Blog : Congressional Action May Boost Penny Stocks

by Ed Zwirn on December 12th, 2013

In my attempts to predict the course of the stock market over the coming months, my previous penny stock blogs have all assumed that the steady progress of the bull market (if that in fact is what we are experiencing) would be interrupted by glitches caused by Congressional brinksmanship over the federal budget and debt limit.

This assumption may possibly be stood on its head as soon as today, when the House of Representatives brings a newly announced budget agreement to the floor. Under the bipartisan deal, not only would the government stay open past Jan. 15, but the $85 billion annual sequester would be reduced by $63 billion over the next two years.

The House is expected to adjourn for the year on Friday, meaning we will probably know this week whether the deal will pass muster. If this happens, investors will be spared at least the January government shutdown market glitch, triggering a market rally. A collapse of the deal would tend to have the opposite effect, although this will be muted since nobody these days expects any rational behavior on the part of our political leaders.

Not only would this deal be good for the market because it avoids the next scheduled "crisis," stocks should rise as a result of an aspect which has enraged conservatives. The budget compromise, as it currently stands, would actually increase government spending over the short term.

Over the next two years, according to the deal, the $85.4 billion of annual automatic "sequestration" spending cuts will be reduced by $63 billion, effectively reducing the annual cuts to $53.5 billion. This stimulus, although it pales in comparison to the $85 billion of monthly bond purchases the U.S. Federal Reserve is using to stimulate the economy, would mark a modest reversal of recent federal fiscal policy.

This modest two-year stimulus would be paid for over 10 years. Losers would include airline passengers, who would have to pay $12.6 billion for higher security fees over the period; federal workers, who would have to eat $12 billion of reduced pension contributions; military retirees, who would see their cost-of-living increases cut, and the long-term unemployed, many of whom would see benefits expire on Dec. 28 because of the failure of Democrats to secure an extension as part of the budget deal.

In addition, budget cutters secured a key victory by disallowing prisoners from collecting unemployment benefits.

Preliminary signs indicate that this deal may actually pass. House Speaker John Boehner, for one, indicated that he would discipline his Republican rank-and-file this time around, calling conservative critics of the deal "ridiculous."

The prospect that stocks will go up over the next couple of days due to the passage of this budget compromise is therefore a real one, while any disappointment over its demise will be shrugged off as business as usual.

Of course, this only postpones a harder day of reckoning. The proposal would have no effect on the need to raise the debt ceiling, which Treasury officials say will become necessary in February of the government is to avoid default. There remains the chance that conservatives, fresh from this recent defeat, will dig in their heels this time around. 

Of course, a federal default would take us into uncharted territory. Possible brinksmanship notwithstanding, one would hope that neither side of the political fence would be willing to test the waters on this one.

Penny stock investors take note: As I pointed out in an earlier blog, there is no time as the present to get your investment portfolio in order before the beginning of the year. Assuming the budget deal passes muster, we ought to be in for a comfortable January. Take advantage of this by subscribing to the Peter Leeds service, and be sure to follow all the tips Peter has about getting started with paper trading and strategies to limit losses while maximizing possible gains.