The big U.S. banks must be ecstatic.

After 100 people at the Federal Reserve ended their review of major U.S. banks, the Fed concluded that some of the largest banks in this country could increase their dividends, buy back shares and repay government loans.

JPMorgan Chase & Co. (NYSE/JPM), Wells Fargo & Company (NYSE/WFC) and State Street Corporation (NYSE/STT) wasted no time in announcing dividend increases for the benefit of their “patient” shareholders. JPMorgan was the most aggressive, raising its quarterly dividend payout to $0.25 a share from $0.05 a share and authorizing a $15.0-billion stock repurchase program.

Since the credit crisis hit, there have been over 300 bank failures in the U.S. The Federal Reserve put the country’s 19 largest banks on a short leash. The Fed is not loosening its hold on the biggest banks by giving them the permission to increase their dividends and start stock buyback programs again. These approvals are only granted for 2011 and dividends to shareholders are limited to 30% of earnings.

Despite all this good news, which I believe the stock market had already discounted some months ago, I would not be a buyer of the big bank stocks at this time. Why?

Simply because we are not out of the woods yet with the economy. I wrote yesterday morning about the pathetic U.S. housing market and how I believe housing prices will drop another 5.0% to 7.5% this year.

Yesterday afternoon, the U.S. Commerce Department announced that new-homes sales plunged in February to the fewest on record. New-home sales fell 17% in February. The year 2010 was the fifth consecutive year of decline for new-home sales in America.

Wells Fargo and Bank of America (NYSE/BAC) still have tremendous exposure to the crippled housing market. We are not talking thousands of foreclosed-upon homes; we are talking millions of them.

Banks like JPMorgan have far fewer ties to the housing market, but they have substantial exposure to the stock market, where the bear market rally that started in March 2009 is getting tired amid looming increases in long-term interest rates.

My simple stock market advice regarding the bank stocks: be wary of them at this point in the economic recovery; the second shoe could drop anytime.

Michael’s Personal Notes: 

According to the National Inflation Association (NIA), under its QE2 program, the Federal Reserve is buying 70% of U.S. Treasuries, as foreign buying of our debt has fallen off drastically.

In a recent report entitled U.S. Dollar Collapse Could Occur at Any Time, the NIA asks, “…if in the unlikely event there is no QE3, who will fill in for the additional buying demand currently coming from the Federal Reserve? After all, with no QE3, the Federal Reserve will go from buying 70% of treasury bonds to being a seller of U.S. Treasuries.”

At the end of the most recent Federal Open Market Committee meeting, the Federal Reserve signaled that it would be unlikely to expand its $600-billion bond purchase program as the economy improves.

I’ve been of the opinion that there would not only be a QE2, but also a QE3 and QE4, as the Fed has become the buyer of last resort for U.S. debt. If in fact the Fed does not continue its buying of U.S. Treasuries, then we will see long-term interest rates rise.

Where the Market Stands; Where it’s Headed:

Market veterans like me review several indicators to determine the direction of stock prices. In general, we look at sentiment indicators, technical and fundamental indicators, economic, fiscal, and monetary indicators.

It’s no coincidence that the bear market rally was born the same month (March 2009) that the Federal Reserve made a pledge to maintain interest rates “exceptionally low” for an “extended period” of time. The Federal Funds Rate has been pegged at between zero and one-quarter percent since December 2008—an unprecedented 29 months of interest rates being ultra-low. How can stocks not go up in such a favorable monetary environment?

The bear market rally in stocks is alive and well.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public haven taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi, PROFIT CONFIDENTIAL, September 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.