% for its public investments in a hedge fund that can invest up to a quarter of its clients’ money in private companies, said people familiar with the fund. The performance of the fund’s private wagers shrank the fund’s losses to 3.3% for the year through September.

Hedge funds without private companies in their portfolios have had a rougher time. Palo Alto, Calif.-based Light Street Capital Management, which manages late-stage growth and other funds along with a hedge fund that only invests in public companies, is down 18.6% for the year through September in its hedge fund, said people familiar with the firm. That has brought the fund’s size down to about $1.7 billion. Its growth funds have fared much better, the people said, with Light Street’s first such fund, whose investments include the restaurant-software provider

Toast Inc.

and the software-development company

GitLab Inc.,

expected to have an internal rate of return of more than 100%.

The rush into private investing by public-market investors has helped fuel surging valuations for private companies. And as hedge funds, along with mutual funds and sovereign-wealth funds, deploy billions of dollars, they often crowd out venture and growth funds.

Hedge funds made up 27% of the money raised in private rounds this year through June, despite participating in just 4% of the deals, according to a recent report by Goldman Sachs Group Inc.

“These tech companies are growing exponentially, and managers want to capture that huge exponential growth for their clients,” said Susan Webb, founder and investment chief at the New York-based outsourced-investment firm Appomattox Advisory.

The higher-return potential is stark. Private-equity and venture strategies gained an average 14.2% a year in the decade ended in 2020, Goldman said, while hedge funds overall averaged half those annual returns over the period—and were subject to the stresses of regular redemption cycles.

Toast, a restaurant-software provider that went public last month, is an investment of a Light Street Capital Management growth fund.



Photo:

Richard Drew/Associated Press

Hybrid funds can offer distinct benefits, said Udi Grofman, global co-head of the private-funds group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. “The beauty of the structure is that it allows the capital of the investors, in between being invested in private investments, to be exposed to public markets,” Mr. Grofman said. Clients typically sit on cash to fund capital calls by venture and private-equity funds.

Stock-picking hedge funds had a banner year in 2020, buoyed by markets that set new highs after bottoming that March.

Their fortunes in public markets have changed this year. The meme-stock rally in January, which sent the price of companies including GameStop Corp. and

AMC Entertainment Holdings Inc.

to extraordinary heights, dealt losses to myriad hedge funds. Whale Rock gained 71% last year, while the D1 share class investing up to 15% of clients’ money in private companies climbed 60%; in January they lost about 11% and 30%, respectively, in just their public investments.

While D1 has almost recouped those losses, Whale Rock and other growth-oriented stock pickers have struggled. Fund managers say sector rotations that have alternately favored growth or value have made it difficult to navigate markets. Long out-of-favor sectors such as energy and financials have been on a tear.

Meanwhile, private markets have continued to be supportive. The U.S. IPO market is flourishing, and companies are continuing to raise more money in private markets than in the past. Hedge funds are contributing to the brisk pace of fundraising. D1 and Tiger Global Management, which manages a series of private-equity funds in addition to a hybrid hedge fund, have participated in private funding rounds this year through September at a pace of more than a deal a week for D1 and more than two deals every three days for Tiger, according to PitchBook Data Inc.

The 44-year-old Mr. Sundheim, who started D1 after several years as chief investment officer at Viking Global Investors, said at a recent capital-introduction conference that he hadn’t expected to get as big in private companies as he has. D1 is invested in 90 private companies, he said.

He said judgment was the only competitive advantage in public markets as private markets offered the additional benefit of firms’ reputations playing a role in gaining access to deals. He said D1 in its earliest investments acted as a resource to management teams so they would be strong references for D1. Mr. Sundheim also said he was confident in his portfolio of public investments over the next three to five years.

Write to Juliet Chung at [email protected]

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Robinhood Stock Sale Soured By Investor Confusion, Valuation | Sidnaz Blog


Robinhood Markets Inc.’s


HOOD 3.45%

bid to revolutionize IPOs has created losses for investors instead, after one of the year’s most highly anticipated listings fell flat.

