I think this year’s bull market is still alive, but it will take good corporate earnings and visibility to carry it forward. We’ve had a really good run up until now and the current price consolidation is not unexpected. I want to reiterate that the stock market is still very fraught with risks that are based on fragility in the U.S. economy and outside factors like the sovereign debt crisis in Europe and geopolitical concerns in the Middle East. I suppose these risks have been with us for years, but I know that investor sentiment is delicate enough to turn this stock market on a dime.

I still believe that a conservative investment stance is warranted and I would not be a big buyer of new positions in this stock market. In my view, the stock market is in the process of topping itself out after a long period of recovery from several big shocks. This doesn’t mean that the stock market won’t be higher at the end of this decade than it is now, but I do see a lot of problems over the next couple of years. Monetary stability, positive investor sentiment and reasonable equity valuations are responsible for carrying the stock market so far this year. What’s required going forward is confirmation in the economic news.

As part of a conservative investment stance, I’m a big believer in large-cap companies that pay dividends. Anybody reading this column over time knows this. The fact of the matter is that large-caps have performed exceptionally well since the financial crisis low in March 2009 and they’ve proven to be just as effective at generating impressive capital gains as traditional growth stocks. In fact, you can argue that traditional growth stocks don’t really exist anymore, because traditional economic growth isn’t a reality in the age of austerity. Regardless, I think stock market investors need to be very cautious in the current environment and that dividends are an investor’s only friend.

I’m looking for big dividends increases over the next two quarters, not runaway financial growth. Large-cap companies know that if they can’t generate both top- and bottom-line growth, they can keep institutional investors happy with increased dividends. It’s the best way to keep the party going.

Specifically, I’m expecting a dividends boost from the financial sector during first-quarter earnings season. We’ve already seen several announcements related to this. I think we’ll also get more dividends announcements from the technology sector and the industrial sector (like railroads), which are due to increase their payouts to shareholders. Regardless, if corporate visibility is murky, then increased dividends will be the only way to keep investors happy.

American Express Company (NYSE/AXP) announced a big dividend increase and the news sent its shares soaring. American Express is mimicking the S&P 500 Index almost exactly. (See Who’s Buoying up the Stock Market for 2012?) The stock is forming the right shoulder top of a traditional head and shoulders formation. With improved dividend news from large-cap companies, this little bull market can continue. Without it, I think we’ll get some drifting in the stock market throughout the second quarter.

Remember this summer when the Dow Jones Industrial Average had a couple of 400-point loss days and we heard so many stock advisors and analysts tell us we were headed straight into a second recession…that corporate earnings would plummet? Stocks fell 20% from their May 2, 2011, high and all of a sudden headlines started to appear saying that we were in a bear market.

Well, these advisors and analysts jumped the gun, as most fail to understand how a bear market actually works.

Let’s take a quick look at some earnings reports from big American companies over the past day or two:

• American Express Co. (NYSE/AXP) made $1.24 billion in the third quarter, up 13% from the same period of last year.
• AT&T Inc. (NYSE/T) reported a big profit of $3.62 billion in its last three months.
• Intel Corporation (NYSE/INTC) posted a 17% profit gain to $3.47 billion in the third quarter.
• Morgan Stanley (NYSE/MS) beat analyst expectations and made $2.2 billion in the last quarter.
• Even beleaguered Bank of America (NYSE/BAC) surprised and reported a strong profit of $5.9 billion in the third quarter.

All told, these few companies mentioned above added $16.43 billion to their coffers in the third quarter. Most of corporate America is doing fine right now (see Three Big Money Profit Stocks). And if they start to see earning growth slow, they’ll simply cut payroll again.

Where am I going with all this?

For the benefit of our thousands of new readers, here’s where we stand today.

A 20-plus-year bull market in stocks ended in October of 2007. A bear market started in October of 2007 that served to send stocks to a 12-year low on March 9, 2009…what I refer to as Phase I of the bear market. On March 9, 2009, a bear market rally was born. That rally, which is a classical Phase II of a bear market, has been going on now for 31 months. Bear market rallies last three to four years.

Strong earnings growth is coming from corporate America. Pessimism amongst stock advisors and investors is also very high. Bear market rallies continue higher under such a scenario. A bear market rally has only one purpose: to give investors the false hope that all is well and that stocks are a safe bet. We’re not there with this mentality yet, but that’s where we are headed. And when we reach that point, that’s when the bear market will start to head south (Phase III) towards its March 9, 2009 low.

Sure, corporate earnings are strong. But the long-term structural problems of the U.S. (i.e. underemployment of 16.5%; interest rates that have bottomed and can only rise; a fiat currency in too much supply; inflation) will eventually overcome corporate America and the stock market.

Michael’s Personal Notes:

As I write this morning, the price of gold bullion is down about $25.00 to $1,619 an ounce. Twice since gold fell close to $1,600 an ounce it has bounced back strongly.

