1/13/2012
By Carlos Guillen, Research Analyst

Equity markets traded slightly in the red during today's trading session as economic data showed rather mixed results and as an S&P downgrade of euro zone nations loomed large.

According to the commerce department, the U.S. trade deficit widened 10.4 percent in November to the highest level since June as companies imported more expensive foreign oil. Imports accelerated by the most since May, rising 1.3 percent to $226 billion, while exports declined 0.9 percent to $178 billion. Clearly, the repercussions of the European debt crisis and the slower growth in China are coming together to reduce American exports. At the same time, our strong thirst for oil accompanied by higher prices served to lift imports here in the U.S. Perhaps although it is encouraging to see that demand from within the U.S. is strong; boosting the need of supplies, material, car parts, and capital goods; it is not encouraging that companies are buying these products from abroad more than from home. On a more encouraging note, the trade deficit with China was slimmer, narrowing to $26.9 billion as U.S. exports to China rose to $9.9 billion, the highest in nearly a year.

Also, here at home, the University of Michigan Consumer Sentiment January result landed at 74.0, which was higher than the Street's expectation of 71.2, increasing from the 69.9 reached last month, representing the fifth consecutive month-to-month increase, and standing at the highest level since May 2011. It is apparent that consumers, despite the still rough economic condition, are becoming encouraged by the recent decrease in gasoline prices and by the continuing upticks in employment. The recent gains in equity markets are also serving to fuel confidence as consumer's perceived wealth improves. Clearly, the uptrend in consumer sentiment is very encouraging, but all is still not well. The economy is still shaky, and at the moment there is still the risk associated with the possibility of not extending the payroll tax holiday for the full year (this has been extended for the first 2 months of 2012). If this tax cut is not extended, all bets are off, and the economy can easily make a turn for the worse.

At the moment, while it is not official, the S&P ratings agency is likely to downgrade a number of European nations including France and Austria. French finance minister Francois Baroin confirmed that the S&P downgraded France's treasured triple-A credit rating by one notch, to double-A-plus, but insisted the move was not a catastrophe and that the government remained committed to overhauling the country's economy. As far as other downgrades are concern, the verdict is still not out yet. This is added pressure to equity markets as the European Saga continues.

Carlos Guillen
Wall Street Strategies