May 26, 2016

Stocks are lower in early trading (Dow -41 pts; SPX -.12%). Here we go again with the seesaw—up one day and down the next. Defensive sectors are leading this morning and the cyclicals are in the red. Biotechs, transportation, and banks are down; telecom carriers, gold miners and discount retailers are higher. The dollar is lower and commodities are mixed. WTI crude oil is down slightly to $49.50/barrel. Bonds are trading higher as yields fall back a bit. The 5- and 10-year Treasury yields are at 1.37% and 1.84%, respectively. 

Costco (COST) reported earnings ahead of expectations (up 6% y/y) and the stock is higher in early trading. Revenue rose 2.5% y/y although same-store-sales fell flat for the first time in years. If you leave out currency fluctuation and gasoline, same-store-sales rose 3%. So the core is healthy. The company managed to raise profit margins (membership fees were up 5.8% y/y and management controlled costs). So compared with other retailers, which are generally reporting terrible numbers, Costco looks pretty good. 

Durable goods orders shot up 3.4% in April compared with prior month levels; March orders were upwardly revised to 1.9% growth. Unfortunately, growth was driven largely by a surge in commercial aircraft orders. Leaving out the transportation category, durable goods orders rose .4% in the month. On a year-over-year basis, orders excluding transportation are down 1.4%. So while there are signs of a modest, gradual recovery in business investment, this report is not very encouraging. 

Pending home sales (i.e. signed contracts) surged 5.1% in April vs. March levels; that’s far ahead of expectations and sets up nicely for a strong spring sales season. On a year-over-year basis, pending sales are up 2.9%, which is also better than expected. Low borrowing costs, rising wages and low unemployment are underpinning strength in the housing market. 

Jim Paulsen of Wells Capital Management asserts that “we have arrested the deflationary abyss” and the market will move higher into the end of the year. At the moment, he’s optimistic because most investors are very pessimistic and globally, he’s beginning to see some economic surprises to the upside. He predicts the S&P 500 will break through to new highs soon. For a while now, he’s been saying published economic data (i.e. productivity figures) are understated and underlying economic growth is probably considerably stronger (like 3%) than we are being led to believe (2%). Longer term, Mr. Paulsen thinks the stock market is still in a sideways trend, but the recession is a long way off (i.e. several more years). And he reminds us that there are no good alternatives to stocks. That’s because central banks are keeping interest rates artificially low so that bondholders aren’t being paid for the risk involved. 

By the way, API this morning reported that Donald Trump now has enough delegates to clinch the Republican nomination for president. 

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