NEW$ & VIEW$ (27 DECEMBER 2013)

U.S. Holiday Sales Rise 3.5%, SpendingPulse Says

U.S. retail sales rose 3.5 percent during the holiday season this year, helped by deep discounts at malls and purchases of children’s apparel and jewelry, MasterCard Advisors SpendingPulse said.

Sales of holiday-related categories, such as clothing, electronics and luxury goods, rose 2.3 percent from Nov. 1 through Dec. 24 compared with a year earlier, the Purchase, New York-based research firm said today. SpendingPulse tracks total U.S. sales at stores and online via all payment forms. (…)

Sales were strongest in jewelry and children’s apparel, while sales of electronics and luxury items excluding jewelry were about the same as the same period last year, SpendingPulse said. Sales of women’s and men’s apparel fell from last year, the researcher said. (…)

Bullishness Jumps to Three-Year High

Individual investors were feeling especially cheery about stocks this holiday week.

The percentage of bullish individuals rose to 55.1%, the highest level in nearly three years, in the week ended Dec. 25, according to the American Association of Individual Investors. That was a jump from the 47.5% of investors who said they were bullish the previous week.

Bespoke provides the charts…

 

…and some caution

While the current level is definitely elevated, it’s by no means without precedent.  As shown below in the chart of the AAIIreading going back to 1987, sentiment has been above the 50% mark many times in the past.

The Blog of HORAN Capital Advisors adds this:

In addition to an elevated bullishness reading, the bull/bear spread has increased 37% and this spread is the highest since AAII reported the spread at 47% for the week of December 23, 2010.

Just a reminder: INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!The bearish reading is more important.

Oh! there is also that:

Twitter Rally Picks Up Steam

Twitter shares have nearly tripled since their initial public offering last month, including an almost 5% gain on Thursday, making the microblogging service’s IPO one of the best performing this year.

Twitter Now Has A Larger Market Capitalization Than 80% Of All S&P 500 Companies

(…) Why the stock has exploded the way it has, nobody knows, and frankly nobody cares: it has entered that mythical zone of raging momentum where things work, until they don’t for whatever reason. But in order to present readers with a sense of where TWTR’s $40 billion market cap, which is greater than 403, or 80%, of all S&P 500 companies, puts in in the context of several companies all of which have a market cap that is lower than Twitter’s, we have shown on the chart below Twitter’s 2014 projected Revenue compared to this same universe of immediately smaller S&P500 companies. Again, just for the sake of perspective. (…)

And that: Copper Prices at Their Highest in 8 Months

But also this:

Treasury Yield Hits 3%

Treasury bond prices fell Thursday, pushing the yield on 10-year notes to 3%, a threshold that may signal a new baseline for higher interest rates.

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Hmmm!

Japan wages halt 17-month decline
Data suggest companies starting to heed calls to pay staff more

(…) Keidanren, the largest and most influential business lobby group, seems willing to recommend that its members prepare for the first increase in base salaries since 2008, when they enter spring negotiations with labour unions. (…)

But three-quarters of total salaries in Japan are paid by small and medium-sized businesses, which are mostly not unionised and where the recovery in profits has not been as strong. (…)

Another factor dragging on wages is the shift in the composition of Japan’s labour force from full-time to part-time workers. The government makes no distinction between the two in its calculations of average earnings per worker, which have fallen almost without interruption since the late 1990s.

And as data for part-timers take longer to calculate, the “encouraging” preliminary wage figures for November could be subject to a downward revision later, said Izumi Devalier, economist at HSBC in Hong Kong.

Other data released on Friday may strengthen policy makers’ confidence that Japan is shaking off 15 years of deflation. Consumer prices excluding fresh food rose 1.2 per cent from a year earlier, reaching a five-year high. Retail sales also increased more than economists expected, marking a fourth straight rise at 4 per cent from a year earlier.

The job-to-applicant ratio touched 1.00 for the first time since October 2007, meaning that there is one job available per applicant.

Ninja  A Metals Mother Lode Sits in Shadows Banks, hedge funds, commodity merchants and others are stashing millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses.

Banks, hedge funds, commodity merchants and others are stashing tens of millions of tons of aluminum, copper, nickel and zinc in a hidden system of warehouses that span the globe.

These facilities are known to some in the industry as “shadow warehouses” because they are unregulated and don’t disclose their holdings.

They operate outside the London Metal Exchange system of warehouses, the traditional home for these metals.

As of October, a record seven million to 10 million tons of aluminum were being housed in these facilities, in countries as far apart as Malaysia and the Netherlands, according to estimates from several analysts.

The amount dwarfs the 5.5 million tons of aluminum in the LME-licensed warehouses, based on LME figures as of Tuesday. Just 12 months ago, the figures were about equal.

A similar shift is taking place with other industrial metals, analysts say. (…)

“It’s a real concern for anyone in the industry that metal can be sucked away into a nonreporting location with no expectation or date as to when it’s going to be available again,” said Nick Madden, senior vice president and chief supply-chain officer with Atlanta-based Novelis Inc., an aluminum-products maker that is among the world’s biggest buyers of the metal.

“The risk here is that the metal gets controlled by fewer and fewer hands, whose interests and business model is probably conflicting with that of end users,” he said. (…)

The lack of transparency is making this shadow system increasingly attractive to institutions seeking to profit from information that other buyers and sellers don’t have. Some companies also are seeking a cheaper alternative to the LME warehouses, which can be 10 times as expensive as the unregulated storage, analysts and traders say. (…)

Five companies operate 75% of the LME’s 778 licensed warehouses. All own shadow facilities as well, people familiar with the companies said.

In some instances, a single firm runs licensed and unlicensed warehouses in the same building, with the metal counted by the LME separated from hidden stockpiles by a chain-link fence, said David Wilson, a commodities analyst with Citigroup.

Until 2010, most warehouses were owned by logistics firms like Netherlands-based C. Steinweg Group. But as metal-financing trades became more popular, C. Steinweg was joined by units of Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. as well as commodity traders Glencore Xstrata PLC of the U.K. and Switzerland and Trafigura Beheer BV of the Netherlands. (…)

Many metal buyers and producers say they are worried that new rules approved by the LME in November will speed up the flow of metal into shadow warehouses. (…)

 

NEW$ & VIEW$ (3 DECEMBER 2013)

Global Output and new orders rise at fastest rates since February 2011

 

At 53.2 in November, up from 52.1 in October, the J.P.Morgan Global Manufacturing PMI™  registered its highest level since May 2011. The headline PMI has signalled expansion for 11 successive months. The faster improvement in overall operating conditions was underpinned by stronger expansions of production, new orders and further job creation.

Among the largest industrial regions covered by the survey, the PMI for the US bounced back to reach a ten-month high, after slowing sharply to a one-year low in October. Growth meanwhile remained solid in Japan and the UK, with the PMI in each of these nations at their highest levels since July 2006 and February 2011 respectively. The modest and fragile
recovery in the euro area continued, while the China PMI also posted slightly above the 50.0 mark.

Global manufacturing output and new business both expanded at the quickest pace since February 2011. The trend in international trade also showed further signs of improvement, as the growth rate of new export orders hit a 32-month record.

A sign that current capacity was being tested by the combination of solid demand growth and lacklustre job creation was provided by a third successive increase in backlogs of work. Outstanding business rose at the quickest pace since March 2011.

Companies reported some success in passing on higher input costs to their clients, as average factory gate prices increased for the fourth month in a row.

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Surge in Public Construction Spending Offsets Private Pullback

October’s U.S. construction data offered a surprise for era of penny-pinching governments: A surge in public spending more than offset a decline in private building.

Spending on construction increased at a seasonally adjusted annual rate of 0.8% in October from the month before, beating the 0.4% gain forecast by economists.

The strength came from an unexpected source. State and local governments, which fund the majority of public construction, boosted spending at 3.2% pace.

The federal government boosted outlays by 10.9% in October, the largest monthly gain since January 2011. The October increase, the first month of the new fiscal year, more than reversed declines the prior two months. Federal construction spending had been weak most of the year due to across-the-board cuts put in place in March.

Meanwhile, private construction slipped in October. Private home building declined 0.6%, the third decrease in the last four months. Spending on communication, power infrastructure and recreation also fell during the month. (…) (Chart from Haver Analytics)

Factory Owners Wary of Bangladesh Pay Rise

Millions of Bangladeshi garment workers—key players in a supply chain that produces inexpensive clothing for Western retailers—got a pay raise over the weekend, as a new government-mandated minimum wage of $67 a month kicked in.

That puts Bangladesh into roughly the same league as other low-cost apparel exporters such as India, Sri Lanka and Cambodia. But factory owners here said the increase risks making the industry, a mainstay of the impoverished country’s economy, less competitive. (…)

For years, extremely low wages helped Bangladeshi apparel makers win contracts by offsetting other weaknesses that plague the industry—from inefficient factories to poor shipping infrastructure and frequent political upheaval that disrupts production.

