6/8/2012
By Carlos Guillen, Research Analyst

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Despite the rather disappointing start to today's trading session, equities traded rather well and slowly creeping higher. In light of the most recent piece of economic data, it is difficult to see why investors were not more negative on stocks today, but perhaps they are still seeing that equity markets are oversold and are making moves to snatch some beat up companies.

Perhaps the most significant piece of economic data today was that the U.S. trade deficit shrank in April, but exports also declined for the first time in five months, clearly not an encouraging scenario for the U.S. economy. According to the Commerce Department, the trade deficit decreased 4.9 percent to $50.1 billion in April, under the $52.6 billion reached in March but a bit above the Street's estimate of $49.3 billion. Both exports and imports fell from the prior month's record highs, but imports fell at a faster rate than exports. In terms of the two main components, exports declined 0.8 percent to $182.9 billion, as overseas demand for capital goods and industrial supplies eased. Imports dropped 1.7 percent to $233 billion, as demand for petroleum eased during the month. In real terms, however, the trade deficit shrank to $48.5 billion from $49.5 billion. Given that net-exports plays a direct effect on gross domestic product (GDP), a greater than expected deficit could lead economists to revise their growth estimates lower for the second quarter of this year. In fact, Goldman Sachs has already moved ahead of the crowd and lowered its GDP forecast to 1.8 percent from its prior forecast of 2.0 percent.

Over this coming weekend, Spain will be in discussions relating to its need or no-need of a bailout package. After weeks of indecisiveness as to whether Spain can handle its debt situation without help, it is now more and more apparent that the nation will need a bailout. Remembering back in late May, Spanish Prime Minster Mariano Rajoy stubbornly declared that Spain did not need help and that it would not seek a bailout of its struggling banks. However, after Fitch downgraded the nation's debt on Thursday, It appears that Spain is now ready to scream help! According to Fitch, Spain will need about at least $60 billion, but it could reach as much as $100 billion, or 9 percent of Spain's GDP, in a worst-case scenario.

At the moment we remain encouraged with the resilience the market demonstrated this week, but we still expect to see lots of volatility in the coming week as the situation in Europe continues to unfold and brings surprises.

Carlos Guillen
Wall Street Strategies