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The Market Likes the Data of The Day

|Includes:AK Steel Holding Corp (AKS), ARO, LB, NUE, STLD

By early afternoon, the major indexes were in positive territory after trading in a sideways fashion in the earlier part of the session. At this juncture, it appears that the overall pace of the rally has ebbed as market participants may be in the process of consolidating gains.

The financials are among the sectors that are a drag on today's performance, following Treasury Secretary Geithner appearance before the Congressional Oversight Panel to present the argument for an extension of the $700 billion TARP program. As it stands, many banks are in a rush to get out from under TARP and government control.

In the earlier part of the session, the dollar index did lose some ground which proved to be an upside catalyst for crude oil prices. In a broader context, the price of the commodity has been moderating over the last few sessions in the wake of the dollar index's rally. However, after a brief pause in the morning session, crude oil prices once again came under selling pressure as the dollar index rose to a session high. The energy sector as a whole though did not follow suit, with many energy-related names holding on to session gains.

Economic Data

Trade Deficit

The U.S. trade deficit shrank in October to $32.9 billion from $35.7 billion the previous month. The deficit was much smaller than the $36.4 billion consensus. Imports increased slightly, while exports increased by 2.6% month to month. Meanwhile, our petroleum deficit fell by 7.6%.

The increases in exports were fairly broad-based, across foods, industrial goods, aircraft, and various consumer goods. Because of the broadness, it seems apparent that the falling value of the dollar was the main factor behind the surge in exports, as all of our goods instantly became more affordable overseas. As it stands, the devalued dollar has been helpful for the manufacturing sector in particular, and our gains in exports should be increasing employment at the nation's factories.

Despite the improvements in exports, however, our dependence on Chinese imports is still as high as ever, which is largely a function of the Yuan being pegged to the dollar. Our deficit with China during the month was $22.7 billion, up from $22.1 billion.

Retailers Hide True Intentions with Creative Promotions
By: Brian Sozzi, Research Analyst

Why are retailers having success this holiday season selling gifts priced below $10.00? It's because retailers are prominently displaying such products in their weekly circulars or on in-store signage. These products, say from the likes of Bath & Body Works (division of Limited), serve the following purposes:

  • Drive traffic to the stores. In order for the consumer to find these items, they have to pass a good portion of the store, where items are higher priced on average (for example, at Wal-Mart, you have to generally have to pass the apparel section to reach these $10 gift giving items, which could be a package of Dial hand sanitizers). The trick is to get consumers into the stores, and then up-sell them, because by and large $10 gifts are not strong profit contributors (especially if it's name brand products)
  • Bring in a customer who was formerly unfamiliar with the brand/store. Hopefully there is bond made in the transaction and the consumer comes back to the store, maybe with more money, down the line.

Of course this holiday season has been value focused across retail, so these types of gifts fit well in that type of environment. If a consumer purchases a gift type item for under $10, the retailer may take the opportunity to give them a promotion to get them back into the store after the holidays, when the chance is likely they will be spending more in the transaction.

A Few Ways to Get Consumers to Spend Beyond Their Budgets this Season

  • Buy one get one free (otherwise known as "BOGO"; selling two items at full-price is much better for gross margins than discounting each product by 50.0%)
  • Handing out gift cards with a purchase exceeding $75.00 (gets people back into the stores in January, when full-price products are on the sales floor)
  • Ability to order products online and then pick them up in the store (retailers tout this as a convenience measure but they really want you in the store, browsing the aisles)

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China Gets Tough on Steel
By: David Silver, Research Analyst

First it was chicken, then tires, and now China has accused the U.S. (and Russia) of dumping steel products into China and driving out the competition with the low prices. China's Ministry of Commerce, in a preliminary ruling, said U.S. and Russian companies are selling flat-rolled electrical steel, a product used in the power industry, at unfairly low prices in China. It also said that it will slap anti-subsidy charges on companies that import such products from the U.S.

The salvos have been going back and forth between China and the U.S., and in recent months tensions between China and Europe have been heating up with threats being made on both sides for investigations on products such as chloroform and fiberglass. In November, the U.S. began imposing duties on steel piping that was imported from China (used in the oil industry), and only a few weeks later, we hear today's announcement.

The ministry said that starting tomorrow importers will need to pay antidumping deposits ranging from 10.7% to 25% to import the product from U.S. companies. The ministry will also charge an anti-subsidy deposit of between 11.7% and 12% on imports of the product from the U.S. It said importers will have to pay a deposit of 4.6% to import the product from two Russian firms, OJSC Novolipetsk Steel and VIZ-Stal Ltd., and 25% for purchases from other Russian companies. Some companies that look to be affected are AK Steel (NYSE:AKS), Steel Dynamics (NASDAQ:STLD) and Nucor (NYSE:NUE), to name a few.

Initial Claims, Fuzzy Math
By: Carlos Guillen, Research Analyst

Earlier today, the Labor Department revealed that initial claims for the week-ended December 5 totaled 474,000, which increased from the 457,000 revised number reported for the prior week, and landed above the Street's estimate of 465,000. This was quite surprising and somewhat discouraging considering that just last Friday it was reported that non-farm employment decreased by just 11,000 for the month of November.

What is even more intriguing is that, while the seasonally-adjusted initial claims figure increased by 17,000 week-to-week, the non-seasonally-adjusted initial claims figure increased by 205,000. Perhaps this is just statistics, but the difference just seems too large. Moreover, the seasonally-adjusted insurance unemployment figure decreased by 303,000, which would be considered as a positive sign; however, when we look at the non-seasonally-adjusted figure, there was actually an increase of 591,000, which is actually very bad. The discrepancy, again, just seems too large, and we must also point out that the insured unemployment figure does not include those who had their benefits extended beyond the allowable 26-weeks, which means that these numbers are actually worse. I would love to see the actual mathematics that explain these huge discrepancies, but for now this just looks like fuzzy math to me.

Nonetheless, I believe the current initial claims level is still extremely high. I believe an initial claims level of less than 400,000 would need to be reached in order to help bring the unemployment rate closer to its normal run rate of 5% to 6%.

Disclosure: None