An appreciating local currency is also adding to the challenges facing Bangladeshi exporters. The Bangladeshi taka is now trading at around 77 to the dollar, considerably stronger than January’s rate of about 84 to the dollar.

That has the effect of making Bangladeshi products more expensive overseas, at the same time that some of the country’s garment-making rivals benefitted from falling currencies. The rupee in neighboring India, for instance, is down about 12% from where it started the year, giving exporters there a boost. (…)

Factory owners said the wage increase means they will need to charge more. “At an average, we’re looking at a 20-30 cents rise on every product and that’s a surprise leap for any brand or any producer,” said Mohammadi’s Ms. Huq. (…)

A recent World Bank study found that the unit cost of producing a basic polo shirt in Bangladesh is approximately $3.46 per shirt, excluding margins and the cost of transportation to port, compared with a cost of $3.93 per shirt in China. But Bangladeshi workers produce 13-27 polo shirts per person per day, lower than the 18-35 pieces per person per day in China, the study found. (…)

European banks: más capital
Periphery banks looking better, but crisis is far from over

(…) This is typical of how banks are getting to their Basel III numbers – small disposals, exits from a few capital-intensive business lines and other changes to the asset side of the balance sheet.

But capital-raising on a different scale looms, spurred on by the European Central Bank’s Asset Quality Review next year, a new regulatory focus on the leverage ratio (capital as a proportion of total assets), and the growing tide of conduct fines. PwC estimates that Europe’s banks have a shortfall of €280bn and that €180bn of that will have to come from new equity. That is well over the new equity that the sector has raised in any year since 2008. Berenberg puts the capital shortfall at €350bn-€400bn.

So the stage is set for a tricky sales pitch to investors. Return on equity at most European banks is poor, barely scraping into double digits despite promises from some that they can make it into the mid teens. Adding more equity will not help. Offsetting that is a fall in the cost of equity – PwC says that for 16 US and European banks it has fallen from 11.5 per cent in 2011 to 9.8 per cent now. Banks might beat their cost of equity after all, but not by much. So the investment case might centre on dividends. But a sector with so much uncertainty about the amount of capital it needs is in a weak position to be making generous dividend promises.

Just kidding This could rock markets in 2014.

SENTIMENT WATCH

Has the Contrarian Investors’ Day Come?

One by one, the bears have fallen.

(…) And now there are precious few leading investors who admit to taking bearish positions on U.S. equities. Indeed, various surveys show that among investment advisers and individual investors the ratio of bears to bulls has rarely, if ever been as low as it is now.

Whisper it quietly, but this is a classic signal for contrarian investors.

The latest high profile bear to capitulate is Hugh Hendry, at the hedge fund Eclectica Asset Management. Although relatively small–Eclectica had $1.3 billion under management at the start of the year–Mr. Hendry has had a high profile for much of the past decade, having been a prominent bear in the run up to the 2007 crash.

But having taken pain from being on the wrong side of a soaring market during the past couple of years, he said recently that he’d thrown in the towel. He hates the market, but is now positioned for it to go up further.

Jeremy Grantham of the giant fund GMO and another prominent bear recently figured the U.S. market could advance another 30%, despite being some 50% overvalued. John Hussman, of Hussman funds and another bear, also figures there are risks of a further market “blowoff”–i.e. a continuation of the recent upward trend. As does Bob Janjuah at Nomura.

None of the high profile bears has actually come out and said that they believe in a bull case, that markets are cheap and need to be bought at these levels. By and large they all expect a correction and for deep market underperformance. But they’ve mostly pared back their bearish positions. But after the U.S. equity market tacked on another 30% this year, having already doubled from 2009 lows by last year, there’s not a lot more pain these investors can take.

As John Maynard Keynes is reputed to have said: “The market can remain irrational longer than you can stay solvent.”

Even if bears haven’t entirely disappeared, they seem to be in deep hibernation. (…)

The visuals, courtesy of Short Side of Long:

Based on volume trends, equities are rising not really because people are buying but rather because they are not selling, frozen in their tracks. Disappointed smile

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Meanwhile:

Boy Girl U.S. 15-Year-Olds Slip in Rankings Crying face

U.S. 15-year-olds made no progress on recent international achievement exams and fell further in the rankings, reviving a debate about America’s ability to compete in a global economy.

The results from the 2012 Program for International Student Assessment (PISA), which are being released on Tuesday, show that teenagers in the U.S. slipped from 25th to 31st in math since 2009; from 20th to 24th in science; and from 11th to 21st in reading, according to the National Center for Education Statistics, which gathers and analyzes the data in the U.S. (…)

U.S. scores have been basically flat since the exams were first given in the early 2000s. They hover at the average for countries in the OECD except in math, where American students are behind the curve. Meanwhile, some areas—Poland and Ireland, for example—improved and moved ahead of the U.S., while the Chinese city of Shanghai, Singapore and Japan posted significantly higher scores. (…)

And this chart, courtesy of Grant Williams (Things that Make you Go Hmmm…)

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Hmmm…

Call me  HELP!

I have accidentally totally removed my Dec. 2nd New$ & View$ post and it seems that the only way to recover it would be if anybody has it opened in a browser and copied it in Word or as pdf and email it to me.  Or if anybody printed it, it could be scanned and emailed at fidanza@gmail.com.

 

NEW$ & VIEW$ (22 NOVEMBER 2013)

Philly Fed Weaker Than Expected

(…)  the Philly Fed Manufacturing report for November came in at a level of 6.5, which was down from last month’s reading of 19.8 and weaker than consensus expectations for a level of 11.9.  (…) every component declined in this month’s report. 

New orders remained high enough……but unfilled orders turned negative……and inventories jumped……and the workweek collapsed…

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through November. The ISM and total Fed surveys are through October. (CalculatedRisk)

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To conclude, Confused smile.

Brent Hits One-Month High; Iran in Focus

Brent crude for January delivery was up 28 cents at $110.37 a barrel on ICE Futures Europe. U.S. crude-oil futures were down 32 cents at $95.12 a barrel on the New York Mercantile Exchange.

Iran remained a major focus of attention. Negotiations continue Friday between the Islamic republic and six states that have the power to revoke sanctions on it related to its enrichment of uranium.

If Iran’s crude flows back into the market next year there could be negative price repercussions for the benchmark, Brent. But JBC Energy Markets noted that not every country stopped importing Iranian crude over the past 18 months.

China was among those who continued but it imported in much less last month.

“Chinese imports of Iranian crude were cut quite drastically in October – falling by 47% month-on-month,” they wrote in a note to clients.

The import reduction could be seen as a move to secure more favorable terms for next year’s prices, “something we have seen in previous years,” said JBC. (…)

Target Shoppers Put Less in Their Carts

The retailer said shoppers put fewer items in their shopping cart for the first time in at least six quarters.

(…) Target expects sales at stores open at least a year to be flat for the current quarter. This comes after it said it lost customers for the fourth straight quarter, ringing up 1.3% fewer transactions in its latest quarter. Shoppers spent more per transaction as they selected higher priced items like electronics, but they put fewer items in their shopping cart for the first time in four years, a sign that they are financially constrained.

Some Target customers say they are reluctant to visit for fear they will be tempted to spend too much, according to Kathee Tesija, executive vice president of merchandising, a phenomenon that Target first saw pop up during the recent recession.

Wal-Mart earlier this month cut its full-year profit forecast for a second time this year, predicting flat sales. Best Buy said this week its margins in the fourth quarter would take a hit because it will match discounts.

U.S. Wholesale Prices Fall 0.2%

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September.

The producer-price index, which measures how much companies pay for everything from food to computers, declined 0.2% last month from September, the Labor Department said Thursday. That was largely due to falling energy costs. Core prices, which exclude the volatile food and energy components, rose 0.2%, in line with the soft readings in recent months.

ECB’s Praet warns of deflationary pressures in euro zone

(…) Praet, who sits on the ECB’s six-strong Executive Board, said the financial crisis had saddled the euro zone with a debt burden unique in Europe’s post-war history because it has created a more deflationary environment.

“This is a very different context for the correction of expectations (about income), which is more of a debt overhang,” he told a conference at the Bank of France.

“It has more signs of a balance-sheet recession, which is a priori more of a deflationary environment than what we had in the 1960s,” added Praet, who is in charge of the ECB’s economics portfolio. (…)

 German Business Confidence Increases as Recovery on Track

German business confidence surged to the highest level in more than 1 1/2 years, signaling that the recovery in Europe’s largest economy remains on track even after growth slowed in the third quarter.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, increased to 109.3 in November from 107.4 in October. That’s the highest since April last year and exceeds all 43 economist forecasts in a Bloomberg News survey. The median was for an increase to 107.7.

Business hopes up for global economy
FT/Economist barometer shows increased optimism among executives

Global business leaders are increasingly optimistic that economic conditions will improve over the coming months, according to the FT/Economist Global Business Barometer.

