Blog : Penny Stock Week: The 'Noisy' New Paradigm

by Ed Zwirn on June 23rd, 2014

In case Janet Yellen hasn't yet convinced all of us of the new paradigm, she laid it out as clearly as she could: Sure, the latest news on consumer inflation showed an uptick, but these readings were just "noisy," and the Federal Reserve Bank she heads up expects no inflation anywhere near its 2% target until 2016 at the earliest.

In fact, including the Fed, the Bank of Japan and the European Central Bank, all three of the world's major central banks appear increasingly preoccupied by the threat of deflation. Although the Fed has made much "noise" with its tapering off on quantitative easing, which it predictably trimmed by another $10 billion this time around, it still holds on to the tremendous amount of assets purchased in the course of this program, and is likely to do so well beyond the point at which boomers pass quietly from the scene. And higher interest rates are even further in coming.

This lesson was not lost on investors.

Both the S&P 500 and the Dow Jones Industrial Average pulled off all-time high closings last week, with the 30 blue chip Dow titans gaining 1.1% to land at 16,947.08, up from the 16,775.74 previously noted on the Peter Leeds site.

The broader market, including penny stocks, did even better, with the NASDAQ composite gaining 1.3% on the week. Penny stocks, as measured by the Russell 2000 small-cap index, gained 2.2% to close at their highest level since April 1.

Investors will confront a densely packed economic calendar this week, expected to include upbeat news on current economic conditions and provide more depressing reading about Q1:

-- 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 brought word of weakness in the real estate sector. Housing starts came in at a weaker-than-expected 1.001 million for May, down 6.5% from April's downwardly revised 1.071 million. Similarly, building permits came to a disappointing 991,000, down 5.6% from April's downwardly revised 1.05 million.

-- Call it noise or whatever you like. Tuesday's Consumer Price Index showed a higher-than expected 0.4% rise, up from April's 0.3% increase. The closely watched "core" figure rose 0.3%, following April's 0.2% spike.

On the other hand, with the latest PPI, reported the prior week, showing a decline, Yellen may actually have a point.

Looking ahead this week:

-- Monday's existing homes sales report is expected to show sales at the rate 4.8 million for May, up from April's 4.65 million pace.

-- Tuesday morning is also expected to bring more benign real estate numbers, with new home sales for May totaling 440,000, up slightly from April's 433,000.

-- May's durable orders report is also expected to be good enough, with the consensus expecting the Wednesday morning report to show a 0.4% gain, following April's downwardly revised 0.6% increase. Excluding vehicles, this increase is expected to come to 0.4%, up from April's 0.3% rise.

So far so good:

-- That being said, expect yet more attention to be captured Wednesday morning by the latest take on the train wreck that was Q1. Analysts are expecting the third estimate of that bleak period to show a 1.8% GDP decline, even worse than the 1% decline reported in the second estimate. This would make Q1 2014 even worse than Q1 2011, when the economy fell 1.3%.

And while the winter has been blamed in large part for this U.S. economic decline, the underlying statistics in the Bureau of Economic Analysis second GDP estimate in May seem to give the lie to that assertion. It is hard to imagine that a hard winter was exclusively responsible for the 11.7% lightening of domestic investment positions seen during the period, and the same goes for the 6% fall in exports.

The second GDP estimate had already trimmed back projections for U.S. (and, by extension, global) economic growth for this year. The pronounced worsening to be seen in this next and final (thank God) estimate may already be priced into the market, but God help us all if the advance take on Q2, scheduled to come out on July 30, doesn't show a sharp rebound. And with the U.S. trade balance under pressure, at least if you go by the easy money propping up Japan and Europe, this rebound is almost exclusively dependent upon the investment community.

-- Thursday will give the market a chance to catch its breath with the release of a report expected to show a rise of 0.4% in personal income for May, up from April's 0.3% increase. Significantly, personal spending is also expected to rise 0.4% after falling 0.1% in April.

But there is likely to be little time for breath catching in any case. With almost all segments of the market at all-time highs, there is no denying the possibility that stocks may get the wind knocked out of them. On the other hand, there may well be more inhaling left to go (and higher highs), as the monetary authorities of the world try like hell to pump up the volume.