Blog : Penny Stock Week: Hamstrung Fed Meet Hamstrung Congress

by Ed Zwirn on June 16th, 2014

Just when investors thought they were safe from the kind of geopolitical risks that bedeviled them throughout much of last year, destabilizing influences both at home and abroad threaten to rear their ugly heads once more.

A home, the surprise defeat of Eric Cantor, Republican majority leader in the House of Representatives, in the Virginia primary, threatens to disrupt the relative calm seen on the domestic political front. Cantor, who has opposed every Congressional initiative (including Obamacare) but on the table by the administration, was apparently not conservative enough to pass muster in this contest, opening up the possibility of more Congressional grandstanding, possibly even ahead of November's elections.

Much farther from home geographically, although perhaps closer to where it hurts politically, is the disastrous news coming from Iraq. Beyond the obvious implications that the wrecking of this country, which is OPEC's second-largest oil producer, would have on energy and commodity markets, are the divisive implications that an actual defeat for this "ally" would have on the body public.

It is not since 1975 and the fall of Saigon that the U.S. has had to deal with the specter of defeat in a war not universally popular. A great deal of national agonizing over this is likely to ensure, with the bitter debate over the prisoner swap used to obtain the return of Sgt. Bowe Bergdahl from Afghan captivity offering just a taste of things to come. In addition, things may soon get even weirder if the U.S. resorts to long-demonized Iran to help it sort out this mess.

In any case, financial markets have so far shrugged off the potentially disruptive nature of these overseas developments, with all major market indices hitting record territory last week before pausing for breath later in the week.

The Dow Jones Industrial Average hit another all-time high on Monday before managing to close Friday at 16,775.74, down 0.9% from the 16,924.28 noted last week on the Peter Leeds site. The broader market, particularly penny stocks, also performed badly (but not as badly as the Dow), with the NASDAQ composite losing 0.2% on the week, partially reversing a 1.9% gain scored the prior week. Penny stocks, as measured by the Russell 2000 small-cap index, lost 0.2% following a 2.7% gain. 

Last week's releases showed plodding gains for a domestic economy at the same time suffering from weak demand:

-- Thursday morning's retail sales report showed a lower-than-expected 0.3% May increase, following April's upwardly revised 0.5%% rise. Excluding the auto sector, the rise for this indicator came to a weaker-than 0.1% following April's upwardly revised 0.4% increase.

-- Friday's producer price index update showed that the economies of Europe and Japan may not be alone when worrying about global deflationary tendencies. The PPI had been expected to show a 0.2% rise for May, a slowdown from April's 0.2% increase. Instead, this leading indicator fell 0.2%, and even the "core" figure, which excludes food and energy, fell 0.1% following April's 0.5% increase.

Investors will confront a relatively loaded economic calendar this week, including a Wednesday policy statement from the Fed and updates on real estate, industrial production and inflation:

-- Monday morning came with word that industrial production rose by a slightly higher-than-expected 0.6% in May, rebounding from April's revised 0.3% decline.

-- Tuesday is expected to bring word of a decline in housing starts and building permits. The consensus calls for 1.028 million housing starts for May, down 4.1% from April's 1.072 million. Similarly, building permits are expected to weigh in at 1.05 million, down 2.8% from April's reported 1.08 million.

-- Tuesday's Consumer Price Index update is not expected to show evidence that the slump in producer prices reported last week is extending farther down the pipeline. The consensus is calling for May's CPI to show a 0.2% rise, down a bit from April's 0.3% increase. The closely watched "core" figure is expected to show a 0.1% rise, following April's 0.2% spike.

-- Although Wednesday's Fed monetary policy statement is expected to hold center stage for investors this week, there seems to be little room for maneuver on the part of the U.S. central bank. The European Central Bank has effectively undercut the Fed by using negative interest rates to effectively devalue the euro and boost European exports.

In addition, with the latest PPI showing a decrease, it is apparent that while the U.S. economy may be making progress on the employment situation, the Fed's inflationary targets remain distant and will force the Fed to keep the pumping up the volume. It almost goes without saying that the Fed will announce a further $10 billion "tapering" of its monthly quantitative easing purchases of Treasury debt and mortgage-backed securities this time around. But beyond that, the uncertain global outlook and (particularly) the ECB action effectively take any further tightening off the table.