In a regulatory filing in early July, the trading platform’s co-founders said they would open their initial public offering to customers on equal terms with institutional investors. They said they recognized it may be the first IPO many would participate in, and pledged to “never sacrifice the safety of our customers’ money.”

It now appears Robinhood’s commitment to “democratizing” the IPO process played a role in the offering’s big initial stumble Thursday. An innovative auction system sowed some confusion among investors, many already suspicious of the valuation of a business that has drawn scrutiny from regulators and criticism from customers, people involved in the process said.

The stock, initially priced at $38, the bottom of the target range, sits below that. It is a disappointing result at a time when IPOs are booming and investor appetite for new issues is robust.

Robinhood proudly tore up the traditional IPO playbook. It insisted a large chunk of its stock—in the end up to 25%—go to its individual-investor customers compared with the normal retail allocation of well under 10%. It said employees could sell a portion of their stock right away instead of being locked up for six months. And when it came to determining the price of its IPO, Robinhood decided to use a hybrid-auction process, which attempts to assign shares to investors based on what they are willing to pay, regardless of who they are.

Robinhood co-founder Baiju Bhatt, in gray suit, and CEO and co-founder Vladimir Tenev in the Wall Street area of New York City on Thursday.

The hybrid auction has worked in other IPOs in the past year. In typical listings, underwriters give their investor clients updates throughout the roadshow—the seven- to 10-day period in which a company pitches its stock. These updates typically include guidance on how much demand bankers are seeing for the shares and the rough price they ultimately expect to set.

In this case the company and lead underwriters

Goldman Sachs Group Inc.

and

JPMorgan Chase

& Co. gave few such updates, people familiar with the matter said. When some large investors called the other underwriters on the deal, some of those bankers pleaded ignorance.

The opaqueness of the process sowed suspicion among some investors who assumed the deal was going poorly and adjusted their orders accordingly, investors and bankers said.

Many had already expressed concern about how much of Robinhood’s revenue comes from a controversial practice called payment-for-order-flow, which the Securities and Exchange Commission is reviewing, people who attended the roadshow said. Others questioned what they saw as the high valuation the eight-year-old company was seeking—in excess of $30 billion.

Another concern: whether Robinhood’s controversial decision earlier this year to stop users from buying meme stocks like

GameStop Corp.

would prompt some to eschew the offering.

Wednesday night, as bankers met with Robinhood Chief Executive

Vlad Tenev

to set the price, some investors said they were only told it would be within the $38 to $42 target range. This surprised many large institutions, who are used to more guidance heading into a pricing meeting.

A Robinhood IPO event in Times Square.

An unusually large percentage of shares were set to be allocated to hedge funds, which are more likely to “flip” IPO stock on the first day of trading, according to people close to the deal. To bring in more of the biggest institutional funds who are viewed as “buy-and-hold” investors, Robinhood chose $38 a share instead of the higher price some funds were willing to pay.

The company and Goldman felt comfortable that the lower price was conservative enough that the shares would rise on their first day of trading, especially given the buzz around Robinhood in the lead-up to the listing, according to people close to the deal.

Instead, the stock opened at $38 a share, unusual at a time when big initial pops for hot IPOs are more the norm. It rose higher briefly, touching $40 before dropping through the IPO price. It closed down 8.4% Thursday.

The shares fell further still Friday morning before regaining some ground in the early afternoon.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

Robinhood’s Stock Market Debut

Write to Corrie Driebusch at [email protected]

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Should You Be Buying What Robinhood Is Selling? | Sidnaz Blog


In rare cases, such pitches have paid off big time. More often, you’d have done yourself a favor by taking roughly half your money and lighting it on fire instead.