For die-hard gold fans, the number to watch, the support level for gold, is $1,500 an ounce. At that level, I believe gold would be a screaming buy. At $1,500 an ounce, gold would have corrected a full 20% from its record high of $1,895 reached on September 5, 2011. At $1,500 an ounce, gold bullion prices would be severely oversold. At $1,550 an ounce, a huge opportunity would present itself for gold investments.

There are plenty of reasons gold investments are still the place to be (see Answered: Can I Still Make Money Buying Gold Now?). And the best way to make money in the 10-year old bull market in gold is with the stocks of the junior and senior gold-mining stocks. I would look at any price weakness in the gold-mining stocks as opportunity. One or two years out, we will look back at the gold-mining stocks and realize what a bargain they were in the fall of 2011.

As I wrote yesterday, all the money printing by world central banks since the credit crisis hit in 2008 has greatly expanded the fiat money supply. And the more fiat money in circulation, the greater the threat of inflation, as evidenced by Britain’s inflation rate hitting a three-year high in September—5.2% annualized! We could be getting close to a real buying opportunity for the gold-mining stocks (see Gold Bullion’s Price Action: Time to Separate the Men from the Boys).

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average continues to hover at the same level it opened at in 2011. Corporate earnings reports for the third quarter of 2011 have been respectable thus far. Pessimism continues to preside amongst investors and stock market advisors. On the backdrop of continued earnings growth, I believe that stock prices will rise.

A bear market rally in stocks that started in March of 2009, although old and “long in the tooth,” as they say, presides.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

Investor sentiment is fragile and the stock market’s been volatile, but the trading action over the last little while has revealed one big consolidation, not a breakdown in the main stock market indices. What’s holding the market around 1,200 on the S&P 500 Index is the expectation for decent corporate earnings. From my perspective, third-quarter earnings results can’t come soon enough. Investors need to hear from corporations about their business conditions and their forecasts for the future. This is the news that can make all the cash sitting on the sidelines take action.

The broader market is very fairly priced at its current level and reduced expectations for future growth are now factored into share prices. Accordingly, I think we’re seeing a new base developing for the broader market and, unless third-quarter earnings are bad or there’s a major shock to the system (like a sovereign debt default) I think stocks can build upon this base.

Still, it’s pretty difficult to imagine a new bull market developing right now. However, I do think that the stage is being set for the resumption of an upward trend (since the March low of 2009), as earnings expectations are generally good. Eventually investors will step up to the plate to purchase earnings growth and, when there’s some good news from the economic data, we could have the makings of a solid stock market advance. When this scenario might play out is the big question. Sentiment isn’t strong enough right now. It could happen later in the fourth quarter. We might have to wait until next year. As an optimist, I’m siding with Warren Buffett’s view that the economy will get better—it’s just going to take more time.

While I’m seeing more value in this market, I do want to reiterate my view that investors don’t need to be in any rush to take on new positions in stocks. There are always good trades out there; but, generally speaking, this is a market that isn’t poised to go far at this time.

Quite consistently, corporate earnings have been very good over the last four quarters and so have corporate balance sheets. While big companies aren’t spending on new plant and equipment, or on new workers, they have been able to increase their selling prices without affecting demand. This is a good sign and it especially reflects better business conditions in the industrial, enterprise-level economy. Things are less robust at the retail, Main Street level.

One sector that Wall Street is looking for leadership in this upcoming earnings season is technology. Large technology companies disappointed so far this year, as analysts were expecting more growth from the big players. Those companies with large, retail operations—excluding Apple Inc. (NASDAQ/AAPL)—didn’t produce good enough numbers. And that’s why you have Hewlett-Packard Company (NYSE/HPQ) wanting to get out of the retail computer business.

Over the very near term, it’s continued choppy trading action. There is, however, something to be said for how well the main stock market indices are holding up.

The simple question: why haven’t jobs been created in the U.S. despite the trillions of dollars the government has thrown at the economy?

There are several answers to this question. There is also a new theory I have been working on, as to why jobs in this country have not been created, which I don’t believe you will read elsewhere.

Many of the actions at the government during the recession were targeted towards helping big business. During the credit crisis of 2008, the government handed out emergency loans to big banks and big companies. It did very little for the small-sized business, under 50 employees, which account for the majority of jobs in this country.

In all due respect, the government and Wall Street created the crisis. The government brought interest rates down so low in 2004 and consumers took the opportunity to buy bigger homes, second homes, even third homes. There was no government supervision over consumer qualifications for loans.

How could a government allow non-income-verification loans? The government failed miserably. A little oversight would have gone a long way towards cooling the real estate market of 2004 and 2005 instead of letting it become a bubble.

Wall Street, in its classic style, caught on real quick to the boom in housing. It was more than happy to buy residential mortgages, repackage them and resell them to investors. No doubt about it, Wall Street’s coffers took in billions during the real estate market boom. All we have to do is look at the massive earnings of the Wall Street firms during the boom days of 2004 and 2005.

But when the bubble burst, and Wall Street should have suffered, the government bailed Wall Street out because it thought Wall Street couldn’t take the hit. Unfortunately, the one investment bank the government should have helped, Lehman Brothers, was the one it chose to let collapse.