In the latest results, 41 per cent of the executives surveyed said they thought the global economy would get “better” or “much better” over the next six months, with 45 per cent saying they expected it to remain the same.

This is a big jump from three months earlier, when only 27 per cent expected the global economy to improve, and 48 per cent expected it to say the same.

However, the results should be read with a degree of caution, as this quarterly edition of the survey gave the respondents additional positive options (“much better” and “better”) rather than simply the “better” of previous surveys.

Out of more than 1,800 business people polled, 53 per cent said their companies were looking to expand significantly in two to five countries over the next six months. (…)

TIME TO BE SENTIMENTAL?

Yesterday, I posted on Barclays’ analysis

that the reading on “bearishness” has a better contrarian relationship with subsequent forward returns. Currently only 16% of respondents describe themselves as “bears”. Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion. Given that the period since 2009 has been a strong bull market, sentiment extremes have provided a good “call” on the market.

Well, the highly volatile AAII survey now shows 29.5% bearishness while bullish sentiment declined sharply. Go figure!

 

NEW$ & VIEW$ (21 NOVEMBER 2013)

Sales Brighten Holiday Mood

The government’s main gauge of retail sales, encompassing spending on everything from cars to drinks at bars, rose a healthy 0.4% from September, despite the partial government shutdown that sent consumer confidence tumbling early in the month. Sales climbed in most categories, with gains in big-ticket items as well as daily purchases such as groceries. (…)

Wednesday’s report showed some clear pockets of strength: Sales of cars rose at the fastest pace since the early summer. Sales in electronics and appliance stores also rose robustly. Stores selling sporting goods, books, and music items saw business grow at the fastest pace in more than a year.

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High five Let’s not get carried away. Car sales have been slowing sequentially lately and are near their past cyclical peaks if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis) (next 2 charts from CalculatedRisk):

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Meanwhile, core sales ex-cars remain on the weak side as this Doug Short chart shows:

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Consumer Prices Ease Amid Lower Fuel Costs

The consumer-price index rose only 1% in October from the same month last year, the smallest 12-month increase since October 2009, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, rose 1.7% from a year ago, similar to the modest gains seen in recent months. The Fed targets an annual inflation rate of 2%.

Prices fell 0.1% last month from September, the first drop since April. Core prices increased 0.1%.

Last month, the overall decrease reflected gasoline prices, which were down 2.9% for the month. (Chart from Haver Analytics)

High five Let’s not get carried away. Core inflation remains surprisingly resilient given the weakness of the economy and the large output gap. On a YoY basis, core CPI is stuck within 1.6% and 1.8% and the Cleveland Fed median CPI just won’t slip below 2.0%. Looking at monthly trends, core CPI has slowed to 0.1% over the last 3 months from 0.2% in the previous 3 months. Yet, the median CPI only slowed to 0.1% MoM last month after a long string of 0.2% monthly gains. The inflation jury is still out.

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Pointing up No Renaissance for U.S. Factory Workers as Pay Stagnates

(…) The average hourly wage in U.S. manufacturing was $24.56 in October, 1.9 percent more than the $24.10 for all wage earners. In May 2009, the premium for factory jobs was 3.9 percent. Weighing on wages are two-tier compensation systems under which employees starting out earn less than their more experienced peers did, and factory-job growth in the South.

Since the U.S. recession ended in June 2009, for example, Tennessee has added more than 18,000 manufacturing jobs, while New Jersey lost 17,000. Factory workers in Tennessee earned an average of $54,758 annually in 2012, almost 10 percent less than national levels and trailing the $76,038 of their New Jersey counterparts, according to the Bureau of Labor Statistics. (…)

Some of the states where factory jobs are growing the fastest are among the least unionized. In 2012, 4.6 percent of South Carolina workers were represented by unions, as did 6.8 percent of Texans, according to the U.S. Bureau of Labor Statistics. New York, the most-unionized, was at 24.9 percent.

Assembly workers at Boeing’s nonunion plant in North Charleston, South Carolina, earn an average of $17 an hour, compared with $27.65 for the more-experienced Machinists-represented workforce at the company’s wide-body jet plant in Everett, Washington, said Bryan Corliss, a union spokesman. (…)

In Michigan, which leads the U.S. with 119,200 factory jobs added since June 2009, automakers are paying lower wage rates to new hires under the United Auto Workers’ 2007 contracts. New UAW workers were originally paidas little as $14.78 when the contract was ratified in 2011, which is about half the $28 an hour for legacy workers. Wages for some of those lower-paid employees have since risen to about $19 an hour and the legacy rate hasn’t increased. (…)

General Electric Co. says it has added about 2,500 production jobs since 2010 at its home-appliance plant in Louisville, Kentucky. Under an accord with the union local, new hires make $14 an hour assembling refrigerators and washing machines, compared with a starting wage of about $22 for those who began before 2005. While CEO Jeffrey Immelt has said GE could have sent work on new products to China, it instead invested $1 billion in its appliance business in the U.S. after the agreement was reached.

The company is also moving work to lower-wage states. In Fort Edward, New York, GE plans to dismiss about 175 employees earning an average of $29.03 an hour and shift production of electrical capacitors to Clearwater, Florida. Workers there can earn about $12 an hour, according to the United Electrical, Radio and Machine Workers of America, which represents the New York employees. (…)

Existing Home Sales Fall 3.2%

Sales of previously owned homes slipped for the second consecutive month in October, the latest sign that increased interest rates are cooling the housing recovery.

Existing-home sales declined 3.2% in October to a seasonally adjusted annual rate of 5.12 million, the National Association of Realtors said Wednesday. The results marked the slowest sales pace since June.

The federal government shutdown last month pushed some transactions into November, Realtors economist Lawrence Yun said. The Realtors group reported that 13% of closings in October were delayed either because buyers couldn’t obtain a government-backed loan or the Internal Revenue Service couldn’t verify income.

The number of homes for sale declined 1.8% from a month earlier to 2.13 million at the end of October. The inventory level represents a five-month supply at the current sales pace. Economists consider a six-month supply a healthy level.

Americans Recover Home Equity at Record Pace

The number of Americans who owe more on their mortgages than their homes are worth fell at the fastest pace on record in the third quarter as prices rose, a sign supply shortages may ease as more owners are able to sell.

The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter, according to a report today from Seattle-based Zillow Inc. The share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place. (…)

Fingers crossed“The pent-up demand from people who now have enough equity to sell their homes will help next year,” said Lawler, president of Lawler Economic & Housing Consulting LLC in Leesburg, Virginia. “We’ll see the effect during the spring selling season. Not a lot of people put their homes on the market during the holidays.” (…)

About 10.8 million homeowners were underwater on their mortgages in the third quarter, down from 12.2 million in the second quarter, Zillow said. About 20 million people had negative equity or less than 20 percent equity, down from 21.5 million in the prior three months. Las Vegas, Atlanta, and Orlando, Florida, led major metropolitan areas with the highest rates of borrowers with less than 20 percent equity. (…)

DRIVING BLIND, TOWARDS THE WALL

Fed Casts About for Bond-Buy Endgame

Federal Reserve officials, mindful of a still-fragile economy, are laboring to devise a strategy to avoid another round of market turmoil when they pull back on one of their signature easy-money programs.

Minutes of the Oct. 29-30 policy meeting, released Wednesday, showed officials continued to look toward ending the bond-buying program “in coming months.” But they spent hours game-planning how to handle unexpected developments and tailoring a message to the public to soften the impact of the program’s end. (…)

Fed officials are hoping their policies will play out like this: The economy will improve enough in the months ahead to justify pulling back on the program, which has been in place since last year and has boosted the central bank’s bondholdings to more than $3.5 trillion. After the program ends, they will continue to hold short-term interest rates near zero as the unemployment rate—which was 7.3% last month—slowly declines over the next few years. (…)

One scenario getting increased attention at the Fed: What if the job market doesn’t improve according to plan and the bond program becomes ineffective for addressing the economy’s woes? The minutes showed their solution might be to replace the program with some other form of monetary stimulus. That could include a stronger commitment to keep short-term interest rates low far into the future, a communications strategy known as “forward guidance.”

Top Fed officials have been signaling in recent weeks that their emphasis is shifting away from the controversial bond-buying program and toward these verbal commitments to keep rates down. (…)

Punch The reality is that, do what you want, say what you want, market rates are market rates.

Millennials Wary of Borrowing, Struggling With Debt Management

Young people are becoming warier of borrowing — but they’re also getting worse at paying bills.

(…) Total debt among young adults actually dropped in the last decade to the lowest level in 15 years, separate government data show, with fewer young adults carrying credit-card balances and one in five not having any debt at all.

And yet, Millennials appear to be running into more trouble when paying their bills — whether on credit cards, auto loans, or student loans.

Millennial borrowers are late on debt payments roughly as much as older Gen-X borrowers, Experian’s data show. Millennials also use a high share of their potential borrowing capacity on cards, just like Gen-Xers, meaning they’re as likely to max out on cards.