Just as Robinhood isn’t the first brokerage to offer commission-free trading, it isn’t the first to seek to “democratize” investing or to sell a piece of itself to its own customers.

On June 23, 1971, Merrill Lynch, Pierce, Fenner & Smith Inc. became the first New York Stock Exchange firm catering to individual investors to offer its shares to the public.

Thirsty for fresh capital in a struggling stock market, Merrill flogged its shares to its own customers, tapping the firm’s “awesome recognition among that vast segment of the population,” reported The Wall Street Journal the next day. “Primarily small investors, the type long championed by Merrill Lynch, quickly purchased the entire amount.”

Nearly 400 insiders at the firm unloaded a total of 2 million shares in the offering. From its initial $28 per share, the stock shot to about $42—a 50% pop—then closed around $39. That valued Merrill at 30.5 times its prior-year earnings, much higher than the overall stock market’s price/earnings ratio of 18.7.

Less than three weeks later, Merrill announced that its net earnings had fallen nearly 50% from the prior quarter.

For the rest of 1971, Merrill’s stock lost 9.4%; the S&P 500 gained 4%, counting dividends.

In 1972, when the S&P 500 rose nearly 19%, Merrill sank 7.7%. And in 1973-74, when the S&P 500 lost 37%, Merrill’s stock slumped by 61%. In its first three full years, Merrill’s stock lost three-quarters of its value; the S&P 500 fell only 5%.

Here in 2021, Robinhood’s offering is one of several trading and investing IPOs:

Coinbase Global Inc.,

the cryptocurrency exchange, went public in April, and

Acorns Grow Inc.,

which helps users invest in tiny increments, said in May that it expects to go public later in the year. Since its Apr. 14 debut, Coinbase is down about 27%. Robinhood fell 8% on its first day of trading Thursday.

One of Wall Street’s oldest and frankest sayings is “When the ducks quack, feed ‘em”—meaning that whenever investors are eager to buy something, brokers will sell it like mad.

Back in 1971, that was the brokers’ own shares. Roughly half a dozen major firms sold stock to the public soon after Merrill, including Bache & Co. and Dean Witter & Co. By 1974, according to data from the Center for Research in Security Prices LLC, several of them had dealt losses at least as devastating as Merrill’s.

In 1987, Jane and Joe Investor got invited to join in on the fun of Charles Schwab Corp.’s IPO, when roughly three million of the offering’s eight million shares were reserved for employees and customers of the firm.

Unlike Merrill, which was rescued from the brink of failure in 2008 when

Bank of America Corp.

bought the firm, Schwab went on to generate spectacular long-term performance. Over the full sweep of time since its 1987 IPO, Schwab is up more than 26,500%, or 17.9% annualized. The S&P 500 gained less than 3,500%, or an average of 11.3% annually.

However, Schwab went public in late September 1987. Only 18 trading days later, on Oct. 19, the U.S. stock market took its biggest one-day fall in history, plunging more than 20%.

Schwab’s stock got brutalized. In their first year, Schwab’s shares fell 59.1%. After three years, the market as a whole had gained 0.6% annually; Schwab’s stock lost an annualized average of 6.9%, according to CRSP.

How many of the original buyers in 1987 stuck around long enough to reap the giant rewards that came much later? That’s impossible to know, but the likeliest answer has to be: very few.

Every once in a while, outside investors in a brokerage IPO do well.

Goldman Sachs Group Inc.

began trading on May 4, 1999. If you’d bought Goldman stock in the IPO and held it ever since, you’d have earned 9.1% a year, versus 7.6% in the S&P 500, according to FactSet.

Yet Goldman was a giant then, as it is now; it was late to the IPO party because it had held on to its partnership structure for so many years. Most brokerage IPOs, like Robinhood’s, occur when the firms are younger and smaller.

That makes them typical. Companies selling shares to the public for the first time tend to be small, with minimal profits; they also require additional invested capital to sustain their rapid growth.

