Best September for Stocks since 1939! Now the Encore

It’s goodbye September, hello October. But what a September it was for the stock market! The S&P 500 jumped 8.8% in September 2010, making it the best September for stocks since 1939.

Reading the investment newsletters of my competitors, there is no doubt I have been one of the sole bulls through the summer of 2010. I believed that the heavy pessimism surrounding the economy, rising corporate profits, the low-yielding bond market, and gradual decline in the value of the U.S. dollar would move stocks higher. And that’s what happened in September.

So what’s next for the stock market? What can we expect for the month of October?

It is my belief that the bear market rally that started in March 2009 remains intact. The rally took a sabbatical from May of this year until September. But, I see bond investors tired of low returns; I see the real estate investors not returning. Aside from gold, what alternatives do investors have today?

Hewlett-Packard Company (NYSE/HPQ), the world’s largest computer maker, announced mid-week that it was raising its earnings forecast for 2011. The U.S. Treasury Department is planning to sell its stake in AIG in 2011. The Federal Reserve is at the ready to ease monetary policy further if the economy does not start growing faster. The environment for stocks right now is good. But, for 2011, I’m not as bullish as others.

The big overhang on the economy is the housing market. It is my suspicion that banks are sitting on a huge inventory of non-performing mortgages that they have yet to cleanse off their books. In fact, I believe that institutions have slowed their rate of foreclosures because they have too much inventory to deal with already. When will the second round of big foreclosures happen in the U.S.? Will it be 2011?

In August, existing home sales in the U.S. were at their lowest level since the early 1990s. New home sales were at their second lowest level on record (they started keeping track in the early 1960s). Applications for mortgages in the U.S. fell last week for a fourth straight week, according to the Mortgage Bankers Association. Home refinances have fallen to a seven-week low. The housing market is pathetic. And it is the black cloud over our economy that will not go away anytime soon.

Enjoy the stock market rally while it lasts!

Michael’s Personal Notes:

There are several stocks and companies I watch carefully to give me an indication on where the economy is headed in the months ahead. One of those companies is FedEx Corporation (NYSE/FDX), the second largest package shipping company in the U.S. after United Parcel Service.

FedEx is positive on its business going into 2011. The company has stopped giving price discounts, profits are up, and demand for its services are rising, which is an indicator for me that businesses are getting busier again. But it is China, India and Brazil that are leading the way for express-shipping, not the U.S.

FedEx’s stock sits today only 10% below where it was when the recession started. As a gauge for economic growth, FedEx stock is bullish on the economy.

Where the Market Stands:

A couple of months ago, I started writing about what I perceived as a bubble in the bond market — too many investors chasing too-low yields in a quest for capital security. My prediction was that these investors would leave the bond market and move into the stock market, which I continue to believe offers an attractive alternative to bonds.

Just a few weeks ago, U.S. 30-day T-bills were paying 0.12% interest. Today, they pay 0.16% interest. Five-year Treasuries have gone from a yield of 1.41% to 1.28% today. If you bought a U.S. Treasury in the past 30 days, you have lost money, unless you plan to hold those Treasuries until maturity.

At the same time, the dividend yield on the Dow Jones Industrial Average has fallen to 2.6% from 2.7%, as stocks have risen. Still a very good yield in my opinion compared to what else is out there for investors today.

The Dow Jones opens this first day of October up 3.5% for 2010. I continue to be immediate-term bullish on stocks, and bearish on the short to long term.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.