Blog : It's the Fed, Stupid

by Ed Zwirn on March 10th, 2013

A Penny Stock Blog By Ed Zwirn

Penny stock pickers looking to gage the broader market would do well to pick the brain of the Fed.

To be sure, this morning's payroll figures, which showed the U.S. economy creating a net 236,000 jobs last month, lowering the official unemployment rate to 7.7%, have created a boost for stocks. But don't kid yourself: The people with the deep pockets are not suddenly acquiring an altruistic streak. The meager progress seen in job creation is not the primary market driver, and is in any case not sufficient to explain why the Dow Jones Industrial Average is up over 9.7% (as of 11:30 a.m. Friday) so far this year.

Fed policy is in fact the primary driver at work. The U.S. central bank has been pumping $85 billion a month into the economy via mortgages and Treasury bond purchases since June 2011. And this monthly "stimulus," ironically identical to the amount politicians say is being "sequestered" annually as a result of the most recent collapse of budget negotiations, is more than enough to outweigh any austerity being contemplated by the government.

Speculation has been rampant recently that this accommodation is likely to continue. In congressional testimony last week, Ben Bernanke indicated that the Fed was reconsidering its announced policy of selling the bonds it has accumulated in its portfolio, a move which would in effect have sucked the same money back out of the economy, and may simply hold the issues to maturity.

Penny stock investors should note that the continuing robust performance of the stock market has not only had the effect of boosting investor assets, but it has also raised the ante. If you could have received north of 9% in less than a quarter by buying a Dow index, why invest in the more speculative parts of the equity market?

The short answer is that there is a lot more money to be made by investing in penny stocks, as opposed to the 30 DJIA component Blue Chips. A penny stock, being potentially more liquid due to its lower price, can generate huge returns. But, unlike a Dow index investment, a plunge into a penny stock requires homework. Before deciding which stocks to buy, penny stock investors need to look closely at things like the realism of a company business plan, whether its cash burn rate will allow it to stay in business until this plan reaches fruition, and how the upside can be measured.

The challenge is to keep all these factors in mind while not ignoring broader indicators, such as the overall direction being taken by stocks and the varying appetite for risk on the part of the investing public. Reading Fed tea leaves can be as important as reading the financial reports of penny stocks, which are at least in part dependent upon the flow of cash that these tea leaves represent..

Of course, this is WHAT WE DO over here at Pennystocks.net. Peter's hot penny stock recommendations will help you get a crack at penny stock returns large enough to dwarf the Dow. At the same time, we try to provide a perspective on how things in the wider world are going, just in case.