That’s what Savina Rizova, global head of research at Dimensional Fund Advisors, an asset manager in Austin, Texas, calls “a toxic combination of characteristics that points to low expected returns.”

On average, IPOs have severely underperformed seasoned stocks in the long run. And, history suggests, brokerages doing IPOs are better at timing the market for themselves than for you.

Write to Jason Zweig at [email protected]

More from The Intelligent Investor

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

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Amazon’s New Day Has a Rough Start | Sidnaz Blog


The results create a bit more of a challenging setup for new CEO Andy Jassy.



Photo:

Patrick Fallon/Zuma Press

OK, so maybe

Jeff Bezos

isn’t quite going out on top.

The final quarter for

Amazon.com


AMZN -0.84%

under the direct management of its famous founder turned out to be a bit of a letdown. Revenue and operating income for the second quarter both fell shy of Wall Street’s estimates, as did the high end of the company’s revenue forecast for the current quarter. It was the first time the e-commerce titan missed the high end of its own sales projections in two years, according to data from FactSet.

Amazon’s


AMZN -0.84%

shares fell more than 7% following the results.

The company is still a juggernaut. Second-quarter revenue rose 27% to $113.1 billion, bringing trailing 12-month sales to more than $443 billion. That puts Amazon well on pace to overtake

Walmart

as the largest U.S. company by annual sales some time next year, while still growing at double-digit rates. Growth at the company’s crucial AWS cloud business also picked up, with revenue jumping 37% year over year compared with a 32% rise in the last quarter. That lines up with trends shown by cloud rivals

Microsoft

and Google earlier this week, suggesting that the market leader, AWS, is at least holding its ground.

But the boom in online sales Amazon enjoyed at the start of the pandemic created a challenging comparison for the most recent quarter. Thursday’s results confirmed the suspicions of some analysts that the company’s Prime Day sales event in late June underwhelmed. Amazon’s online stores segment saw revenue grow by only 16% to $53.2 billion in the second quarter, falling well short of analysts’ targets. Revenue growth from third-party and subscription services decelerated. Advertising revenue, reflected in the company’s “Other” segment, showed a strong jump of 87% year over year to $7.9 billion. But advertising still contributes only about 7% to Amazon’s total revenue.

The results create a bit more of a challenging setup for new CEO

Andy Jassy

as Amazon will face difficult comparisons for the rest of the year following its pandemic-fueled sales jump in 2020. But the bar seems low enough. The midpoint of the company’s revenue projection for the third quarter represents growth of 13% year over year. That would be Amazon’s slowest growth rate in 20 years, even with the pandemic picking back up and possibly driving more sales online.

Amazon’s new boss has plenty to do.

Write to Dan Gallagher at [email protected]

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Pinterest Shares Fall as U.S. Monthly Average Users Decline | Sidnaz Blog


Pinterest reported Thursday second-quarter net income of $69.4 million, compared with a loss of $100.7 million a year earlier.



Photo:

Gabby Jones/Bloomberg News

Shares of

Pinterest Inc.


PINS -6.01%

fell more than 14% in after-hours trading, as the online sharing platform said its monthly average users in the U.S. contracted during the quarter, a trend that accelerated this month.

The company reported 91 million monthly average users in the U.S. in the quarter, down 5% from a year earlier. Pinterest said that “engagement headwinds” continued this month, with monthly average users down 7% as of July 27. Globally, monthly average users increased 9% in the quarter.

“Our second quarter results reflect both the strength of our business and the recent shift in consumer behavior we’ve seen as people spend less time at home,” Chief Executive

Ben Silbermann

said in prepared remarks.

Pinterest saw its user growth soar during the pandemic, as shut-in consumers turned to the website for masks and other products. The company has said the pandemic may have pulled forward some user growth.

The company also reported Thursday second-quarter net income of $69.4 million, compared with a loss of $100.7 million a year earlier.

