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October's Big Story: Winter May Be Coming, But Don't Let That Darken Your Outlook


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“Only the paranoid survive,” Andy Grove once said. Given how Grove lived through both Nazi and communist regimes in his native Hungary, became a refugee, and ultimately ran Intel in the hyper-competitive tech industry, he had good reason to perpetually fear the end was near. But should LBM dealers feel the same?


My calls and chats with dealers nationwide these past weeks revealed a lot of nervous people in construction supply. Listening to them, you get the sense that business could turn south as early as next year. Lumber prices are as flat as old champagne, and there was so much other disappointing news on other materials at Do it Best’s fall market update luncheon for dealers that, at the end, LBM VP Gary Nackers joked, “Maybe we should serve alcohol here.”


Consider other omens as well: Fewer pole barns are going up in mid-America, while housing on both coasts is far too expensive for wannabe homeowners. Consolidation among distributors is provoking fears about tough future bargaining sessions. Add ever-rising interest rates and continued turmoil in Washington and you can feel the ulcers coming on.


Keep Things in Perspective

As you contemplate that half-empty glass, just remember that extremely good times have a way of making normal times look dismal. In June, Random Lengths’ composite framing lumber price topped out at a record $582. Since then it has tumbled 36% to reach a seemingly pitiful $373. But that $373 is about where prices stood in February 2017, and it’s above the levels of any time in the previous year. In 2016, you were cheering that prices had risen as high as $373.


Do it Best’s overall forecasts call for lumber, roofing, drywall, and insulation prices to hold steady through the rest of this year, with some attempts by vendors to push through increases in 2019’s first quarter. You near this more-of-the-same talk as well from economists like Metrostudy’s Mark Boud, who has said there’ll be an undersupply of housing and enough economic growth (despite higher interest rates) to keep things pretty much as they are until 2022. Housing starts are forecast by Metrostudy to rise no more than 3.9%, but that prediction came before this fall's hurricanes..


If this were a baseball game, Boud says, we’re in the bottom of the seventh inning. And just as there is no time clock in baseball, so it is with that estimate. Boud has had us playing the seventh inning for at least 18 months.


All this suggests that it’s not the known factors we need to worry about, it’s the unknown ones that could knock us askew. Will fires or blizzards or worker strikes crimp lumber production in British Columbia? Will some factor cause the Chinese or U.S. to blink in their trade talks? As more than one market expert has said on CNBC lately, bull markets don’t die of old age; they get killed off by something unexpected.


We just don't know what it will be .. or if anything bad will happen at all.


Weathering Potential Changes

I once read a commentary that said Silicon Valley rather than Boston ended up being America’s technology capital because Bostonians expect bad but ultimately survivable winters every year while Californians expect conditions to be great every day--until an earthquake or forest fire or tsunami destroys everything.


Which style should you emulate? It depends on whether you want to have a business that will last for generations or one in which you expect to make hay only so long as the sunny times last, and then reinvent yourself.* Most independent dealers are in the former camp, while private equity funds tend toward the latter.


Unless you're certain of when to jump off the escalator, I believe you should focus on the bottom line more than the revenue number. Make sure you can handle your debt payments even if business declines. Pursue collections vigorously. Ask yourself twice whether you really need to buy that new truck. And above all, remember that big revenues are nice, but big profits are even nicer.


When I hear people talk about a coming crash, I’m reminded of the words of one of my favorite journalists, the longtime CBS reporter and commentator Eric Sevareid. He once said: “I’m a pessimist about tomorrow, but an optimist about the day after tomorrow.” Yes, winter is coming. But seasons--and housing cycles--ultimately will spring back. Just make sure you have enough candles to get through the dark times.

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