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Five Things You Need to Know: Smoot, Hawley Vow to Save American Jobs, Trade Deficit, Producer Pricing Power Tested?, Hedge Funds "Mainstream", 49ers Fans Relieved to Learn Team Leaving Without Causing Scene


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Smoot, Hawley Vow to Save American Jobs

China yesterday reported its trade surplus surged 56 percent last month to the highest level ever, according to Bloomberg. And now, with Democrats in control of both the House and Senate, expect talk of a stronger yuan and protection of American jobs to become a transition toward action. The likely result of that action? Two words: Smoot-Hawley.

  • The Smoot-Hawley Tariff Act raised U.S. tariffs ("tariff" is a fancy word for tax) on more than 20,000 imported goods.
  • Some may be surprised to learn that the Smoot-Hawley tariff was sponsored by Senators Reed Smoot of Utah and Willis Hawley of Oregon, both Republicans.
  • The Smoot-Hawley Tariff Act sounded reasonable enough. It was drafted to "save American jobs" with unemployment running at about 9 percent.
  • Let's fast forward.
  • China's trade surplus continues to roar ahead, last month hitting a record level.
  • Meanwhile, part of the reason for the surge in the trade surplus last month was because imports into China have slowed.
  • While China insists imports slowed due to Premier Wen Jiabao's curbs on investment, which caused economic expansion to slow in the third quarter for the first time in more than a year, the reality is that domestic demand in China remains too weak for the country to act forcefully to curb exports.
  • Exports are about 40% of China's GDP. Imports, meanwhile, are only growing by about 5% of GDP.
  • The bottom line is that any move by U.S. policymakers and politicians to "save American jobs" from China will up the ante in the game of global protectionism that has been bubbling just beneath the surface of globalization and "free trade."
  • Senator Charles Schumer (D-NY) and South Carolina Republican Lindsey Graham shelved plans for a September vote on a bill that would impose tariffs on China.
  • Meanwhile, outgoing Senate Finance Committee Chairman Charles Grassley and ranking Democrat Max Baucus have pushed a separate bill that cuts off U.S. government loan guarantees to countries whose currencies are ``fundamentally misaligned'' with the dollar.

2. Trade Deficit Narrows to Astonishing From Previously Inconceivable

While China fights over its trade surplus, the U.S. worries about its trade deficit. Last month the U.S. trade deficit narrowed to $64.3 billion in September from a record the prior month, according to Bloomberg.

  • The U.S. trade deficit actually fell 6.8%, the biggest drop in nearly two years, coming in below expectations for an increase to $66B.
  • The improvement in September's trade deficit reflected a $3.1 billion decline in foreign oil prices.
  • The price of imported oil, which had set a record in August, dropped by $3.60 per barrel to an average for imported crude of $62.52 in September.
  • Meanwhile, imports of telecommunications equipment, computers and autos also fell in September.
  • Finally, China is now threatening to overtake Mexico as our number two trading partner.
  • Canada remains number one.

3. Producer Pricing Power Tested? No.

General Motors (GM) announced yesterday it has raised prices an average of 0.5 percent on about one-third of its models due to rising raw materials costs. Wow, does this mean GM has some kind of new-found pricing power? No.

  • The increases were effective Monday and are driven largely by steel prices, which have gone up globally by 13 percent since January, GM spokesman John McDonald said, according to the LA Times.
  • Sticker prices went up anywhere from $60 to $425 on 239 of the companies 681 versions of its cars and trucks.
  • The price increases included a boost of $115 on the company's best-selling car, the Chevrolet Impala.
  • The Impala is GM's best-selling car!? Why?
  • Oh, cop car.
  • So it appears GM will be one of the first companies to test its ability to pass through rising raw materials prices to its customers? No.
  • Back in January the company reduced sticker prices on its vehicles anywhere from $1,300 to $3,000.
  • It will take a lot of $100 price hikes to get prices back to pre-January levels. Nice try.

4. Hedge Funds Now "Mainstream"

The head of Barclays Global Investors has told the Financial Times that the distinction between hedge funds and the mainstream asset management business has become increasingly "arbitrary" as the two industries converge.

  • Blake Grossman, chief executive of BGI, told the Financial Times that the divide that is in the market now between traditional strategies and hedge fund strategies, is arbitrary as hedge funds have now become "mainstream."
  • BGI, controlled by Barclays, the UK banking group, has $1,600bn under management, and is best known as a manager of passive and exchange-traded funds, the FT said.
  • "We're getting mandates to employ some degree of short-selling, some degree of derivatives," Grossman said.
  • "If you look out five years, there will be much less of a divide between what's considered a hedge fund and what's considered a traditional strategy," he added.
  • BGI is a purely quantitative manager, and uses computer-driven strategies in its active investing that make heavy use of derivatives, shorting and synthetics – to the point that many of its strategies are interchangeable with those of a large hedge fund, the FT said.
  • Close to a fifth, or about $80bn, of BGI's actively managed money has a fee structure similar to that of hedge funds, charging a performance fee of 20 percent, the newspaper reported.
  • And that two and 20 is for what, again?

5. 49ers Fans Relieved to Learn Team Leaving Without Causing Scene

The San Francisco 49ers plan to move to either Santa Clara or somewhere else in California, according to the Associated Press.

  • The 49ers broke off talks with San Francisco aimed at securing a new stadium at Candlestick Point and according to the Mercury News hope to build a home for the team near Great America in Santa Clara.
  • Minyanville has learned that the pre-emptive breakup by the 49ers with San Francisco is actually a relief for fans who had been mulling ways to break off ties with the team since early October.
  • The 49ers are 3-5 this season, 0-3 on the road.
  • Last season the team finished 4-12. Their last winning season was in 2002.
  • "Honestly, this is a huge relief," former 49ers fan Jerry Randall said. "Some of us have been trying to drop subtle hints to get them to leave for most of this season. Last week some guys 'accidentally' wore a Vikings jersey to the game."
No positions in stocks mentioned.

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