Five Reasons Why Stock Prices
Will Rise in the Immediate Term

Michael's five reasons why stock prices will rise in the immediate term.Below I list five facts about the stock market, all very bullish cases for stock prices to rise in the immediate term.

According to Bloomberg’s survey of 9,000 stock analysts, the S&P 500 companies will earn 18% more in 2011 than they did in 2010. Despite this, the S&P is trading at 14.5 times last year’s earnings. Since 1991, the S&P has traded at an average of 20.5 times earnings.

Interest rates in the U.S. are not rising for the near future, as the unemployment rate remains high, the Fed is not pushing the inflation panic button yet, and the Fed is committed to a policy of monetary stimulus.

Stock prices have fallen 6.2% since May 2, 2011—and investors are in panic mode. While most investors have very short-term memories, I remember last year, in particular the period from April 2010 to the end of June 2010, when stock prices fell 16% and investors were panicking as well. Stocks subsequently rose 34% from the end of June 2010 to May 2011.

Investors pulled $5.46 billion out of stock mutual funds last week, according to the Investment Company Institute in Washington—the biggest withdrawal of money from stock mutual funds since the week ended December 8, 2010. From December 8, 2010 to May 2, 2011, stocks rose 12%.

The percentage of bullish stock advisors in the marketplace has fallen to a low not seen since September 2010 (Source: Investors Intelligence). The Dow Jones Industrial Average rose 22.6% from the beginning of September 2010 to May 2, 2011.

Michael’s Personal Notes:

Excellent story in this weekend’s New York Times on the backlog of residential home foreclosure cases across the country. The article refers to data from LPS Applied Analytics, which reports it would take “lenders 62 years at their current pace to repossess the 213,000 houses now in severe default or foreclosure” in New York State (New York Times, 6/19/11).

The article goes on to claim that millions in the U.S. are staying in their homes without making payments on their mortgages, as the foreclosure process grinds to a halt.

You may remember last fall’s controversy over banks foreclosing on homes without all the paperwork in order. This slowed the foreclosure process dramatically. Add to this a large number of homes still to be foreclosed on and the system is overwhelmed.

Do the banks really want more foreclosed homes on their books? I doubt it. It takes money to foreclose on a home and more money to sell it (real estate commissions, etc.). If I were a bank with tens of thousands of homes on my books, wouldn’t I want the people living in the homes to pay the utilities as opposed to my bank?

I’ve said this before: I have never seen the U.S. economy recover when the housing market hasn’t recovered with it. It will take another decade for any normality to return to the U.S. housing market. Hence, you can see why I’m so wary of the economic recovery and so concerned about a double-dip recession.

Where the Stands; Where it’s Headed:

My opinion remains unchanged: stocks are oversold. The bear market rally in stocks that started in March of 2009, although getting near its end, is still alive and well.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael began talking about and predicting the financial catastrophe we started experiencing in 2008, long before anyone else.