Since Millennials tend to have fewer assets than Gen-Xers and other generations, as well as shorter credit histories, they end up with the worst average credit score — 628 — of any demographic group.

Pointing upMillennials have “the worst credit habits,” and are “struggling the most with debt management,” Experian said in a report.

(…) A study by the Federal Reserve Bank of New York recently suggested high student-loan balances may have encouraged young adults to reduce their credit-card balances between 2005 and 2012.

Other young adults may be less willing to take risksin a weak economy, whether by splurging on furniture for a new apartment, moving geographically or starting businesses — things that often require debt.

What Experian’s data suggest is that the Millennials who are in fact borrowing are struggling to do so responsibly, at least partly because of the nation’s 7.3% jobless rate, sub-3% growth and $1 trillion student-loan tab — all things that are weighing disproportionately on young people, especially those without college degrees.

As the Journal reported last week, the share of student-loan balances that were 90 or more days overdue in the third quarter rose to 11.8% from 10.9%, even as late payments on other debts dropped. While the incidence of late payments on Millennials’ overall debts isn’t alarming yet, it’s big enough to drag down their credit scores, Experian said. (…)

Thumbs up Thumbs down TIME TO BE SENTIMENTAL?

In December 2010, I wrote INVESTOR SENTIMENT SURVEYS: DON’T BE TOO SENTIMENTAL!, warning people not to give much weight to bullish sentiment readings:

I have analyzed 30 years of data plotting the II bull-bear % difference against the DJ Total Stock Market Index of 5000 US stocks. Extreme readings are above +/-25%. However, I have easily identified 11 periods when the “contrary” indicator rose to cross the extreme +30% level which were followed by strongly rising markets. Obviously not useful on that side of the ledger. (…)

Overall, never mind the extreme positives, they are essentially useless. The extreme negatives (bullish) are few but generally very good although some require patience and staying power.

My analysis was based on relative bullishness, bulls minus bears like in the chart below, but Barclays here takes another angle looking at the absolute level of bears:

According to the US Investors’ Intelligence Survey there are currently 40% more bulls than bears. At the end of August, the same survey indicated just 13.4% more bulls that bears. Global equities have rallied by 9% since then. Other measures also confirm this bullish hue, but none have displayed anything close to the relationship that the Investors’ Intelligence Survey has had recently with forward returns.

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Here’s the more interesting part:

Closer examination reveals that the reading on “bearishness” has a better contrarian relationship with subsequent forward returns. Currently only 16% of respondents describe themselves as “bears”. Since the beginning of 2009, when there have been less than 18% bears, the market has been lower six months later on each occasion. Given that the period since 2009 has been a strong bull market, sentiment extremes have provided a good “call” on the market.

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GOOD READ: ASSESSING THE PARTY’S DECISIONS

CLSA’s Andy Rothman is one of the most astute analyst living in China:

China’s leaders have issued strong statements in support of private enterprise and the rights of migrant workers and farmers which, if implemented effectively, will facilitate continued economic growth and social stability.  By announcing relaxation of the one-child policy and the abolishment of ‘re-education through labor’, the Party acknowledged it needs to curb human rights abuses and re-establish trust.  The creation of new groups to coordinate economic and national security policy signal that Xi Jinping has quickly consolidated his power as Party chief, raising the odds that the decisions announced Friday will be implemented quickly.

The brief, initial communique issued when the Party Plenum closed last Tuesday was dense, obtuse and packed with outdated political slogans.  But the more detailed ‘decision document’ published Friday was, for a Communist Party report, unusually clear, particularly in its support for private enterprise and markets.

Strong support for entrepreneurs

The most important signal from the Party leadership was strong support for the private sector and markets. Private firms already account for 80% of urban employment and 90% of new job creation, as well as two-thirds of investment in China, so improving the operating environment for entrepreneurs is key to our relatively positive outlook for the country’s economic future.  Friday’s document did not disappoint in this respect.

Although the Party still cannot rise to the challenge of actually using the Chinese characters for ‘private’ sector’, continuing to refer to it as ‘non-public’, they did pledge to ‘unwaveringly encourage, support and guide the development of the non-public economy’, and declared that ‘property rights in the non-public economy may equally [with the state sector] not be violated.’

In Friday’s document, the Party said it would ‘reduce central government management over micro-level matters to the broadest extent’, called for an end to ‘excessive government intervention’, and said that ‘resource allocation [should be] based on market principles, market prices and market competition.’  The world’s largest Communist Party declared that ‘property rights are the core of ownership systems’, and called for ‘fair competition, free consumer choice, autonomous consumption, [and] free circulation of products and production factors.’  The document also says China will ‘accelerate pricing reform of natural resources’ to ‘completely reflect market supply and demand’, as well as the costs of environmental damage.

The Party also pledged to reduce red tape and administrative hurdles to doing business.  Zhang Mao, the head of the State Administration for Industry and Commerce, explained that ‘registering a business will become much more convenient in the near future.’  And Miao Wei, minister for industry and information technology, announced that implementation of the plenum decision would lead his agency to eliminate at least 30% of administrative approval procedures by the end of 2015.

Friday’s document called for better protection of intellectual property rights, as well as the ‘lawful rights and interests of investors, especially small and mid-sized investors.’  The Party said it would create a ‘marketized withdrawal system where the fittest survive’, and a better bankruptcy process.

Party leaders did say that public ownership would remain ‘dominant’, but they clearly didn’t mean it.  Repeating this language, especially in light of the fact that private firms are already dominant, is, in our view, just a rhetorical bone thrown to officials whose political or financial fortunes are tied to state-owned enterprises. (…)

 

The Party did, however, raise the share of SOE income that has to be paid into the national security fund to 30% by 2020, up from 10-20% now.

In what may be a warning that serious SOE reform is likely down the road, the Party did call for the elimination of ‘all sorts of sector monopolies, and an end to ‘preferential policies . . . local protection . . . monopolies and unfair competition.’

Hukou reform coming

If the most important message from the plenum is renewed support for the private sector, a close second is the decision to reform the hukou, or household registration system.  This is important because there are more than 230m urban residents without an urban hukou, accounting for one-third of the entire urban population.

According to the official news agency, Xinhua, ‘Friday’s document promised to gradually allow eligible rural migrants to become official city residents, accelerate reform in the hukou system to fully remove restrictions in towns and small cities, gradually ease restriction in mid-sized cities, setting reasonable conditions for settling in big cities while strictly controlling the population in megacities.’ (…)

Hukou reform will be expensive, but the Party has no choice but to provide migrant workers and their families with equal access to education, health care and other urban social services.  In cases where local governments cannot afford these services, the central government will transfer the necessary funds.  Hukou reform will be rolled out gradually, and in our view:

Will reduce the risk of social instability from the 234m people living in cities who face de jure discrimination on a daily basis, particularly in eligibility for social services.

May increase the supply of migrant workers in cities at a time when the overall labour force is shrinking.

Should improve consumption by strengthening the social safety net for migrants, which will increase transfer payments and reduce precautionary savings.

Should result in higher productivity in manufacturing and construction by reducing worker turnover, and by creating a better-educated workforce. (…)

The one-child policy will be relaxed by ‘implementation of a policy where it is permitted to have two children if either a husband or a wife is an only child,’ a change from the current rules which require both the husband and wife to be only-children in order to qualify to have a second child.

Wang Peian, the deputy director of the national health and family planning committee, said that the Party will allow each province to decide when to switch to the new policy, but Friday’s announcement, in our view, spells the rapid end of the one-child policy.

Wang Feng, one of China’s leading demographers, told us over the weekend that Friday’s announcement was a ‘decisive turning point.’  But he also reminded us that in a May CLSA U report, he explained why ending the one-child policy is likely to result in a temporary uptick in the number of births, but is unlikely to change the longer-term trend towards a lower fertility rate.  The current fertility rate of 1.5 could drop even lower in the future, closer to Japan and South Korea’s 1.3, as the pressures of modern life lead Chinese couples to have smaller families. (…)

Xi consolidates power

The plenum decided to create two new groups within the government, a National Security Council and the Leading Small Group for the Comprehensive Deepening of Reform.  This signals that Party chief Xi Jinping has quickly and effectively consolidated his political power, far beyond, apparently, what his predecessor Hu Jintao was able to achieve.  This bodes well for Xi’s ability to implement the reform decisions announced Friday. (…)

 

NEW$ & VIEW$ (12 NOVEMBER 2013)

THE AMERICAN PROBLEM

Job Gap Widens in Uneven Recovery

America’s jobs recovery is proceeding on two separate tracks—a pattern that is persisting far longer than after past economic rebounds and lately has been growing worse.

(…) Youth unemployment, for example, nearly always improves after recessions more slowly than that of prime-age workers, those between 25 and 54. Following the 2001 recession, it took six months for the gap between the youth and prime-age unemployment rates to return to its long-run average. After the early 1990s recession, it took 30 months. This time, it has been 52 months, and the gap has hardly narrowed.

