Blog : Core PPI

by Ed Zwirn on July 12th, 2013

Never mind all the background noise created this week by Federal Reserve Chairman Ben Bernanke, who has stated the obvious: U.S. central bank monetary policy is likely to remain accommodative for some time, boosting penny stocks and everything else that likes to see money being pumped into the domestic economy.

Despite all the speculation created by worry over when the Fed might tighten, this tightening remains as remote as ever, and with it the bank's $85 billion monthly bond buying program (which won't taper off before June 2014) and near-zero short-term interest rates, which are likely to last much longer.

The latest evidence that this is the case is this morning's producer price index release, which shows continued muted price growth and with it the assurance that inflation is nowhere near heating up. While this morning's release shows a 0.8% spike in overall producer prices for June, following a 0.5% May increase, this spike was almost exclusively generated by rising energy prices, with the more relevant "core" figure, which excludes this, rising by a more modest 0.2%.

The PPI, particularly the core figure, is a more forward-looking indicator than the consumer price index, reflecting as it does inputs that hit the economy ahead of their effects upon consumers, meaning that penny stocks, which are already overperforming in relation to their more expensive counterparts, should continue to get a boost. 

While this core increase represents a slight uptick from the previous month's 0.1%, analysts agree that this is hardly the stuff that inflationary nightmares are made of. And the market for everything from penny stocks to blue chips apparently agrees, with all major stock indices holding steady. Looking at penny stocks and low-cap companies more specifically, the Russell 2000 index is at an all-time high of 1,034.38 as of this writing, up slightly so far on the day and about 21.8% higher so far this year.

By way of contrast, the Dow Jones Industrial Average, which consists of 40 blue chips, is off a bit today and up 17.8% this year. The NASDAQ, which includes more penny stocks than the DJIA, is up a tad today and 18.7% ahead of where it stood on Dec.31, 2012. This relationship between the performance of large and small companies, including penny stocks, is widely considered a bullish indicator for the market as a whole, because it signals continued strong risk appetite.

And it's bon appetite for penny stocks as long as this lack of risk aversion continues.