Blog : Penny Stock Week: Too Drastic to Hedge

by Ed Zwirn on March 24th, 2014

It's been one of those market weeks which have unfortunately become all too common as of late. Once again, the stock market has been buffeted by overseas concerns which engender bearishness even in the face of relatively good economic news at home.

To take potentially less deadly of these concerns first, the news from China, the country which powers much of the world's economic growth, has been far from encouraging, with weaker-than-expected readings showing a manufacturing contraction in the early part of 2013. China's flash Markit/HSBC Purchasing Managers' Index, it was announced over the weekend, fell to an eight-month low of 48.1 in March from February's final reading of 48.5.

But the market had already been skittish about China and so much of the worry about that country may already have been baked into the market pie. Not so with Ukraine, where the possibilities, however remote, are too drastic to hedge against. The deterioration of the current dispute between Russia and Ukraine into a deadly military conflict would prove a tragedy in and of itself and also serve to destabilize a region that, for better or worse, has been at peace since the end of World War Two.

Even under best-case scenarios there are going to be economic consequences, particularly in Europe, and the EU and Russia retaliate against each other with trade sanctions. The Russians, assuming they shut off their natural gas pipelines, have the potential to inflict a major hit on the West by causing Western Europeans to sit in the cold at the same time many of their natgas-dependent industries, particularly chemicals, are forced to shut down.

In any case, despite basically the same set of fears, coupled with a distracting Federal Reserve announcement, stock market investors are returning to the fray in a cautious manner on Monday following a volatile trading week which saw the market end on the upside after wild swings.

The Dow Jones Industrial Average closed Friday at 16,302.77, up 1.5% from the previous week's 16,065.67. The broader NASDAQ Composite rose 0.7 %.

At the same time smaller stocks, including penny stock investments, held their own, with the small-cap Russell 2000 up 1%.

When not hamstrung by the international agenda or concern over the direction of Fed policy, investors actually had relatively benign economic news to digest last week:

-- Monday's industrial production report showed a much higher-than-expected 0.6% rise for February, following January's revised 0.2% fall.

-- Tuesday's consumer price index update showed an inflation slowdown for February, confirming the indicator posted by the prior week's producer price index, which showed a deflationary February. Consumer prices in fact rose last month, according to the latest, but did so by a less-than-expected 0.1%, continuing the rate of increase seen the prior month. Core prices as expected rose 0.1%, the same pace seen in January.

-- Despite breaking no new policy ground whatsoever, Wednesday afternoon's Federal Reserve announcement and subsequent Janet Yellen press conference managed to rattle financial markets all the same.

Financial markets hungry for headlines quickly seized on the fact that the Fed statement dropped earlier guidance to the effect that hitting a 6.5% unemployment rate threshold could act as a possible tripwire for a possible hike in short-term interest rates. As Yellen made clear in the subsequent press conference, the Fed was bowing to the reality that, despite moderate labor market gains, the economy is far from overheating and that inflation, one of the other benchmarks for Fed rate guidance, continues to run far below targeted levels.

But the dealbreaker this time around was Yellen's presumably off-the-cuff statement that a rise of short-term interest rates could occur six months after the end of quantitative easing, putting the event as early as April 2015, as opposed to the year-end 2015 that most had been expecting. 

Whether this remark was a slip on the part of Yellen, who had been repeatedly asked by the press when rates would rise, even though the conditions for this to occur are far off, or an attempt to "jawbone" the market (as Alan Greenspan attempted to do with his "irrational exuberance" comment), by the next day stocks had regained the ground they lost Wednesday afternoon.
 
-- Thursday's existing home sales report as expected showed little February movement following a mildly disappointing January. February's tally came to 4.6 million, following January's 4.62 million reading.

Looking ahead this week:

-- Tuesday morning's new home sales report is expected to weigh in at 445,000 for February, down from January's 468,000.

-- On Wednesday morning, the market is expecting to hear news of a 1% increase in February orders for durable goods, following January's 1% decline. Excluding transportation, the increase is expected at 0.3%, an improvement from the prior month's 1.1% fall.

-- Friday is expected to bring word that the personal income of Americans rose 0.2% in February, a slight slowdown from January's 0.3% increase. These same Americans will have outspent these pay raises, according to the consensus, which predicts a 0.3% rise for February's personal spending, following January's 0.4% rise.