Blog : Penny Stock Week: Driving Driving Good Times

by Ed Zwirn on May 27th, 2014

This was supposed to have been the travel bomb weekend. Americans of all background used to spend Memorial Day in the pre-Monday holiday era paying honor to the sacrifices of slain soldiers. Under the three-day weekend paradigm, the appropriateness of the holiday is summed up largely by the consumption of petrochemicals.

Cheerleaders for the travel industry in all its manifestations have been banking big that Americans would exhibit both optimism and patriotism by taking to the road (and sky and sea) in huge numbers. AAA Travel has predicted that 36.1 million Americans would travel 50 miles or more this past weekend, a 1.5% increase from 2013 and the busiest Memorial Day travel weekend since the recession, and the second-highest travel volume since 2000.

Assuming this projection is borne out by the tallies to be released this week, this would mark the bright spot on an otherwise dismal economic calendar, with news expected of an economic contraction for Q1, a durable orders retreat for April and a slowdown of increases in personal income and spending.

A recovery for Memorial Day weekend driving would also beg the question of whether all this fuel consumption will have been propelled by an improving outlook. There is some reason to believe that this is the case. According to the Bureau of Labor Statistics, the U.S. economy added 857,000 jobs through April 30, an incremental improvement over the 711,000 new jobs reported for the first four months of last year.

As unimpressive as the gains seen by wage earners may look, investors have fared worse, however much the headlines may trumpet the latest record set by the Down Jones Industrial Average and S&P 500. Investors who bought either the 30 Dow blue chip stocks or the broader NASDAQ Composite on Dec. 31 have reaped a paltry 0.2% gain so far this year.

Penny stock investments, at least as measured by the small-cap Russell 2000 index, have performed markedly worse so far this year, losing 3.2%.

Investors have obviously dumped risk in favor of safe-haven investments, and it is not hard to understand why. As I have observed earlier in this investment blog, a volatile international situation has dovetailed with a decreasing level of U.S. Federal Reserve support, pulling the rug out from overseas equities and at the same time spreading risk aversion stateside.

With the usually challenging (for stocks) summer season underway, there is no reason to believe that the pressure on penny stocks will abate any time soon, and this week's four-day trading session promises more of the same.

The Dow closed Friday at 16,606.27, up 0.7% from the 16,491.31 noted last week on the Peter Leeds site.

At the same time, the broader market, including smaller and more speculative stocks, outperformed, with the NASDAQ composite gaining 2.3% and the penny stock-rich Russell 2000 small-cap index up 2.1% on the week.

Last week's economic news was dominated by relatively good news from the real estate sector:

-- Thursday is expected to bring word of 4.65 million of existing home sales for April, in line with consensus expectations, up from March's 4.59 million.

-- Friday morning's new of 433,000 new homes sales for April exceeded both the consensus 415,000 and March's upwardly revised (from 384,000) 407,000.

Looking ahead this week, a relatively high volume of doom and gloom has been priced into consensus economic forecasts:

-- Tuesday morning's durable orders report for April is expected to show a broad-based retreat, with the overall number registering a 1.3% decline, following March's upwardly revised 2.9% rise, while the decline excluding transportation is expected to come to 0.2%, following March's upwardly revised 2.4% spike.

-- Thursday's second estimate of Q1 GDP is expected to make for bleak reading. The last time around, the Q1 figure had been pegged at a 0.1% increase. The consensus now expects the Q1 estimate to descend into negative territory, showing a loss of 0.5%. This would be a sharp slowdown from Q4 2013's 2.6% growth and even Q1 2013's 1.1% increase.                                                                                        

Stock market investors are apparently already resigned to this weak number. But the descent of the GDP into negative territory calls into question the extent to which this poor economic performance can be blamed on the harsh winter conditions experienced throughout much of the U.S. during the quarter. There is widespread disagreement between economists on this score, and the question won't become moot until the issuance of the advance GDP estimate for Q2 comes out on July 30. Looking not too far into the future, anything short of proof of a sharp rebound at that point could prove nettlesome to a market likely to be stuck in summer doldrums.

-- Friday is expected to see the release of lackluster but relatively benign reports on personal income and spending. Look for personal income to show a 0.3% rise for April, following March's 0.5% increase. Personal spending is expected to lag, rising only 0.2% following March's 0.9% spike.