For those with decent jobs, wages are rising, albeit slowly, and job security is the strongest it has been since before the recession. Many families have paid down debts and are seeing the value of assets, from homes to stocks, rebound strongly.

But many others—the young, the less educated and particularly the unemployed—are experiencing hardly any recovery at all. Hiring remains weak, and the jobs that are available are disproportionately low-paying and often part-time. Wage growth is nearly nonexistent, in part because with so many people still looking for jobs, workers have little bargaining power.

Wage growth has moved on two tracks

The two-track nature of the recovery helps explain why the four-year-old upturn still doesn’t feel like one to many Americans. Higher earners are spending on cars, electronics and luxury items, boosting profits for the companies that make and sell such goods. But much of the rest of the economy remains stuck: Companies won’t hire or raise pay without more demand, and consumers can’t spend more without faster hiring and fatter paychecks. (…)

‘Rural America’ slow to recover
Net job growth near zero, say data

Employment growth in the US’s sparsely populated heartland has stagnated since the economy began to recover in 2010, according to official data that underscore the weakening economic power of rural America.

The data, from this year’s US Department of Agriculture’s Rural America at a Glance report, show that while employment in both urban and rural areas fell by 5 per cent during the 2007-09 recession and recovered by a similar level in 2010, their prospects have since diverged. Since the start of 2011, net job growth in non-metropolitan areas has been near zero, while it has averaged 1.4 per cent annually in metropolitan areas.

The report notes that rural job growth stagnation has coincided with the first-ever recorded net population decline in those regions, driven by a drop in the number of new migrants moving in. This means the unemployment rate in rural regions has not risen, since fewer people are seeking work.

Population loss has meant fewer jobs as demand for goods and services falls, which in turn encourages those with higher skills to move away. (…)

In summary (chart from Doug Short):

Click to View
 

Fingers crossed About 1-in-4 U.S. Pumps Selling Gas Below $3

Americans are seeing the lowest pump prices for gasoline since February 2011, AAA says.

Gas prices dropped 6.6 cent per gallon the past week to $3.186, which is down 25.3 cents from a year earlier.

That’s a 7.4% drop YoY! Right before Christmas. Chain store sales rose 1.2% last week, boosting the 4-week moving average to +2.1% YoY.

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Expiring US jobless benefits fuel concern
The scheme launched in 2008 is due to run out

(…) Unless Congress takes action to renew it again, about 1.3m long-term unemployed would see their benefits halted at the end of the year, and a further 850,000 would be denied access to the benefits in the first three months of next year, according to a report from the National Employment Law Project, an advocacy group. (…)

Federal assistance for the long-term unemployed was launched in 2008, during the last recession, and renewed until the end of this year. Michael Feroli, a senior economist at JPMorgan Chase, has estimated that the expiry of the federal jobless benefits would trim about 0.4 percentage points off annualised gross domestic product growth in the first quarter of next year. This is roughly equivalent to estimates of the hit to US output produced by last month’s US government shutdown. (…)

Sad smile  Small Businesses Optimism Takes a Tumble

Fall arrived literally this month, as small business optimism dropped from 93.9 to 91.6, largely due to a precipitous decline in hiring plans and expectations for future smal -business conditions. Of the ten Index components, seven turned negative, falling a total of 27 percentage points. The stalemate in early October over funding the government as well as the failed “launch” of the Obamacare website left 68% of owners feeling that the current period is a bad time to expand; 37% of those owners identified the political climate in Washington as the culprit—a record high level.

Small business optimism report data through October 2013

 

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Fingers crossed OECD: Global Growth to Pick Up

Economic growth is set to pick up in the euro zone, China and the U.K., while remaining sluggish in India, Brazil and Russia.

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Punch  LE PROBLÈME FRANÇAIS (from Reuters’ AlphaNow):

COTW_1111

Rating the Euro Zone’s Progress

Many euro-zone indicators have taken on a more promising outlook in recent months. Credit ratings firms are beginning to reflect that.

The direction of travel can be more important than where on the journey you are. That’s particularly true of the euro zone and the credit ratings assigned to its member states. November’s actions—a downgrade for France and improvements in outlooks for Spain and Portugal—send some key signals. The euro zone is undergoing adjustment, although not all its members are yet on the right track.

France’s downgrade to double-A by Standard & Poor’s might look like the most important action, but isn’t. French bond yields hardly reacted; strategists at Royal Bank of Scotland told investors to “ignore” the cut. That is quite right; France faces no immediate threat that should cause bond yields to spike higher.

Still, the rationale is cause for long-term worry: France is falling behind. “French exporters appear to continue to be losing market share to those European competitors whose governments have more effectively loosened the structural rigidities in their economies,” S&P warned. The European Commission last week forecast that net exports would contribute just 0.1 percentage point to French growth of 0.9% in 2014 and be a slight drag on growth in 2015. France’s government still hasn’t found the right policy direction to regain competitiveness.

More significant was Fitch’s decision to raise Spain’s rating outlook to stable from negative, the first of the major ratings firms to do so. Spain won plaudits for its fiscal and structural reforms, and the move to surplus in its current account. That is an important turnaround: Spain was on the front line of the crisis just 18 months ago.

Most interesting of all was Moody‘s move to a stable outlook from negative on Portugal. Moody’s is becoming rapidly less bearish on the euro zone. At the start of September, it had just two euro-zone sovereigns with a stable outlook; now there are six. The big move for Moody’s would be to shift Spain back to a stable outlook. The decision on Portugal provided a glint of hope, with Moody’s highlighting the benefit of a recovery in Spain, its key trading partner.

Ratings are often dismissed as backward-looking, and downgrades or upgrades are frequently priced in long before they actually happen. But outlooks can provide new information to the market. That is where investors should look for signposts.

IEA warns of future oil supply crunch
Concerns rise as Gulf states delay investment due to US shale revolution

(…) Mr Birol was speaking as the Paris-based IEA unveiled its annual outlook for the energy market. Its 2012 forecast that the US would be a net oil exporter by 2030 helped bring shale oil production to global attention. But this year the organisation downplayed the significance of US production growth, with Mr Birol calling shale “a surge, rather than revolution”.

The IEA still expects US oil output to reduce the world’s dependence on Middle Eastern oil in the near term: it now forecasts that the US will displace Saudi Arabia as the world’s biggest oil producer in 2015, two years earlier than it had estimated just 12 months ago.

But it expects US light tight oil production, which includes shale, to peak in 2020 and decline thereafter, even as global demand continues to grow to 101m barrels a day by 2035, from around 90m b/d today.

Outside the US, light tight oil production is only expected to contribute 1.5m b/d of supplies by 2035, as countries such as Russia and China make limited progress towards unlocking their shale reserves.

That will leave the market once more dependent on crude from the Opec oil cartel, of which Gulf producers are key members. (…)

But the IEA expects domestic demand in the Middle East to hit 10m b/d by 2035 – equal to China’s current consumption – thanks to subsidies for petrol and electricity, even as foreign demand for Gulf oil increases.

Mr Birol said the Gulf states needed to invest significantly now to meet rising demand after 2020, because projects take several years to begin producing. But he said he was concerned Gulf countries were misinterpreting the impact of rising US shale production. (…)

Gulf producers have taken a cautious approach to investment in recent years, in the face of fast growing US output. Saudi Arabia does not plan to increase its oil production capacity in the next 30 years, as new sources of supply, from US shale to Canadian oil sands, fill the demand gap.

The UAE is reported to have pushed back its target for raising production capacity to 3.5m b/d to 2020 from 2017, while Kuwait is struggling to overcome rapid decline rates from its existing fields. (…)

SENTIMENT WATCH

Charles Schwab’s Liz Ann Sonders posted this good Ned Davis chart, although her bullishness dictated her to write that sentiment was “a bit” stretched.

Sentiment does look a bit stretched in the short-term, with both the Ned Davis Crowd Sentiment Poll and SentimenTrader’s Smart Money/Dumb Money Confidence Poll showing elevated (extreme) levels of optimism. Investor sentiment shoots higher

Since 1995, being in such a “bit stretched” territory has not been profitable, on average:Screen Shot 2013-11-07 at 4.21.29 PM

This next chart, posted by ZeroHedge, is nothing to help sentiment get less stretched.

Note however that the latest tally from S&P reveals that estimates for Q3 have turned up to $27.02 ($26.77 last week) while the forecast for Q4 is now $28.23 ($28.38 last week).

 

NEW$ & VIEW$ (4 NOVEMBER 2013)

DRIVING BLIND

We had two important U.S. stats last week: the manufacturing PMIs and car sales. Draw  your own conclusions:

The PMIs:

The Institute for Supply Management’s index of industrial activity edged up from 56.2 in September to 56.4 in October, reaching its highest level since April 2011.

The components of the ISM index were somewhat mixed. New orders and new export orders grew faster, while production and employment grew at slower paces compared with the previous month. Prices also increased at a slower pace. But economists still cheered.