Adjusted earnings were 25 cents a share. Analysts polled by FactSet were expecting adjusted earnings 13 cents a share.

Revenue totaled $613.2 million, compared with $272.5 million a year earlier. Analysts expected $562 million in revenue.

Pinterest shares closed Thursday at $72.04 apiece, down 6%. So far this year, the stock is up 9.32%.

Write to Robert Barba at [email protected]

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Smaller but More Frequent Catastrophes Loom Over Insurance Sector | Sidnaz Blog


Less devastating than mega events such as earthquakes and hurricanes, these secondary perils, as they are known in the industry, happen relatively frequently and include hail, drought, wildfire, snow, flash floods and landslides.

Climate change and urban sprawl are driving a jump in secondary perils losses, said Tamara Soyka, Head Cat Perils EMEA at

Swiss Re.

Insurers and reinsurers, who traditionally focused on predicting big weather events that can cause widespread damage, are increasingly incorporating secondary-peril models.

Swiss Re, for instance, last year started considering pluvial—that is, heavy rainfall, similar to the recent European floods—flood zones when assessing risks.

A storm system over Europe dumped heavy rains in recent weeks, causing heavy floods in Germany, Belgium and parts of the Netherlands and Switzerland. The German Insurance Association on Wednesday said it expects insured losses could hit nearly $6 billion as a result of the flooding in North Rhine-Westphalia and Rhineland-Palatinate. It doesn’t yet have estimates for the damage in Saxony and Bavaria.

Before-and-after images show the extent of damage in German towns hit by the region’s worst flooding in decades. Visiting one inundated village, German Chancellor Angela Merkel called for more effort to combat future climate-related disasters. Photo: Satellite Image ©2021 Maxar Technologies

This year is expected to be the most damaging for the country since 2002, when insured storm damage totaled about €11 billion, equivalent to $12.98 billion, the association said. While mostly all residential buildings have windstorm and hail coverage, only 46% of homeowners have cover for heavy rain and floods.

Heavy rain, hailstorms and wind in Germany and Switzerland in June have already cost the industry an estimated $4.5 billion, according to analysts at Berenberg.

Analysts at

Moody’s Investors Service

in a note this week said German insurers “may find it challenging to protect homeowners against climate risk without significant price increases.”

Insurers paid out $81 billion for damages related to natural catastrophes in 2020, according to reinsurance giant Swiss Re, up 50% from 2019 and comfortably topping the $74 billion 10-year average for such losses.

Secondary peril events accounted for more than 70% of the $81 billion in natural catastrophe losses last year, according to the data.

Firms expected to take hits to their earnings from the European floods include Swiss Re,

Munich Re AG

and

Zurich Insurance Group,

according to analysts. Spokespeople for Swiss Re, Zurich and Munich Re declined to give estimates of the potential impact.

UBS Group AG analysts project $6 billion worth of losses for the industry, split into $2 billion for primary insurers and $4 billion for reinsurers.

SHARE YOUR THOUGHTS

Have you been affected by a natural disaster? What was your experience working with insurance companies? Join the conversation below.

The prospect of more intense weather has insurers rapidly updating their risk-assessment models and recalculating the price of insurance. Property insurers faced an estimated $18 billion bill for damage to homes and businesses from the long stretch of frigid weather in Texas and numerous other states, the equivalent of a major hurricane, The Wall Street Journal reported earlier this year.

In some cases, the increased frequency of extreme weather events can lead insurers to drop coverage altogether. Some insurers in California chose to not renew insurance policies for homeowners in high-risk areas for wildfires, the Journal reported in 2019. California wildfires the prior two years had killed dozens of people and racked up more than $24 billion in insured losses.

Analysts say the losses from the European flooding will be manageable for the industry. While they may dent quarterly or yearly earnings, they won’t have a seismic effect on their capital. If the coming U.S. hurricane season is a normal one, that will likely crimp earnings further for some.

