Blog : Penny Stock Week: After the Fed, the Binge

by Ed Zwirn on December 16th, 2013

Expect the stock market to open on the upside Monday morning as investors prepare for a busy, data-driven trading week ahead of Wednesday afternoon's policy announcement by the U.S. Federal Reserve.

The U.S. Senate is expected to pass (and the president is expected to sign) the budget deal and avoid a January shutdown, leaving the Fed as the last major U.S. institution capable of disrupting the holidays. 

The Fed communication, the last such one of the year and probably the last one to come out of a Fed headed by Ben Bernanke, will of course be closely scrutinized when it comes out for any hint of the Fed's 2014 course, particularly insofar as its $85 billion monthly (quantitative easing) bond purchase program is concerned.

This follows a week which saw the market continue its two-week funk, with the Dow Jones Industrial Average closing Friday at 15,755.36, down 1.7% from the prior week's 16,020.20. Penny stocks and mid-sized companies performed at least as badly, with the NASDAQ Composite down 1.5% and the small-cap Russell 2000 down 2.2%.

Last week's economic releases, although generally upbeat, largely provided more evidence that the U.S. economy is proceeding at a sluggish pace:

--Thursday's retail sales report is showed a better-than-expected 0.7% November increase, up from October's upwardly revised 0.6%. Excluding autos, the rise was a better-than expected 0.4%, off a tad from October's upwardly revised 0.5%.

--Friday's producer price index report, as expected, showed little or no inflation, with the headline figure for November falling 0.1% (exactly as expected), following October's 0.2% drop. The "core" figure, which excludes food and energy, rose 0.1% as expected, a slowdown from October's 0.2%.

Looking ahead this week, a crowded data release calendar will precede Wednesday afternoon's Fed policy announcement:

--Investors are expecting Monday morning's industrial production report to show a 0.4% rise for November, following October's 0.1% decline.

--Tuesday morning's consumer price index report is expected to mirror last week's PPI and show little or no price movement. The consensus is expecting the headline figure to rise 0.1% for November, following October's 0.1% decline, while the core is expected to rise 0.1%, the same as the prior month.

Beyond that, the last big hurrah of the year is likely to be Wednesday afternoon's Fed announcement and press conference, which investors will attempt to parse for guidance about when quantitative easing will begin to "taper" off. I would go along with the common wisdom on this one and argue that any groundbreaking announcement in this regard will probably have to wait until March, after Janet Yellen has had a chance to get her feet wet as the new Fed chair.

In any case, the recent economic evidence that could conceivably influence Fed thinking has been mixed. Much has been made of the Dec. 6 nonfarm payrolls report, which showed higher-than expected jobs growth for November accompanied by a downtick in the unemployment rate. In fact, the 203,000 jobs created in November was only a slight pickup from the prior month and the labor market recovery is continuing to advance slowly.

One counterindicator to a possible Fed tightening announcement came in the form of last week's producer price index. As I pointed out in my last penny stock blog, the PPI's deflationary track for November and the market's total lack of reaction to it shows that investors have already priced deflationary expectations into their market assessments, inhibiting large-scale private-sector spending and swelling company cash balances.

Wednesday morning's CPI update - which comes out during the Fed meeting - is universally expected to provide further evidence of a lack of pricing power on the part of U.S. companies and another argument in favor of the Fed's not rocking the boat before Christmas.

Penny stock investors take note: A Fed tightening announcement between now and March being "baked into" the investor expectation pie, the Fed would have to go to great lengths to shake up the market this time around. This will not happen. The Fed governors are too smart to inflict that kind of wound upon themselves.

At the same time, this limits the potential upside from any lack of tapering, since that is what most investors are expecting in any case. In other words, the harder it is to find differences between the upcoming and prior Fed announcements, the better everybody will be pleased, but not by all that much.

The major winners will undoubtedly be lower Manhattan bar owners, as the Wall Street crowd takes one last look at the lie of the land before descending into its annual collective stupor. Although I can sometimes be a contrarian, I think I'll be going with the so-called thundering herd on this jaunt.