(Bespoke Investment)

High five  Wait, wait: Markit’s U.S. PMI report

indicated “only modest improvement in business conditions”, “output growth weakest for over four years“, and “new orders increasing at the slowest pace since April.”

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Car sales:

The seasonally adjusted annual sales pace for October was 15.2 million vehicles, up from 14.4 million a year ago but down from August and September’s pace, said researcher Autodata Corp.

High five  In reality, car sales are not showing any momentum (next 2 charts from CalculatedRisk):

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High five  A longer term chart suggests that car sales are at a cyclical peak if we consider the early 2000s sales levels abnormally high (internet and housing bubbles, mortgage refis):

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This RBC Capital chart shows that even boosted incentives fail to propel sales lately. Can incentives get much higher?

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So, taper or no taper?

HELP COMING?

Oil-Market Bears Are Out in Force The oil market bears are out in force today.

(…) According to Morgan Stanley’s analysis, the structure of the Brent market “is at its weakest point for this time of year since 2010,” and they point out that of the things currently keeping oil prices high—a weaker dollar, the aforementioned Middle Eastern instability and the wide difference between the U.S. and North Sea benchmark prices—all appear more likely to improve than get worse.

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Fingers crossed  Gas prices have dropped 12% since July. They are 7% lower than at this time last year and in line with prices last Christmas. Welcome additional pocket money at this crucial time…image

…because income growth is very very slow.

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THAT’S NOT HELPING
 
US public investment at lowest since 1947
Republicans stymie Obama push for more spending

(…) Gross capital investment by the public sector has dropped to just 3.6 per cent of US output compared with a postwar average of 5 per cent, according to figures compiled by the Financial Times, as austerity bites in the world’s largest economy.

US public investment is at its lowest percentage share of GDP since post-WW2 demobilisation

Construction projects have taken the early hit as budgets come under pressure, with state and local government building fewer schools and highways

Emerging economies show diverging fortunes Brazil’s industrial production misses forecasts, fiscal deficit widens

Industrial production rose 0.7 per cent seasonally adjusted in September, government statistics agency IBGE said. The figure missed expectations for a 1.2 per cent rise, underscoring one of the myriad economic issues the country is facing.

World-Wide Factory Activity, by Country

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China manufacturers squeezed as costs rise
Wage rises and renminbi strength weigh on companies

(…) On top of the stronger Chinese currency, wages in the Pearl River Delta are climbing at double-digit rates each year as factories compete for workers in a tight labour market.

Sean Mahon, managing director of an Irish company called Brandwell that owns several accessory brands and has been coming to the Canton Fair for 20 years, says his suppliers charge 20 per cent more each year for the 3,000 products – everything from umbrellas to underwear – that he sources. (…)

China Industrial Activity Weakening

CEBM’s October survey results indicate that aggregate demand has stabilized, but remains weak. The CEBM Industrial Sales vs. Expectations Index decreased from -4.9% in September to -8.1% in October, suggesting that the industrial activity has again weakened.

Investment was sluggish, while real estate and automobile sectors outperformed. Steel sales dropped substantially relative to the past two months’ sales volume, implying that the investment rebound observed over the past several months is losing steam. Automobile and residential home sales growth exceeded expectations.

In general, external demand was stable in October, but consumption remained weak. Freight forwarding agents reported positive shipment growth due to fee adjustments and shipments being delayed from September. However, absolute shipment volume M/M in October, as well as Y/Y growth, was flat. In consumer sectors, home appliance sales outperformed other products, but, overall, consumer demand remained weak.

Looking forward into November, the forward-looking CEBM Industrial Expectations Index (SA) decreased to -7.7% in November from -7.4% in October, suggesting enterprises have weaker expectations toward next month’s sales demand.

EARNINGS WATCH

S&P updated its data as of Oct. 31 with 356 company results in. The beat rate rose to 69% from 67% the previous week. Beat rates are highest in IT (85%) and Consumer Discretionary (73%) and weakest in Consumer Staples (54%) and Utilities (59%). Factset calculates that

In aggregate, companies are reporting earnings that are 1.4% above expectations. Over the last four quarters on average, actual earnings have surpassed estimates by 3.7%. Over the past four years on average, actual earnings have surpassed estimates by 6.5%. If 1.4% is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q4 2008 (-62%).

Q3 earnings are now expected at $26.77, down from $26.94 the previous week and from $26.81 on Sept. 30. It is curious to see good beat rates but flat earnings vs expectations. That could mean that misses are more significant than beats.

At this stage of Q3 2013 earnings season, 79 companies in the index have issued EPS guidance for the fourth quarter. Of these 79 companies, 66 have issued negative EPS guidance and 13 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 84% (66 out of 79). This percentage is well above the 5-year average of 63%.

But the average of the last 3 quarters is 79.5% at the same stage, not terribly different considering the small sample.

Q4 estimates keep being tweaked downward. They are now $28.38 compared with $28.52 on Oct. 24 and $28.89 on Sept. 30. Nothing major, so far. In fact, according to Factset

the decline in the bottom-up EPS estimate recorded during the course of the first month (October) of the fourth quarter was lower than the trailing 1-year, 5-year, and 10-year averages.

Money  US bank securities portfolios back in black  Reversal of fortunes as Treasuries rally

Big US banks have seen billions of dollars of losses on their vast portfolios of securities reversed following the recent rally in the price of Treasuries and other assets.

Data released by the Federal Reserve on Friday showed unrealised gains in these portfolios had recovered to $8bn after plummeting into negative territory from June to September, when worries that the central bank might taper its bond-buying programme caused investors to sell securities including US government debt.

Profits on big banks’ securities portfolios plummeted from almost $40bn at the beginning of the year as the yield on the benchmark 10-year Treasury spiked to 3 per cent. The yield on the Treasury note has fallen back to 2.6 per cent in recent weeks, helping to push banks’ securities portfolios back into black.

The recovery will come as a relief to bank executives who had worried that the paper losses, which reached more than $10bn in early September, would translate into lower regulatory capital ratios under new Basel III proposals. (…)

The central bank revealed last week that it would include a sharp rise in interest rates when it next “stress tests” the largest US banks, suggesting it is concerned about rate risk in the financial system.

SENTIMENT WATCH

Europe Stocks Hit Five-Year High

Investors Return to IPOs in Force

Investors are stampeding into initial public offerings at the fastest clip since the financial crisis, fueling a frenzy in the shares of newly listed companies that echoes the technology-stock craze of the late 1990s.

October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion. The coming week is slated to bring a dozen more initial offerings, including Thursday’s expected $1.6 billion stock sale by Twitter Inc., the biggest Internet IPO since Facebook Inc. FB -0.91% ‘s $16 billion sale in May 2012.

The 190 U.S.-listed IPOs this year have raised $49.2 billion, more than the $45 billion raised by the 132 deals during the same period in 2012. (…)

Many of these companies aren’t profitable. But investors increasingly are willing to roll the dice, particularly on technology firms that they say have the potential to “disrupt” the industry. (…)

So far this year, 61% of companies selling U.S.-listed IPOs have lost money in the 12 months preceding their debuts, according to Jay Ritter, professor of finance at the University of Florida. That is the highest percentage since 2000, the year the Nasdaq Composite Index roared to its all-time high of 5048.62. The index closed Friday at 3922.04.

Investors this year are putting a higher value on debut companies’ revenue than at any time since the crisis. The median IPO this year has been priced at five times the past 12 months’ sales, according to Mr. Ritter. That is the highest mark since 2007, when the median ratio was more than six times.

Companies holding their IPOs in the U.S. this year have posted an average 30% gain in share price, according to Dealogic. That compares with a 23.5% advance in the S&P 500 index.

Many IPOs this year have raised funds to pay back debt to private-equity owners rather than to invest in corporate expansion, a use of funds that many observers say is more likely to lead to stronger performance. Thinking smile So far this year, 41% of U.S.-listed IPOs have been of private equity-backed firms, according to Dealogic. (…)

In 1999 and 2000, the median IPO company was valued at more than 25 times past-year sales, according to Mr. Ritter. Many had revenue of less than $50 million. This year, fewer than 40% of IPOs fall into that category.

And so far this year, 3% of the 190 U.S.-listed IPOs have doubled in their first trading day. That compares with 22% of the 536 U.S. debuts in 1999. (…)

Three charts from The Short Side of Long

  • Most bullish newsletter sentiment since 2011 market top

  • Managers are holding extreme net long exposure towards stocks

  • Retail investor cash levels are now at extreme lows

Italy’s economic woes pose existential threat to euro zone

(…) I have lived in Italy for six years and have never seen its citizens worry so much about their children, whether those children are kids, university students or young adults starting families. There is no work, or work so beneath their skill levels they can barely muster the enthusiasm to get out of bed in the morning.

Every young Italian I know is leaving the country, or wants to. The U.S., Canadian and British consulates in Rome are seeing a surge in work-visa applications from desperate Italians.

