Blog : Penny Stock Week: What a Difference a Phone Call Makes

by Ed Zwirn on March 31st, 2014

The U.S. stock market has entered its last trading day of Q1 sharply on the upside following a weekend telephone call between Russian leader Vladimir Putin and U.S. President Barack Obama and the start of a series of meetings between their top diplomats.

While no breakthroughs have emerged from these exchanges, aimed at diffusing the Ukrainian crisis, tensions along the Ukraine-Russia border have reportedly eased, as have market concerns, as the threat of conflict seems averted for now.

This leaves U.S. investors free to look inward, where the news is less frightening. Ahead of Friday's widely anticipated jobs report, this morning's scene stealer was a speech by the Fed's Janet Yellen, who told a conference on community development that the U.S. economy continues to fall "considerably short" as measured by the Fed's two goals: maximum sustainable employment and low and stable inflation. This means that the Fed's easy money policies will continue for some time, be reassured.

The contrast between Monday morning and Friday afternoon could not have been more marked. Monday morning's euphoria over Yellen's restating the obvious follows a week which produced bifurcated market results despite relatively good domestic news, with blue chip behemoths holding their own while anything more speculative than that took a bath.

As a result, Dow Jones Industrial Average closed Friday at 16,323.06 up 0.1% from the previous week's 16,302.77. At the same time, the broader market took a beating, with the NASDAQ Composite falling 2.8% and smaller stocks, including penny stocks, taking an even worse hit, with the small-cap Russell 2000 off 3.5%.

This showing leaves Q1 2014 squarely in the negative as of the end of its last full trading week. The Dow was off 1.5% so far this year as of Friday, the NASDAQ off 0.5% and Russell 2000 off 1%.

Last week's poor market showing notwithstanding, the domestic economic news released last week was mainly indicative of continued growth:

-- Tuesday morning's new home sales report proved a minor disappointment, with February's number coming in at a lower-than-expected 440,000, down from January's 455,000, which was downwardly revised from 468,000.

-- Wednesday's durable goods orders report provided evidence of a pronounced upturn in February, propelled by gains in the motor vehicles sector. The increase in durable orders last month was pegged at 2.2%, more than twice the rate of increase called for by the consensus. This follows an adjusted decline of 1.3% for January. Excluding transportation, the increase came to a lower-than-expected 0.2%, down from the prior month's downwardly adjusted 0.9% rise.

-- Friday brought word that the personal income of Americans rose by a higher-than-expected 0.3% in February, continuing January's pace. Personal spending (as expected) also rose 0.3% in February, a pickup from January's downwardly adjusted 0.2% rise.

Looking ahead this week, Friday's March jobs report will be preceded by a full calendar of economic releases:

-- Tuesday's construction spending report is expected to show a 0.1% rise for February.

-- Later that day will see the release of the latest auto and truck sales figures. In February, auto sales came to 5.2 million and truck sales to 7 million, and the March news may prove indicative of whether the rise seen in last week's durable orders report is reflective of progress in this sector.

-- Wednesday is expected to bring news of a 1.1% uptick in factor orders for February, which would be just what the doctor ordered following January's 0.7% decline.

-- But it is Friday's nonfarm payrolls report which has the potential to be the biggest market mover.

February's news that 175,000 new jobs had been added to the collective national payroll proved a welcome antidote to the more recent dismal jobs showings, while still indicative of subpar growth. The market appears to be betting that March's number will be an improvement over February's, with the consensus calling for a jobs growth figure of 197,000, driven by private sector hiring.

In addition, look for the unemployment rate to tick back down to 6.6%, January's level, from February's 6.7%. Hourly earnings are expected to go up 0.2%, following February's 0.4% rise, and the average workweek is expected to rise to 34.4 hours, from 34.2.

A confirmation that the recent rise in consumer sentiment is based as much as on solid jobs growth and not so much on smoke and mirrors ought to do much to reassure a stock market understandably diverted by what seems to be nothing but bad news coming from overseas venues.

If a genuine gobs recovery, or at least no further derailment of the jobs market, proves to be the case, it may be time to look again at many penny stock investments that may have been hit hard by the recent flight from speculative assets. Buying opportunities may be out there for stocks that have been propelled south strictly due to broader market movements.