Will Operation Twist Impact Penny Stocks?

| September 22, 2011 | 0 Comments

Fed Chairman Ben BernankeIs everyone ready to do the Twist?  Operation Twist that is.

The Fed announced their highly anticipated monetary program, known as Operation Twist, just this week.  The strategy’s colorful name comes from its goal of “twisting” the yield curve.  To put it more plainly, the Fed plans to sell short-term Treasuries and use the proceeds to buy longer maturity government bonds.

With interest rates near zero, the Fed has been experimenting with out of the box policies in recent months.  And Operation Twist is the latest idea pulled from the Fed’s bag of tricks meant to light a fire under the dormant economy.

So what’s the point of this new policy?

Before I answer that, let’s step back for a minute.

Keep in mind, the Fed’s previous quantitative easing programs focused on buying short-term Treasuries.  There were two main reasons behind this.

First, the Fed wanted to inject enough money into the economy to fend off deflation.  Second, they intended to lower short-term interest rates to the point where banks felt obligated to make new loans (in order to generate higher profits).

On the first point, preventing deflation, so far QE has been a clear success.  On the second point, increasing loan activity, well… not so much.

You see, banks are still hesitant to make new loans.  They’re still smarting from the 2008 crisis.   What’s more, many consumers, who have good enough credit to get new loans, are afraid to take on additional debt.

So, in order to spur loan activity, the Fed is giving Operation Twist a go.

Here’s the deal…

By purchasing long-term Treasuries, the Fed hopes to push medium and longer term key rates to record lows.  That means important consumer rates should come down such as car loans, and of course, mortgages.

The hope is consumers won’t want to miss out on historically low rates.  And, this increased demand will coerce banks into ramping up their loan activity.

The end result… economic growth.

At least, that’s the theory.  And while theory doesn’t always match up with reality in the world of economics, it’s not like anything else is improving the economy!

Okay, now that we’ve gotten past the technical stuff, let’s get to the bottom line…

How will Operation Twist impact penny stocks?

For one, the Fed’s continued efforts to improve the economy have been a boon to the stock market, and to some extent, investor confidence.  And confident investors are much likelier to purchase penny stocks.

More specifically, if mortgage rates continue their downward spiral, we could see resurgence in the home construction industry.  In that case, there are plenty of penny stock companies who would benefit.

Overall, I think Operation Twist could help penny stocks, especially if the home construction industry improves.  At the very least, it can’t hurt.  And right now, it’s better than nothing.

Yours in profit,

Gordon Lewis

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Category: Breaking News, Investing in Penny Stocks

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