Blog : Penny Stock Week: Spare Us the Surprises

by Ed Zwirn on March 17th, 2014

Eastern Europe is in a war-like posture, a commercial airline mysteriously disappears out of the sky, the next Federal Reserve announcement is due out Wednesday and the stock market in the U.S. opens sharply on the upside this Monday morning, partly reversing the sharp losses seen at the end of last week amid international concerns.

The focus of much of the world's diplomacy and market speculation is on Ukraine this morning, as both the E.U. and the U.S. ready sanctions against the Russians in the wake of their moves to annex Ukraine's Crimean peninsula.

The outcome of the vote itself on Sunday was never in doubt. Through it, Crimean residents, or at least those that voted, gave overwhelming referendum approval to reuniting with Russia, reversing a 1954 move made by then-Soviet leader Nikita Krushchev which transferred Crimea from Russia to Ukraine within the U.S.S.R.

For now, this seems to be the kind of static situation markets like. Nobody had expected any other result from the referendum in Crimea, with its majority Russian population. The Russian and Ukrainian defense ministries have reportedly agreed on a weeklong ceasefire in the peninsula, on which both countries keep armed forces.

This leaves the peace of Europe in the hands of: 1)The Crimean Tatars, an indigenous people who have no love of their Russian occupiers, especially since their forced deportation to Central Asia by Joseph Stalin during World War II, and 2) Ethnic Russian residents of Eastern Ukraine, who may be emboldened enough by the results in Crimea to launch separatist efforts of their own which, if they turn bloody, could give Moscow a pretext to intervene in order to "protect" the Russian speakers in the region.

This follows a week which saw all major market indices in the U.S. fall sharply as a result of both the Ukrainian situation and news of an economic slowdown in China. The Dow Jones Industrial Average closed Friday at 16,065.67, down 2.4% from the previous week's 16,452.72. The broader NASDAQ Composite fell 3.2%.

At the same time smaller stocks, including penny stock investments, didn't do quite as badly, with the small-cap Russell 2000 down 1.8% after hitting a record the week before and scoring its fourth consecutive weekly gain.

On the domestic front, the news released about the economy last week was mixed:

-- Thursday's retail sales report was certainly a mixed bag. While the consensus had expected a 0.2% retail sales rise for February, following January's 0.4% decline, February came in better than expected, with a 0.3% increase. On the other hand, it turns out that January had been worse than initially reported, with the decline revised to 0.6% in the announcement. Excluding the auto sector, retail sales rose by a better-than expected 0.3%, following January's 0.3% decline (revised from a flat reading).

-- Friday morning's producer price index release had been expected to show little movement. But instead of the 0.2% rise forecast by most analysts for February, the PPI fell by 0.1%, partially reversing January's 0.2% rise. The less volatile "core" figure, which excludes food and energy, fell even more, by a greater-than-expected 0.2%. 

Looking ahead this week, assuming there are no more rude international awakenings, investors in everything from penny stocks to blue chip shares will have their attention diverted to a relatively heavy calendar of domestic economic news:

-- Monday's industrial production report is expected to show a 0.1% rise for February, following January's 0.3% fall.

-- It will be interesting to check out Tuesday's consumer price index update, especially in the light of last week's fall in producer prices. The consensus is calling for a 0.2% rise for February, a pickup from the 0.1% inflation seen the prior month. Core prices are expected to have risen 0.1%, the same pace seen in January.

-- Wednesday afternoon's Federal Reserve announcement is not expected to break any new ground, given that unemployment is still above the bank's target level and inflation is running at such a low rate, if at all. As usual, we will be looking closely at the statement for any change in its assessment of the U.S. economy since the Fed last met six weeks ago. Hopefully, by Wednesday the extent of the blowout from the Ukraine crisis will have been made clear, but there also remains the possibility that Yellen and company will make a statement or announce measures intended to boost liquidity in the event of a major hit to the world economy.

-- Look for Thursday's existing home sales report to show little February movement following a mildly disappointing January. The consensus is calling for this number to come in at 4.6 million, following January's 4.62 million reading.