Blog : Penny Stock Week: Speculative Stocks Get Hit

by Ed Zwirn on February 10th, 2014

The more speculative ends of the stock market, including both emerging market shares and penny stocks, continue to see pressure Monday morning even after last week's relatively good showing for large stocks. Penny stocks, as represented by the small-cap Russell 2000 index, are off 0.6% in morning trading even as the NASDAQ Composite is ahead 0.2%.

This follows a mixed showing for the stock market last week. Pushed by a broad end-of-the-week rally, the Dow Jones Industrial Average snapped a two-week losing streak to close Friday at 15,794.08, up 0.6% from the previous 15,698.85. The week ended with decided upside momentum, with the Dow up 2.3% on Thursday and Friday alone, the NASDAQ up 3.3% and Russell 2000 up 2.1%

While smaller stocks, including penny stocks, participated in the rally on Thursday and Friday, the broader market still lags behind the blue chip index on a weekly basis, with the NASDAQ Composite up less than 0.1% and the small-cap Russell 2000 off 1.3%, steeper than the 1.1% decline seen the previous week.

Friday morning's non-farm payrolls report apparently had no ill effect on stocks despite being a major disappointment for everybody who had been hoping for a pickup for job creation in January. The consensus had called for a January job creation figure of 175,000, following December's 74,000 disastrous showing. Instead, the January figure came to an anemic 110,000.

Incorporating the revisions for November and December, which increased non-farm employment by 34,000 on net, monthly job gains have averaged 154,000 over the past three months. In 2013, employment growth averaged 194,000 per month.

On the other hand, as I pointed out in a penny stock blog this past weekend, there were some silver linings to the jobs release. For one thing, the unemployment rate, which had been expected to hold steady at 6.7%, actually ticked down to 6.6% at a time when the labor participation rate rose.

This means that the lower unemployment rate, at least this time around, had nothing to do with people giving up on job searches. The number of unemployed who have given up looking for work out of despair over their prospects actually fell, to 837,000 in January from 917,000 in December. Also, the number of workers who said they were part-time due to economic reasons fell by 514,000, to 7.25 million.

Hourly earnings rose as expected by 0.2%, following December's flat reading (downwardly revised from a 0.1% increase). The average work week as expected held steady at 34.4 hours.

Other items on the calendar of economic releases last week also contributed to the outlook that the economy, while growing, is seeing this growth slow down:

-- Monday morning's construction spending report as expected showed a 0.1% rise for December, a slowdown from November's downwardly revised 0.8% increase.

-- Also on Monday, January's auto and truck sales figures provided an ambivalent take, with auto sales down to 5.1 million, following December's 5.3 million, while truck sales rose, to 7 million, up from December's 6.6 million.

-- Tuesday's December factory orders report came in slightly better than expected to show only a 1.5% decline, a letdown nonetheless from November's 1.5% rise (downwardly revised from 1.8%).
Looking ahead this week:

-- Thursday's retail sales report is expected to record a flat reading for January, following December's 0.2% rise. Excluding the recently ailing auto sector, look for sales to have risen 0.1%, following December's 0.7% spike.

-- Friday's industrial production report is expected to show a 0.3% rise for January, continuing the rate of increase seen in December.

On the Global Radar:

Evidence of continuing concern of Fed policy's impact on emerging markets came early this morning with the release of a report by Moody's Investors Service warning that QE tapering could further weaken the liquidity of companies overseas, particularly in the Middle East and Africa.

According to Moody's the more highly leveraged companies in Turkey and South Africa, which have experienced significant currency depreciation relative to the US dollar, may be most at risk.

"The primary threat to liquidity of some emerging market companies as a consequence of U.S. government tapering may lie in policy responses that impact the domestic macroeconomic environment and financial systems, including local banks. Government and monetary policy decisions that raise interest rates could pressure corporate cash flows," the ratings agency warned.

-- A possible wrinkle in the European situation emerged over the weekend with the narrow approval by voters in Switzerland of restrictions on immigration. Although Switzerland is not a member of the European Union, it is part of the EU trading bloc. Since the free movement of people within the EU was one of the conditions of joining this trading bloc, to which Switzerland sells almost all of its exports, this latest development could put this trading status in jeopardy, to the detriment of both the Swiss and the EU.