Blog : In With the Old, Out With the New

by Ed Zwirn on August 23rd, 2013

Old houseThe latest reports from the real estate sector can only serve to cloud the outlook for Federal Reserve action.

Bear in mind that the quantitative easing program through which the Fed pumps $85 billion monthly into the economy by purchasing mortgage-backed and Treasury securities has the real estate sector as its primary target. One of the pillars of the U.S. economy, housing has only just begun to recover from the financial meltdowns of 2007-2008.

And the latest news about whether or not this recovery is gaining steam is ambiguous, at best.

A strong bullish signal was seen in this regard earlier this week with the release of numbers showing existing home sales - which account for about 90% of the housing market - rose more than 6% on the month in July, despite (or maybe because of) higher, more volatile mortgage rates.

In results that should trickle down to penny stocks and other small-cap shares, Home Depot and Lowe's have reported robust earnings, as homeowners apparently spent more money to refurbish these existing homes.

But the bear came out on Friday with the news that new home sales, a more advanced indicator, came in at their lowest level in nine months. Analysts attributed the poor showing both to the interest rate increases and to the higher prices new home builders are trying to fetch based on a housing recovery.

Increased speculation over whether the Fed will begin "tapering" as soon as next month has already boosted the yield on the 10-year U.S. Treasury, which was trading today at 2.82%, decreasing appetite for more risky investments like penny stocks at the same time as making mortgage payments more expensive.

This round of speculation is likely to continue, at least until the Federal Reserve's Open Markets Committee unveils its latest monetary policy statement on Sept. 18. The announcement is asterisked on the FOMC calendar as being a full-fledged announcement with a barrage of fresh economic statistics and a press conference by Ben Bernanke, making it an ideal venue to announce any changes in policy or economic outlook.

In the meantime, penny stock investors should keep their eyes peeled for any new economic information to come out between now and then. Sept. 6's jobs release will be closely watched for any signs of an economic overheating, as will Sept. 13's producer price index and Sept. 17's CPI, which will be announced just prior to the start of the FOMC two-day meeting.

There remain two possibilities for Sept. 18: 1) that the Fed will leave things exactly the way they are, with no hint of a QE scaleback, 2) that some tapering will be announced. Assuming the tapering is not that severe or abrupt, which it won't be, this development has been at least in part priced into market calculations. On the other hand, any hint at continued easy money should provide a boost for the upside.

Get Our Best Low-Priced Investments

  • don't have the time?
  • can't do all the work required?
  • want selections from the authority?

For only $199 per year, we give you our best high-quality, low-priced stock picks. Along with a full team, Peter Leeds is the widely recognized authority on small stocks. Start making money from penny stocks right away.