Is Europe’s Debt Deal Good For Penny Stocks?

| October 31, 2011 | 0 Comments

Although today is Halloween, there’s no reason to be scared of penny stocks.  In fact, I think we’re about to see investors return to penny stocks in droves.

Why am I so optimistic?

In a word… Europe.

Just last week, European leaders were finally able to piece together a plan to deal with the region’s most immediate debt concerns.  The plan was comprehensive enough to allow global financial markets to breathe a collective sigh of relief.

As a matter of fact, we saw quite the stock market rally on the day of the announcement.  To give you an idea, the Dow Jones Industrial Average rose 3%.  That’s an impressive single-day move for the Dow.

So what’s any of this got to do with penny stocks?

I’ll get back to that in a minute.  First, let’s take a closer look at the plan…

In a nutshell, European leaders addressed three major concerns regarding the debt crisis.

First, bondholders will take a 50% loss on Greek debt.  Keep in mind, the European crisis began with problems in Greece.  And the question of what to do with Greek debt has been hanging over the region’s head for months now.

For most bondholders, a 50% “haircut” is far superior to a 100% loss – which is what many expected.  And it also allows Greek officials to more accurately plan their budget.

Second, Europe’s leadership agreed to leverage up their rescue fund to 1 trillion Euros ($1.4 trillion).  That should be enough firepower to keep European banks (or governments) from becoming insolvent due to debt writedowns.

Finally, the agreement includes plans for recapitalizing Europe’s fragile banking system.  Restoring confidence to the system is one of the most important aspects to the entire process.

Don’t get me wrong… Europe isn’t out of the woods yet.  And much of the details have yet to be finalized.

However, this is a huge step in the right direction.

And it’s a big deal for penny stocks.

You see, European woes have kept many investors out of stocks.  Instead, investors have been focusing on safe-haven investments like gold and bonds.  The risks associated with Europe were just too big to ignore.

Don’t forget, the financial crisis of 2008 wasn’t so long ago.  Many haven’t forgotten how quickly the financial system can implode.

But with Europe taking major strides towards an orderly resolution of their crisis, the risk trade may be coming back… and with a vengeance.

Penny stocks, considered risky investments by many, are often the first to go when investors are worried about risk.  However, they’re also the companies leading the market higher when investors return to stocks.

And with the risk trade back on the table, we just might see the surge in penny stocks we’ve been waiting for.  Hang on for the ride.

Yours in profit,

Gordon Lewis

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Category: Breaking News, Investing in Penny Stocks

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