Blog : A Farewell to Q1

by Ed Zwirn on March 30th, 2013

Penny stock investors take note: The first quarter of 2013 will either go down in economic history as the start of another raging bull market or as evidence of another "bubble" that investors were too blind to see.

And the evidence in this case cuts both ways.

As almost anybody who follows the news will tell you, the major stock market indices such as the Dow Jones Industrial Average and the S&P 500 finished the quarter at new highs, despite weak economic growth in the United States and significant headwinds coming from overseas. The debacle in Cyprus, with all the dangers it poses for penny stock and other investors, actually contributed to this rise in U.S. markets, because, as my previous penny stock blogs have pointed out, it has resulted in scared money leaving Europe in particular for the safe haven of North America.

But is this "safe haven" really all that safe? Serious structural problems still remain in the economy of the U.S., where both Gross Domestic Product and job growth have been anemic at best. In addition, while real estate prices appear to be making a comeback, the mechanism by which this segment of the economy--government-sponsored entities such as Fannie Mae and Freddie Mac--remain moribund.

In the absence of these props, which were designed in the wake of the Great Depression to provide a secondary market for mortgages, the Federal Reserve has been forced to step in by buying mortgage-backed securities to the tune of $85 billion a month. The Fed indicated in March that this stimulus measure, which has been in effect since June 2011, is likely to continue for the foreseeable future, but it remains to be seen how long this foreseeable future will in fact prove, and any hint at a retreat from this policy is likely to bring a sharp reverse to the stock market, hitting penny stock investors and just about everybody else without a winning lottery ticket or an unlimited trust fund right where it hurts.

On the other hand, as bulls point out, the DJIA and S&P 500 still have some way to go before hitting the inflation-adjusted highs they hit in 2000. Does this mean that they still have farther to go? Probably, but as Peter Leeds says in his Invest in Penny Stock book, don't bet your lunch money on it.

But many people are probably betting their lunch money on the continued rise of the stock market, penny stock pickers being no exception. Hot stocks to buy are a topic not only among financiers, but also around the dinner tables of my neighbors in rural New York State. And when that starts to happen, it may be time to get careful and do careful research before investing in penny stocks or, for that matter, anything else. Of course, there were some people who were smart enough to make money on the market even after the 1929 crash, when penny stocks (i.e., former "dollar" stocks) suddenly became much more numerous.