Blog : Penny Stock Week: Guns Vs. Butter

by Ed Zwirn on April 21st, 2014

With the Easter-Passover abbreviated trading week behind us, look for the market for stocks of all shapes and sizes to continue its relatively strong showing this week, with investors weighing strong domestic U.S. economic data against an unsettled (and possibly deadly) international situation.

Following an Easter Sunday truce which held for a few hours, gunfire has erupted in eastern Ukraine with a gunfight at a checkpoint in the city of Slovyansk, which is controlled by pro-Russian separatists. Three people were reportedly killed.

It remains to be seen whether this development proves to be a flash in the pan, or whether this fighting will spill over to other parts of the country, providing Russia with a pretext for further intervention in Ukraine on the heels of its Crimean takeover.

Russia may already be laying the diplomatic groundwork for such an intervention, with foreign minister Sergei Lavrov accusing the Kiev government of breaking last week's Geneva agreements, which had called for an immediate end to violence in eastern Ukraine and for armed groups to surrender weapons and leave official buildings.

However destabilizing this international scenario proves, on the domestic side of the equation, the news was all moderately good, indicating a strong March showing for the economy, with key indicators like retail sales, housing starts and industrial production all showing rises from the previous month.

Against this benign domestic backdrop, the stock market reversed its recent sharp losses, with the Dow Jones Industrial Average closing Thursday at 16,408.54, up 2.4% from the previous week's 16,026.75, to finish in a dead heat with April 4's 16,412.71. The broader market mirrored this performance, with the NASDAQ composite and the penny stock-rich Russell 2000 small-cap index each rising 2.4%.

Last week's economic highlights were all indicative of the start of a spring thaw:

-- Monday's retail sales report showed a 1.1% increase for March, following an upwardly revised increase of 0.7% for February.

-- Tuesday's consumer price index update followed in synch with the recently reported and unexpected upsurge of producer prices. The CPI had been expected to show a 0.1% rise for March, continuing February's 0.1% increase. [0.2%] The core figure was also expected to rise 0.1%, the same rate of increase seen the prior month. Instead, consumer prices were reported to have risen 0.2% in March and the "core" figure, which excludes the more volatile food and energy components, also rose 0.2%, following the prior month's 0.1% rise.

While this showing could spook some inflation hawks, it can also be viewed from a glass-half-full perspective, signaling as it does an upsurge of demand. As I pointed out in an earlier penny stock blog, this upsurge of demand, as muted as it may be, can be viewed as a prerequisite for a sustained recovery, indicating as it does a return of pricing power for companies.

-- Wednesday produced news of a slightly smaller-than-expected 946,000 March housing starts, from February's upwardly revised 920,000. Building permits, on the other hand, fell slightly, going from February's downwardly revised 1.014 million to a March showing of 990,000 million.

-- Also on Wednesday, March's industrial production update showed a better-than-expected, following February's upwardly revised 1.2% rise.

Looking ahead this week, look for a relatively light calendar of economic releases to provide further word on the performance of two key economic sectors during last month:

-- Tuesday morning is expected to bring news of a 4.6 million existing homes sales figure for March, continuing February's rate of increase.

-- Wednesday's new home sales figure for March is expected to show a 455,000
March increase, up from February's 440,000.

-- Look for Thursday to bring word of a 2% March increase for durable orders, largely driven by the transportation sector, following the prior month's 2.2% rise. Excluding transportation, durable orders are expected to increase 0.5%, following February's downwardly revised 0.1% rise.

The upshot for penny stock investors: Given the relatively good U.S. economic news we've seen lately, everything from blue chip shares to more speculative investments ought to enjoy a welcoming, bullish reception, at least for the short term.

But it is necessary to add cautions to this outlook: For one thing, the bull market, assuming that that is still what we are in fact experiencing, is an old and fragile one and, with markets still approaching all-time highs is even more vulnerable to "bad" news. Many analysts have already declared that we are in the start of a pronounced correction, to continue through the summer.

And then there is the international situation. Any conflict between the U.S. and Russia, even one conducted through proxy states, could well prove these bearish analysts correct and then some. It is beyond the job descriptions of these analysts to judge whether or not fighting will break out in Europe, with all the killing and economic disruption this would bring on. A cooling down of the Ukraine crisis would prove welcome news (or at least the absence of bad news), leaving investors free to make money, at least until the advent of the next crisis, wherever (and whenever) that may occur.