Blog : Penny Stock Week: Chinese Trigger Debacle

by Ed Zwirn on June 24th, 2013

As I write this week's penny stock blog, the Dow Jones Industrial Average is down over 200 points, propelled downward, according to the headlines, by the fear of a possible credit crunch in China. The central bank in that country issued a statement early this morning which in effect told Chinese bankers that they were on their own in sorting out an apparent liquidity crisis.

Even more disheartening for penny stocks and other speculative investments, news of the breakdown of interbank lending in China has also sent the yield on the U.S. 10-year Treasury note up to over 2.6% this morning for the first time in 10 years. Any rise in the "risk-free" returns you can get by lending to Uncle Sam provides a disincentive to riskier investments like penny stocks.

This week's dismal start follows a dismal last week, which saw the Dow Jones Industrial Average closing Friday at 14,799.40, down some 1.8% from the prior week's 15,070.18. Thursday's 353-point drop, following the Ben Bernanke press conference, was confidence jolting in-and-of-itself.

But the news from China could prove to be a game changer for everything from penny stocks to blue chips. Never mind Greece or Cyprus, what we're talking about here is the possible meltdown of one of the world's largest economies and any further indication that this is happening could send shock waves all the way to penny stock portfolios.

Closer to home, last week saw penny stock investors treated to a release of a mixed bag of economic indicators:

--Tuesday morning's May Consumer Price Index rise came in at a lower-than expected 0.1%, following April's 0.4% fall. The core CPI, which excludes food and energy, rose 0.2% after rising 0.1% in April.

--Also on Tuesday morning, May housing starts came in at a disappointing 914,000, up from April's adjusted 856,000, up from April's 853,000. Building permits, which had been expected to total 975,000, actually came in pretty close to that mark, at 974,000, down from April's adjusted 1.005 million.

--On Thursday morning, existing home sales for May was reported at a better-than-expected 5.18 million, following April's 4.97 million.

Economic releases worthy of a penny stock picker's attention this week include:

--On Tuesday morning, the report on durable goods orders is expected to show a 3% rise for May, driven by vehicle purchases, following April's 3.5% increase.

--Later Tuesday morning, a clearer picture of the state of the real estate sector will emerge in two reports: 1) The Case-Schiller 20-city index is expected to show a 10.5% April price rise, following last month's blockbuster release, which showed a 10.9% March increase. 2) New home sales for May are expected at 470,000, following April's 454,000.

--On Thursday morning, the consensus calls for a 0.1% rise in personal income to be reported for May, following April's flat reading. Personal spending, on the other hand, is expected to spike by 0.4%, following April's 0.2% increase.