Blog : Maven to Greenspan: Hang It Up!

by Ed Zwirn on June 12th, 2013

I didn't always pretend to be a penny stock maven.

Among the other disciplines for which I have had pretense to expertise over the years, it is useful for me to recall my stint covering basically the opposite end of the spectrum from the penny stock world - the investment grade bond market. Sitting on the bond desk at Dow Jones Newswires, I was one of the first to see the December 1996 news flash in which the words "irrational exuberance" were extracted from a speech by then-Federal Reserve Bank Chairman Alan Greenspan.

The reaction by mainstream investors, particularly those buying and selling penny stocks, to this byte was predictable. Stock markets, particularly if you had been following the penny stock-rich NASDAQ, were depressed for some time after that, spurred on by the fear to be expected when a person in Greenspan's position starts hinting at the existence of a market bubble.

But this bubble, however much it may have proved to be a bubble in hindsight, still had some pumping up left to do. And the same may hold true for the penny stock party.

As one of my bond trader contacts put it at the time of the news flash, "Greenspan's just trying to jawbone the market," he told me. "By talking about this stuff he is telling us that he is only trying to let some of the steam out with words, and that any tightening by the Fed is likely to be a long time in coming."

Looking back on this, I am not only convinced that my trader friend was correct, but also realize in retrospect that he and the other professional investors, who perversely took "irrational exuberance" as a buy signal, took advantage of this interpretation to buy everything from penny stocks to investment grade bonds on the cheap, profiting handsomely from what we now call the dot.com bubble, a bubble which still had had a few years to go before bursting.

It is interesting in this context to point out that the ex-Fed chairman has been prominent in the last week or two in calling for the institution he used to head to rein in its monetary stimulus. His comments follow on the heels of his successor, Ben Bernanke, who in recent Congressional testimony has hinted that a Fed scaledown may be necessary at some point.

From this I draw two lessons: 1) That it is time for the 87 year-old Greenspan to hang it up, and 2) Downturns caused by stray comments (and not backed up by hard measures) may represent buying opportunities.

Penny stock investors take note: The economy in the U.S. is experiencing slow growth, and the global situation is, if anything, worse. The vulnerability of your penny stock portfolio to market risk is directly dependent upon the Fed, especially as the government curtails spending. The Fed, all stray remarks aside, has clearly spelled out the rules by which it will decide whether to cut back on its stimulus. Next week will probably prove pivotal for penny stock investments in that regard, after the public parses the next FOMC statement on Wednesday for clues.