Statistics released on Thursday confirm that Italy suffers a hellish employment problem. The overall jobless rate ticked up in September to 12.5 per cent, the highest since the records began in 1977. The youth jobless rate also rose, to 40.4 per cent, approaching Greek levels.

Even as the rest of the euro zone emerges from the economic crypt, Italy alone continues to dig its grave, tragically unaware of Warren Buffett’s maxim: “The most important thing to do if you find yourself in a hole is to stop digging.”

Besides being a textbook case for relentless wealth destruction, Italy poses an existential threat to the euro zone. Forget Greece; its economy is the size of a corner store compared with Italy. Italy is a Group of Eight country. Its economy is bigger than Canada’s. It is the euro zone’s third-largest player and second-biggest manufacturer, after Germany. If Italy goes down, the euro zone is finished.

This may sound like newspaper columnist hyperbole. It is not. Only a few days ago, the eminently sober-minded Joerg Asmussen, the German economist who sits on the executive committee of the European Central Bank, said this in a speech in Milan: “The future of the euro area will not be decided in Paris or Berlin, or in Frankfurt or Brussels. It will be decided in Rome.” (…)

A recent article on the London School of Economics website by Roberto Orsi, a professor at the University of Tokyo, was refreshingly brutal in its analysis of Italy. He called it “the perfect showcase of a country which has managed to sink from a condition of prosperous industrial country just two decades ago to a condition of unchallenged economic desertification, total demographic mismanagement, rampant ‘thirdworldization,’ plummeting cultural production and complete political-constitutional chaos.”

Evidence that he is not exaggerating comes from the youth diaspora. Writing this week in The New York Times, Corriere della Sera newspaper columnist Beppe Severgnini noted that 400,000 university graduates have left Italy in the last decade.About 60,000 Italians flee Italy every year, most of them with university degrees. You can’t blame them.

Italy needs an economic revolution, pronto. What’s happening now – a slow-motion suicide – is still a suicide. (…)

 

NEW$ & VIEW$ (31 OCTOBER 2013)

Fed Opts to Stay Course For Now

Fed officials emerged from a policy meeting with their easy-money program intact and no clear signal about whether they would begin pulling it back at their December meeting or continue it into 2014.

(…) “The housing sector has slowed somewhat in recent months,” the Fed said in its statement. All in all, however, officials stuck to their view that the economy is expanding “at a moderate pace” and exhibits growing underlying strength.

Inflation Stays Tame, Supporting Fed on Easy-Money Strategy

U.S. consumer prices climbed modestly in September, underscoring weak inflation and supporting the Federal Reserve in keeping its bond-buying program intact.

The consumer-price index, which measures what Americans pay for everything from bread to dental care, rose 0.2% from August, the Labor Department said Wednesday. Core prices, which exclude volatile food and energy costs, increased 0.1%.

From a year ago, overall prices were up 1.2% while core prices were up 1.7%.

Wednesday’s report is particularly noteworthy because it’s used to calculate annual cost-of-living increase in Social Security payments for almost 58 million Americans. The Social Security Administration said Wednesday that benefits would increase 1.5% in January.

Pointing up But underlying inflation trends remain above 2.0%:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (2.1% annualized rate) in September. The 16% trimmed-mean Consumer Price Index also increased 0.2% (2.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

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Another Downbeat Payrolls Report

ADP private-sector payrolls rose a lackluster 130,000 in October following a downwardly-revised 146,000 increase in September. While firms are still hiring, there’s no denying the slowing trend. Pronounced weakness among small service-providing businesses suggest the 16-day government shutdown was a special factor this month, and that payrolls will rebound in November…unless business owners fear another shutdown in the New Year. (BMO Capital)

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Money  Rich People’s Views of the Economy Near Pre-Recession Levels

Affluent U.S. households, buoyed by a surging stock market, feel better about the economy this fall than at any time since before the recession began.

A gauge of sentiment about current economic conditions among the wealthiest 10% of Americans jumped 22 points from the spring to a fall reading of 93, a survey by the American Affluence Research Center showed.

It’s the first “neutral” reading after five years mired in “negative” territory. The last time the index found positive sentiment — above 100 — was the fall of 2007, just before the recession began.

(…) “The stock market has made a big recovery…and these people control over 80% of all stocks and securities owned by the general public.”

Despite the optimism, many wealthier Americans said they’re reluctant to open their wallets further.

Of 17 categories tracked by the biannual survey, respondents only expect spending on domestic vacations to increase during the next 12 months.

The affluent said they plan to decrease spending on designer apparel, fine jewelry and camera equipment. They expect to hold steady in most other categories, including entertainment, dining out and home furnishings.

Ghost The rich even said they’ll cut back on holiday shopping.

The survey found affluent households plan to spend an average of $2,175 on holiday gifts, a 2.8% decline from 2012. (…) Last year, the rich spent 7% more than they said they would in the fall 2012 survey, Mr. Kurtz said.

Goldman Shrinking Pay Shows Wall Street Poised for Bonus Gloom

The firm’s average compensation cost per employee fell 5 percent to $319,755 in the first nine months of 2013. At JPMorgan Chase & Co.’s investment bank, it fell 4.8 percent to $165,774. The figure plummeted 16 percent at Zurich-based Credit Suisse Group AG to $204,000.

At the other extreme:

Retailers Brace for Cut in Food Stamps

Retailers and grocers are bracing for another drain on consumer spending when a temporary boost in food-stamp benefits expires Friday.

The change will leave 48 million Americans with an estimated $16 billion less to spend over the next three years and comes just months after the expiration of a payroll tax cut knocked 2% off consumers’ monthly paychecks.

On the business side of the equation, the cuts will fall particularly hard on the grocers, discounters, dollar stores and gas stations that depend heavily on low-income shoppers. Weak spending in that stressed consumer segment has already led retailers including Wal-Mart Stores Inc. and Target Corp. to lower their sales forecasts for the rest of the year ahead of holidays. (…)

Enrollment in food-stamp benefits surged during the recession and in its wake, increasing by 70% from 2007 to 2011 before leveling off. The government’s stimulus program increased Supplemental Nutrition Assistance Program, or SNAP, benefits across the board by 13.6% in 2009.

As that temporary increase expires on Friday, benefits for a family of four receiving a maximum allotment will drop by 5.4%, the equivalent of about $36 a month, or $420 a year, according to the U.S. Department of Agriculture.

The $16 billion, three-year toll of the cuts estimated by the Center on Budget and Policy Priorities pales in comparison with the estimated $120 billion, one-year hit caused by the earlier expiration of the payroll tax cut. But for many retailers the two have a cumulative effect.

Wal-Mart estimates it rakes in about 18% of total U.S. outlays on food stamps. That would mean it pulled in $14 billion of the $80 billion the USDA says was appropriated for food stamps in the year ended in September 2012.

THE EUROZONE IS NOT OUT OF THE WOODS JUST YET

Storm cloud  Eurozone retail sales fall at faster rate in October

Eurozone retail PMI® data from Markit showed a steeper drop in sales at the start of the final quarter of 2013. The Markit Eurozone Retail PMI remained below neutrality and declined to 47.7, from 48.6, indicating the fastest monthly rate of decline since May. In contrast, the average reading over the third quarter was the highest since Q2 2011 (49.5).

The faster decline in eurozone retail sales mainly reflected a steeper contraction in Italy, which had seen the slowest fall in sales in two years one month previously. Sales fell further in France, albeit at a slower rate, while the rate of growth in Germany was the weakest since May.

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France September consumer spending was down 0.1% on the month, having dropped 0.4% in August and was down 0.1% YoY.

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Euro Inflation Slows, as Rate-Cut Pressure Grows

Annual inflation in Germany fell in October to 1.3% from 1.6% the previous month based on common European Union definitions, Germany’s statistics office said. In monthly terms, consumer prices fell 0.2% from September.

Separately, Spain’s statistics institute said annual price growth in the euro zone’s fourth-largest economy fell to 0.1% in October from 0.5% in September.

Belgium also reported low inflation rates this month, with annual consumer price growth of 0.6%, the lowest since January 2010.

Taken together, Wednesday’s reports suggest annual euro-zone inflation, due for release Thursday, will come in as low as 0.9%, economists said. That compares with 1.1% in September and is far below the ECB’s target of just under 2% over the medium term.

The October CPI Flash Estimate rose 0.7% YoY up 1.1% in September.

SENTIMENT WATCH

From Bank of America Merrill Lynch:

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US stock market cap to GDP (Exhibit 2), one of Warren Buffet’s favored valuation metrics, is currently 1.12x, clearly high by the standards of the last 60 years. The measure is at the very least a reminder that growth in 2014, rather than liquidity, is essential to prevent an overshoot of the equity market.

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U.S. Blasts German Policy

The Treasury’s semiannual report says Germany’s export-led growth is creating problems for the euro zone and the global economy.