Flooding in Altenahr, Germany. In some cases, the increased frequency of extreme weather events can lead insurers to drop coverage altogether.



Photo:

friedemann vogel/Shutterstock

The Euro Stoxx Insurance index is up 7.6% this year, trailing the broad Euro Stoxx 600 stock-market index, which is up nearly 15%. The insurance index has fallen 6.4% since March 30, which Berenberg analysts attribute to fears of potential dividend cuts due to recent natural catastrophes.

The costs of reinsurance in Asia and the U.S. went up over the past couple of years owing to hurricanes and wildfires, said Berenberg analyst Michael Huttner. But prices in Europe didn’t increase significantly over that period. The floods will likely help catastrophe pricing increase, said Mr. Huttner.

Will Hardcastle, an analyst at UBS, says this year is shaping up to be the fifth consecutive year that natural catastrophe losses will be above reinsurers’ budgeted level.

“The last five years would suggest you’re not getting appropriate pricing for it,” he said. “It’s always difficult to determine whether the trend is short term. Now at this point you have to be thinking it’s more structural” because of climate change, he said.

Write to Julie Steinberg at [email protected]

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Unilever Gives a Preview of Worsening Inflation Pinch | Sidnaz Blog


Inflation is becoming as much a headache for CEOs of household-staples companies like

Unilever


UL -0.19%

as for shoppers. Their ability to pass on price increases hinges on where and what they sell.

The U.K.-based maker of Hellman’s mayonnaise and Ben & Jerry’s ice-cream said Thursday that sales increased at a healthy 5% clip in the three months through June, compared with the same period of 2020. Some products that saw demand slump during lockdowns, such as deodorant, have returned to growth now that social restrictions are being lifted in certain countries.

However, Unilever’s shares fell 5% in early London trading because of new profit guidance. Operating margins are expected to be flat in 2021, down from the slight increase that Chief Executive Officer

Alan Jope

was targeting just three months ago.

Inflation is the clear culprit. For Unilever and its main European peer Nestlé, costs of goods sold amount to around half of revenue. Bernstein recently estimated that over the next 12 months these two companies face roughly 14% increases in bills for everything from plastic packaging to food commodities. On a call with analysts, Unilever’s finance director said that costs spiked again in the latest quarter. Soybean oil prices, an important ingredient for the company’s salad dressing, jumped 20% compared with the first quarter.

Predicting who has the best ability to pass on these higher prices to consumers isn’t easy, but investors can look for clues in market-share data, as well as companies’ mix of products and countries.

Unilever, the maker of Dove soap, said costs spiked again in the latest quarter.



Photo:

Jason Alden/BLOOMBERG NEWS

Even though consumers have less disposable income on average, it is easier to increase prices in emerging markets than in mature economies. This is because supermarkets in developing countries often have less bargaining power than in Europe and the U.S., where grocers are more consolidated. Unilever’s high exposure to emerging markets, which contribute roughly 60% of group sales, is positive. However, it can only push so far before pinched shoppers trade down to cheaper brands. This is already happening in Indonesia.

The company and its main rivals will have to fight harder in Europe, where price negotiations between consumer-staples companies and supermarkets are notoriously fraught. In certain markets like France, the prices of some goods are in deflation.

This week’s controversy over Ben & Jerry’s decision to stop selling ice cream in Israeli settlements may not help the task. The move taken by the brand’s independent board could cause problems for Unilever in the U.S., where it has spent years trying to improve its competitive position. Any slip in consumer demand will make it harder to increase prices.

Lastly, the split of luxury and mass-market brands in consumer companies’ portfolios will determine how much they can shield margins. It is easier to raise prices for premium products, such as Unilever’s posh cleaning brand The Laundress, than for mundane brands where shopper loyalty is weaker.

Consumer bosses face a delicate balancing act to get through this year with both their margins and market share still intact.

The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s. WSJ’s Jon Hilsenrath looks at what consumers can expect next.