By keeping interest rates low, the Federal Reserve is really helping the big banks. Sure. If I was a big bank, I’d love to borrow from the Fed at 0.25% and buy a 10-year Treasury yielding almost 10 times that. But how does this help the economy? It doesn’t. If you are small business today, try borrowing money from a U.S. bank. From my experience, it’s next to impossible unless you have significant collateral the bank can secure.

If I were advising the government during the credit crisis, I would have made two recommendations:

The first would have been to do nothing. Long-term readers will know I was against the government throwing trillions at the economy in 2008, because I believed it would do nothing but increase our debt. Booms and busts are like Mother Nature—you need to let them run their course.

The government didn’t slow down the boom of 2004 and 2005, hence why did it interfere with the bust? The only way to get the entire system on strong ground again is to have it wash itself out. Painful, of course, but we would have been over it by now.

Imagine a U.S. today with the same national debt level we had when Obama took office; about $10.0 trillion instead of today’s $15.0 trillion. Imagine how much stronger this country would be.

Recommendation number two would have been to help small business and consumers. The government did very little for either small business or consumers. Instead, the government bailed out big business and Wall Street.

And this brings me to today’s point.

One of the reasons the U.S. job machine has stopped is because government has simply gotten too big. I see different parts of the government working independently without thinking through their actions or how they affect the objectives of other government departments.

The government wants a higher stock market. So does the Fed. A higher stock market results in higher consumer confidence, which results in consumers spending as opposed to saving—that’s what really gets the economy going. A higher stock market means Wall Street makes more money, the banks make more money, and the purses are loosened for small business loans again.

But the government, unwittingly and unknowingly, is punishing the stock market, consumers and investors. Friday, through the Federal Finance Agency, the U.S. government sued 17 banks for $196 billion, claiming the banks misled Fannie Mae and Freddie Mac over the soundness of mortgages underlying the securities that the banks sold to Fannie and Freddie.

The banks sued include Bank of America Corporation (NYSE/BAC), JPMorgan Chase & Co. (NYSE/JPM), and Citigroup, Inc. (NYSE/C). Let’s think this through. The stock market is very fragile. Bank of America stock was already down 50% for the year before the lawsuit was announced.

What is the government doing to big banks by suing them? It’s creating uncertainty for the investors and consumers who deal with these banks, it is sending the stock market down by lowering the valuations of these companies, and it is creating more job losses, as the these banks will now tighten their costs again as they deal with this latest claim. Haven’t the banks suffered enough? Haven’t they settled enough lawsuits?

The government needs to give the market, investors and consumers the right message. Right now its actions are creating more uncertainty.

Michael’s Personal Notes:

Now I remember why I usually don’t listen to CNBC…

Driving to work Sunday morning (yes, I work most weekends), CNBC had an analyst on the radio who was saying that gold was in bubble…that it was about to burst. The analyst compared the current gold market to the tech bubble before it burst in early 2000.

In this economist’s humble opinion, gold is nowhere near bubble status. I vividly remember 1999. Many of my friends at the time were jumping on the “tech bandwagon,” buying stocks of hi-tech companies with little to no sales. It was common for investors who knew nothing about tech to be buying tech stocks. It was very similar to the real estate days in the U.S. in 2004 and 2005.

The gold bull market is a totally different story. Ask 10 (non-investment-sophisticated) friends if they own any gold investments and about 90% will say no. Only a very small minority of consumers and investors have the foggiest clue that gold has been in a bull market for 10 years.

Sure, we all hear and read about gold moving from $1,500 an ounce to $1,600, $1,700 and $1,800…but how many investors are getting into the gold market?

Phase one of the gold bull market—that’s when the very smart money gets in—is definitely behind us. We are in phase II now when sophisticated investors are getting in. We are far from phase III—the period in which mass retail investors and equity funds jump on the bandwagon.

Sure, gold has run up very quickly in price—up $623.00 or 49% over the past 12 months. And a correction back to $1,600 or $1,500 is surely overdue. But the gold bull market, in my opinion, is far from bubble status.

Where the Market Stands; Where it’s Headed:

The market surprised me on Tuesday. On Monday the European stock markets took a beating, with the stocks of most big European banks down sharply. Being a holiday in the U.S. and Canada on Monday, I was expecting the fallout from Monday’s European rut to hit North American markets on Tuesday.

And while the Dow Jones Industrial Average did open down 2.5% on Tuesday morning, by the end of trading yesterday, the Dow Jones pared its losses and was down less than one percent for the day. This turnaround is a positive signal.

As far as I read it, negativity prevails amongst analysts and investors. The jobs (or, should I say, lack of jobs) report released Friday shows there is no employment growth in this country. In the short term, this is good for corporate America, as it continues to churn out great profits without new hires. Long-term, unless jobs start happening, consumers (who account for 70% of the economy) will pull back on spending and sales will decline for consumer goods and services companies.

Given the current backdrop of negativity but strong corporate earnings, I continue to believe that the bear market rally will ride the wall of worry higher.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on over-extended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.