Blog : A Penny Stock Mea Culpa

by Ed Zwirn on June 21st, 2013

I admit it: I was wrong. The stock market did not rally following the Wednesday Federal Reserve blitz, as I erroneously predicted in last week's Penny Stock Week.

Now that I got the hard part of this penny stock blog out of the way, a close look at the plans released by Bernanke and company reveals (if I may say so) that I might not have been so wrong after all.

While Wednesday's FOMC statement provided only slight insertions into the previous statement, Ben Bernanke's follow-up press conference spooked the market by specifying in detail the manner in which the Fed will ultimately unwind its monetary stimulus, particularly its $85 billion monthly purchases of mortgage-backed securities and Treasury debt.

The Fed will eliminate this stimulus at the end of the first half of next year, provided the unemployment rate is at 7% (versus the current 7.6%) at that point and seems to be progressing at a healthy pace. In addition, in a nod to the housing market, Bernanke pledged to hold on to the Fed's mortgage holdings "during the process of normalizing monetary policy."

Looking farther ahead, the Federal Funds target interest rate is likely to remain at or zero for some time. According to a handout released with the press conference, the overwhelming majority of FOMC members expect Fed Funds to stay at around 0.25% through the end of 2014, at the very earliest.

So there you have it. The Federal Reserve will continue its bond buying for at least another year and is committed to boosting the real estate market by holding on to its asset purchases in that sector during that same transition timeframe. Beyond that, monetary stimulus through interest rate targeting will continue until at least 2015, providing a boost to penny stocks and other speculative instruments as investors seek yield.

If you have a longer timeframe in mind for your penny stock portfolio, god bless you. For all other penny stock investors, the good news is that market movements based on Fed policy may have been priced into the market. However much Thursday's 353 Dow drop may have weakened my renown for prognostication, it supposedly provides an accurate picture of investor sentiment given the Fed plans. Any variations from the Fed's projections should move a rational market accordingly.

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