Write to Carol Ryan at [email protected]

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Western Wildfires Are Hitting the Lumber Market | Sidnaz Blog


Lumber prices finally cooled off. Now come the fires.

Forest fires raging in the West are threatening an important swath of the U.S.’s wood supply, pinching output that has been under pressure since the Covid-19 pandemic touched off homebuying and remodeling booms and sent lumber prices soaring.

Canfor Corp.


CFPZF 3.33%

, one of North America’s largest lumber producers, said that starting Monday it would cut back output at its mills in British Columbia because of hundreds of blazes that have broken out in the Canadian province and challenged its ability to shuttle wood to and from its facilities. The company expects to reduce output at its 10 operating mills there by a total of about 115 million board feet during the quarter.

That is only a sliver of North America’s overall supply. Yet analysts said they expected further curtailments because of fires that are scorching logging forests on both sides of the U.S.-Canadian border. In addition, lumber prices have fallen below the cost of sawing boards in the continent’s most expensive place to process timber.

“The wildfires burning in western Canada are significantly impacting the supply chain and our ability to transport product to market,” said

Stephen Mackie,

executive vice president of Canfor’s North American operations.

Traders responded Wednesday by bidding up lumber futures for delivery through January by the daily maximum allowed by exchange rules. September futures rose 7.75% to close at $584 per thousand board feet, a rare up day in the midst of a 66% decline since early May.

Lumber is one of several commodities markets being roiled by extreme weather this summer. The same heat and drought that set the stage for an unusually early and intense fire season in the West have dried up hydroelectric power output and increased air-conditioning demand in the region, which has helped push natural-gas prices to their highest summer levels in seven years.

The lumber market was just getting back into balance when wildfires broke out in British Columbia.



Photo:

JR Adams/Reuters

A lack of rainfall in South American farming regions has left the Paraná River too shallow for fully loaded boats to pass from Argentina’s interior to Atlantic shipping lanes, contributing to high prices for soybeans and corn. Flooding in Germany last week forced the closure of a plant owned by

Aurubis AG

, a major metal producer and recycler, as copper prices hover around all-time highs.

Aurubis said that one of its two facilities in Stolberg, western Germany, was evacuated without injury to employees. The damage is extensive and production isn’t expected to resume until the fourth quarter at the earliest.

“Delivery to customers and acceptance of incoming deliveries are impossible right now,” the firm said.

The lumber market was just getting back into balance when the fires broke out. North America’s sawmills sent workers home at the start of the lockdown and were unprepared for the building boom that ensued. They have struggled to saw logs fast enough to meet demand from home builders, do-it-yourselfers and restaurants that raced to install outdoor seating areas.

Lumber prices topped out in May at more than four times what is typical for two-by-fours, which helped reduce demand, particularly from the more price-sensitive DIY market that buys wood from retailers such as

Lowe’s

Cos. and

Home Depot Inc.

Wood is now piling up at mills.

Mark Wilde, an analyst with BMO Capital Markets, said he expects more mills to announce reduced hours and shifts in the coming weeks

“Pricing windfalls like that of the last 12 months are once in a generation,” he said. “It would be crazy to simply return all that cash to the market by overproducing during a weak market.”

The wood-pricing service Random Lengths said in its midweek report that some Western mills have recently unloaded two-by-fours of spruce, pine and fir for below $400 per thousand board feet. Forest-product executives said that mills operating in British Columbia, where the provincial government metes out log supply, usually need more like $700 to be profitable these days.

Wildfires spawned by extreme heat have devastated parts of British Columbia.



Photo:

Darryl Dyck/Canadian Press/Associated Press

Such a high break-even price, along with the threat of fires, outbreaks of wood-boring beetles and distance to the Sunbelt’s mushrooming housing markets, has relegated what was once the continent’s top lumber-producing region to the status of swing producer. That means that the region’s mills—much like U.S. shale producers in the oil market—are likely to be the first to curtail production when lumber prices fall and are then counted on to increase output when supplies are stretched and prices rebound.