Employing unusually sharp language, the U.S. on Wednesday openly criticized Germany’s economic policies and blamed the euro-zone powerhouse for dragging down its neighbors and the rest of the global economy.

In its semiannual currency report, the Treasury Department identified Germany’s export-led growth model as a major factor responsible for the 17-nation currency bloc’s weak recovery. The U.S. identified Germany ahead of its traditional target, China, and the most-recent perceived problem country, Japan, in the “key findings” section of the report. (…)

The focus on Germany represents a stark shift in the Obama administration’s economic engagement with one of its most important allies. (…)

Punch  Jacob Kirkegaard, an expert on the euro zone at the Peterson Institute for International Economics, said the timing of the criticism is likely an attempt to influence economic policy in Germany while a new coalition government is being formed and is debating its agenda for the next several years. (…)

Ninja  The currency report comes at a time when officials in Berlin and Washington are already clashing over other issues including allegations about U.S. spying. (…)

THE STATE OF THE UNION

 

NEW$ & VIEW$ (10 APRIL 2013)

Soft patch watch. Housing costs going up. OECD LEIs. Beware Slovania, but France and Europe even more. China car sales, trade data. Copper and oil. Sentiment watch.

SOFT PATCH WATCH

Recent data points to a soft patch:

  • NFP Employment (payroll and household)
  • U.S. ISM
  • Vehicle sales
  • Unemployment claims
  • Heavy truck sales
  • NFIB

Small Firms Curtail Plans To Add Staff As Confidence Ebbs(Chart fro IBD)

Furthermore:

Evidence of a slowdown has also played out in Citigroup’s U.S. Economic Surprise Index, which measures the degree to which economists’ consensus estimates have been too optimistic or pessimistic about data releases. The index has been trending lower over the past few weeks and on Monday fell to its lowest level since Feb. 25. (WSJ’s Market Beat)

Although not in housing:

U.S. Land Gets More Expensive

The rebounding U.S. housing market has sparked a sharp rise in land prices, creating big profits for land investors but putting pressure on builders to further increase the price of new homes.

[image]Land values across the U.S. rose on average 13% in 2012, the first annual gain since 2005, according to estimates in a March report by Zelman & Associates, a housing consultancy. (…)

Land cost constitutes 21.7% of the final sale price of a new home, according to the National Association of Home Builders. As land prices rise, builders tend to pass 100% of those costs on to consumers.

Buck Horne, a housing analyst with Raymond James & Associates, predicts that new-home prices will rise 10% to 15% in 2013, chiefly because of rising demand and because of the scarcity of land.

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Lumber Prices near Housing Bubble High

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OECD says growth picking up in most major economies

The Paris-based think tank’s composite leading indicator shows growth firming in Japan and picking up in China while the outlook is improving for Italy and France is stabilizing.

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EU Sounds Alarm on Spain, Slovenia Economies

(…) In Spain, a deep recession, deleveraging and bumpy access to market financing remain a “tangible threat” the report warned. It called the country’s reform agenda “incomplete,” despite fiscal cuts and a deep restructuring of the banking sector as part of a €41.3 billion ($54.03 billion) financial sector bailout from the euro zone. (…)

Slovenia’s troubles emanate from excessive corporate debt that is sending ever more loans into the red—the report says 23.7% of corporate loans are nonperforming, which means they are in arrears for longer than three months.

“Credit is contracting and the interaction between weak banks and the sovereign has intensified. The state has de facto become the source of capital,” the report said. It warned that deleveraging in the banking sector combined with a double-dip recession are making it hard for companies to grow and are leaving troubled assets stuck on banks’ balance sheets. (…)

The Commission’s report identified another 11 countries that need to correct imbalances, but said these weren’t “excessive.” The countries are Belgium, Bulgaria, Italy, the United Kingdom, France, Italy, Sweden, Finland, Malta, Hungary and the Netherlands.

France, the euro zone’s second-largest economy, was losing its ability to deal with sudden economic downturns outside its borders, the report said.

“The resilience of the country to external hocks is diminishing and its medium-term growth prospects are increasingly hampered by long-standing imbalances,” it said.

But Gavekal is more realistic about France and the collateral damage to the Eurozone:

The severe squeeze on household income will ensure a collapse in French
imports which can only have negative consequences for producers in
Spain and Italy—for most eurozone countries France is their second largest export market.

France’s budget deficit is going to explode. Higher unemployment will push up government spending, while reduced consumption causes a
collapse in VAT receipts. And lower economic activity reduces all forms
of tax income that a voracious government machine so depends upon.

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French long rates will quickly come under pressure as was the case for Spain and Italy once their budgetary situation deteriorated—the French government is hugely complacent about its entitlement to low cost funding even though any spike in rates will quickly make the budget situation untenable. (…)

But what especially scares me about the French situation is that the
economy is already suffering a huge credit crunch which can only get
worse.

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EU intensifies reform pressure on France
Brussels issues stinging report on government’s efforts

(…) it warns that France’s increasing sovereign debt levels, which are expected to rise to 93.8 per cent of economic output next year, are not only choking off growth prospects but are threatening the country’s banking system and the broader European economy.

Weak economy adds to Hollande’s headache
As the president grapples with fallout from a scandal, France eked out 0.1% growth in the first quarter
 
CHINA
 

Car sales back on fast track  China’s passenger vehicle sales returned to high-speed growth in March due to surging demand for entry-level cars, as well as the flurry of new models launched in the spring.

The total sales of passenger cars, sport-utility vehicles, multi-purpose vehicles and minivans jumped 15 percent year-on-year to 1,459,095 units in March, the third-highest monthly growth in a year, the association said.

The strong performance in March boosted first-quarter domestic passenger vehicle sales to 4.21 million units, up 19.2 percent year-on-year.

Rao also predicted robust growth in April as the Shanghai International Auto Show, which will start on April 21, will further boost consumption enthusiasm with new models expected to be launched by nearly all the brands.

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China trade data raise accuracy worries
Volatility and discrepancies in the March figures questioned

China’s latest trade figures showed a sharp decline in export growth combined with a strong rebound in imports in March, but volatility and discrepancies in the data have raised concerns about their accuracy.

Exports from China increased 10 per cent in March from the same month a year earlier, compared with a 22 per cent increase in February, while imports surged 14.1 per cent in March, compared with a year-on-year drop of more than 15 per cent the previous month, according to Chinese customs administration data released on Wednesday.

China Exports Miss Forecasts as ‘Absurd’ Data Defended

An “astounding” 92.9 percent jump in exports to Hong Kong, the most in 18 years, raises questions on data quality, researcher IHS Inc. said.

The customs agency acknowledged concerns that the data may be overstated at a press briefing today while standing by its figures and saying the Hong Kong gains stem from different statistical methods. Sales to the U.S. and Europe both fell for the first time since November, leaving the world’s second- largest economy with weaker global demand to support a recovery.

COPPER AND OIL

Copper Sentiment Plunges, Critical Price Points for Copper and Crude Oil

(By Chris Kimble of Kimble Charting Solutions)

OPEC Trims Oil Demand Growth Forecast; March Output Drops

Worldwide oil consumption will rise this year by 800,000 barrels a day, or 0.9 percent, revised down from 840,000 last month, the Organization of Petroleum Exporting Countries said in its Monthly Oil Market Report today. Demand will rise to 89.66 million barrels a day in 2013 versus 88.87 million last year, OPEC estimated. The group’s output fell in March as Nigeria, Iran and Kuwait pumped less.

OPEC, which supplies about 40 percent of the world’s oil, produced 30.19 million barrels of crude a day last month, according to OPEC estimates based on secondary sources. That compares with 30.29 million in February.

Saudi Arabia, the world’s largest crude exporter, increased output to 9.12 million barrels a day in March from 9.08 million the previous month, OPEC said.

SENTIMENT WATCH

 

Bears Reign Supreme

Last week we asked Bespoke readers to complete our April market survey, and over at Bespoke Premium, we have just sent out our full analysis of this month’s results.  As shown below, a large majority of survey participants expect the S&P 500 to be lower one month from now. This is surprising given the market’s recent run to new highs, but it’s nothing new.  Throughout this entire bull run over the last few years, investors have been loathe to get long equities.

High five  But, as Bill Hardison (via Doug Short) notes, investors may say something but what counts is what they are doing.

The following chart shows margin debt levels in all accounts and is reported at the end of each month (with a lag). To make it an easier comparison with market data for Excel, the data point for the S&P 500 each month is, somewhat arbitrarily, a 5 day moving average of price on the last trading day of the month. Data for the amount of margin debt is only available through the end of February, though I extended the S&P data by one additional month to show it as of the end of March, thus including the new all — time high for the S&P.

 

What this chart is showing is that, despite the lack of participation in the rally that you hear about, account holders are acting so bullish that they have a near — record amount of margin debt. The actual record debt level (3.9% higher than now) occurred at the end of July 2007, about two months prior to the actual market peak. Surprised smile

Fingers crossed  Seoul on alert as N Korea moves missiles US commander reports movement of weapons