Canfor and its rivals have responded by shifting their focus to the U.S. South, where a glut of pine trees has pushed log prices to their lowest levels in decades despite strong demand for finished lumber. They have been quick to invest profits from the recent price surge into the South, which has overtaken Canada as the continent’s top lumber-producing region.

Share Your Thoughts

What impact has the availability and price of lumber had on your home-construction or renovation project? Join the conversation below.

Write to Ryan Dezember at [email protected]

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Twitter, Texas Instruments, Intel, Las Vegas Sands: What to Watch | Sidnaz Blog


Futures are rising, pointing to an extention of the rally on Wall Street for a third day. Here’s what we’re watching ahead of Thursday’s open.

A Texas Instruments office in San Diego, Calif., April 24, 2018.



Photo:

mike blake/Reuters

  • Railway operator

    CSX


    CSX 1.25%

    jumped 2% premarket after it said profit more than doubled in the second quarter.

  • Las Vegas Sands


    LVS 3.43%

    said losses narrowed in the second quarter as revenue recovered from last year’s more restrictive measures to limit the spread of Covid-19, but market players are still taking their bets off the table. Its shares were down 2.5%.

  • Airbnb


    ABNB 2.32%

    shares are up 1.7% premarket. CEO

    Brian Chesky

    told Barrons that he sees the “travel rebound of the century,” even as Covid-19 cases jump.

  • Equifax


    EFX -0.60%

    raised its projections for the year as it sees broad-based revenue growth across all its segments. Market watchers greeted the news with a yawn: Shares were flat premarket.

  • Appliance maker

    Whirlpool


    WHR 1.91%

    lifted its guidance but said it will spend $1 billion more on raw materials this year as inflation hits corporate balance sheets. Its shares slipped 0.4%.

  • Intel,


    INTC 1.79%

    Twitter


    TWTR 2.36%

    and

    Snap


    SNAP 1.70%

    are set to report earnings after markets close. In Intel’s case, an earnings drop could be in the cards amid a global chip shortage.

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Stock Futures Rise Ahead of Earnings, Jobless Data | Sidnaz Blog


U.S. stock futures ticked higher ahead of a flurry of earnings reports and jobless figures that are expected to reach a fresh pandemic low.

S&P 500 futures gained 0.2% and Dow Jones Industrial Average futures strengthened 0.2%. Changes in futures don’t necessarily predict moves after the opening bell.

European stocks climbed Thursday for a three-day winning streak. The Stoxx Europe 600 added 0.5% in morning trade. Energy and utilities sectors led gains while consumer staples and healthcare sectors lost ground.

Unilever

slipped 3.4% as it posted its fourth consecutive session of declines.

The U.K.’s FTSE 100 rose 0.1%. Other stock indexes in Europe also mostly climbed as France’s CAC 40 gained 0.5%, the U.K.’s FTSE 250 added 0.6% and Germany’s DAX rose 0.7%.

The Swiss franc and the British pound were up 0.1% and 0.3% respectively against the U.S. dollar and the euro was flat against the U.S. dollar, with 1 euro buying $1.18.

In commodities, international benchmark Brent crude fell 0.1% to $72.16 a barrel. Gold was flat, at $1,802.60 a troy ounce.

German 10-year bund yields were down to minus 0.399% and 10-year U.K. government debt known as gilts yields were down to 0.592%. The yield on 10-year U.S. Treasury fell to 1.270% from 1.279%. Yields move in the opposite direction from prices.

Indexes in Asia gained as Hong Kong’s Hang Seng climbed 1.6% and China’s benchmark Shanghai Composite rose 0.3%.

Traders gathered for the IPO of VTEX at the New York Stock Exchange on Wednesday.



Photo:

brendan mcdermid/Reuters

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