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Facing the music — a vote for recession

This U.S. advisory has no illusions about the coming recession and its ill affects. But it does have a stock of the year that it still likes.

Now that the word recession has spilled from the financial reports onto the regular newscasts, there’s no point in trying to avoid it. Of course we’re still talking about a U.S. recession, not a homegrown Canadian one. But since we haven’t gotten around to building a recession wall across the 49th parallel, there’s also no use in pretending that Canada can remain blithely unaffected.

The headline on The KonLin Letter is about as straightforward as it can be: Entering Recession. This was written before last week’s massive sell-off, but that sell-off will have come as no surprise to this U.S. advisory.

The president’s plan to reboot the economy came after this issue was published, but we can’t imagine it would get a good reception from the editor. The White House mortgage plan didn’t.

“Washington’s efforts to freeze mortgage rates to stop soaring foreclosures will not solve the subprime credit crunch… it just prolongs the crisis and deepens the losses.”

That sets the tone for the message that follows. The advisory also has an update on its stock of the year for those who are unafraid to venture into the market. We’ll conclude with that.

Capitalizing on greed

This advisory refers to two barometers that are not displaying promising numbers. The Institute of Supply Management (ISM) Manufacturing Index, which was “extremely weak” with its 50.8 November reading, is “flirting with recession.”

The Philly Fed (or Federal Reserve Bank of Philadelphia) keeps a manufacturing index of its own, and it plunged to a four-year low in December while jobless claims hit a two-year peak. “The economy is contracting,” says the advisory.

Furthermore, the idea that the credit crisis could be contained gets short shift from this quarter. “Capitalizing on greed, the wizards of Wall Street employed excessive leverage to turn out exotic investments that are imploding.” That has been evident for some time, but its effects are spreading, not diminishing.

“Sector by sector is being sucked under by the leveraged undertow with the U.S. economy sliding into the abyss. Even certain kinds of money market funds, offering higher interest rates that were supposed to be liquid and safe, owned asset-backed commercial paper and had losses.”

Local government funds suffered the same fate — Florida’s investment pool had to be frozen to halt the rush to withdrawls by panicked investors. “Derivatives will continue to cause financial shockwaves for years,” states the advisory.

Mom & Pop close up

The majority of economists and analysts claimed this credit crisis would not spread, says the advisory. But it is shutting off the flow of credit into key sectors of the economy. Housing woes and higher gasoline prices are weighing on the consumer.

And small business, the backbone of the economy, has sunk to a 14-year low as Mom & Pop shops around the U.S. close their doors.

From the beginning of last year, adds the advisory, “we alerted you that companies’ EPS would drop like an anchor, but analysts and the media made excuses even if it’s the lowest level of earnings since ’04 (when the S&P 500 Index averaged at the 1160 level).”

Not surprisingly, the S&P Retail Index cannot keep up. It is on the verge of a three-year low and its relative strength has already reached a five-year low. “Declining retail spending is a direct result of the housing depression and high energy costs that are due to Congress’ idiotic massive regulations and extremely restrictive energy policy.”

This advisory is not an advocate of government intervention.

Despite the soothing words of banks, economists and analysts, the housing crisis is getting worse, not better. Housing prices are falling at a record pace. The results are being felt throughout the system.

The masters of disaster

“Most disturbing, growth is in a tailspin!” cries the advisory. The Economic Cycle Research Institute reported that its U.S. leading ECRI Growth Index deepened to –5.2 per cent, the worst since November 2002. It is now in the area of recession. The drop in yearly economic indicators is the largest since the recession in 2001.

The U.S. Federal Reserve Board — referred to collectively as the “masters of disaster” — has dropped the ball, in this advisory’s opinion (and in the opinion of a number of other advisories, we notice). “All the reckless Fed’s tightening over the past three years has taken its toll. The deepening credit crisis prompted the destructive Fed to snip rates only 1/4 point last month, sending the Dow Jones Industrial Average plunging nearly 400 points in fear of the worst global credit crisis in history.”

Then they made things even worse. When the Fed and other central banks force fed the banking system with money, they created a huge monetary crisis.

“You see,” adds the advisory, “holding rates at 5.25% with growth in a hard downtrend is just like raising rates higher. Now, their solution is too little too late after they held interest rates too high too long. The stock market is declining during the best seasonal period of the year, confirming that we have entered a recession.”

Unfortunately, that statement is even more accurate today than it was the day it was written.

Free lunches and oil barrels

The advisory has more denunciations of the follies of financial institutions and the toxic assets they are frantically trying to throw overboard, but the point has been made pretty clearly. Things are bad, and they aren’t getting better any time soon.

The Dow Jones was bouncing around furiously in December, and here’s how The KonLin Letter sees its progress (or lack of same). “A sell signal would be given at 13,050 with next support at 12,750, then the August low at 12, 517. If taken out, we would be in a bear market with next support at 11,950.” At Friday’s closing, the Dow stood at 12,099.30 Happily, it will not be going any lower today, since the markets are closed for Martin Luther King Day. But tomorrow?

The advisory does not believe that the weaker U.S. dollar and its stimulating affect on exports is enough to compensate for expensive imports and their inflationary impact.

Its conclusion is as much about morality as economics. It’s also about one of this advisory’s favourite themes, controlling the energy supply. “We’re at a point where people don’t care or understand, live for tomorrow, and look for a free lunch. Over the last 20 years the political system has become too corrupt and beyond repair.

“No group or political party can continue to control oil’s supply and demand. Sooner or later a massive crisis will shock people out of their apathy and they will vote to enhance our domestic oil reserve because crude is a deterrent to those who think they have us over a (oil) barrel today.”

Stocks, anyone?

Blood sugar and Carmen Electra

This advisory’s stock of the year has not fallen with the market. Its shares have gone up exactly one cent in price since this issue was published. It doesn’t trade on the much-beleaguered indexes, but on the Over-the-Counter Bulletin Board.

The company has a name that would have made investors shudder in the aftermath of the dot-com bubble: eFoodSafety.com Inc. (OTC-EFSF). In fact, it is a micro biotech company that already has several products making their way in the world.

Cinnergen™ is an all-natural liquid nutritional supplement designed to regulate blood sugar on a daily basis. This makes it a non-prescription diabetes product, and has gained it an appearance on ABC’s Eyewitness News Sunday Morning. With over 20 million confirmed diabetics in the U.S. alone, and over three times that number who are pre-diabetic, the potential market is somewhere in the neighbourhood of $132 billion.

The company also has a Scar Cream on the market, which in addition to helping heal and smooth over scars, has been found to reduce fine lines and wrinkles, age and liver spots.

Then there’s a new product: the Immune Boost Bar, hailed as a “natural, safe and effective way to boost the immune system.” It contains a blend of citrus oils, anti-viral vitamins and a blend of minerals and electrolytes to stimulate the immune system to its maximum benefits. After years of research, the Boost Bar is now on the market.

Not least, there is a PurEffect™ anti-acne skin care system which will roll out its marketing in March with Carmen Electra as the spokesperson.

To promote all of the firm’s products, a national marketing campaign is targeting the trade: grocery chains, drug stores, convenience stores, natural food and club stores. Revenues increased over the course of 2007 and the balance sheet is in good shape, with strong cash flow and no debt. 40 per cent of the 165,420,00 outstanding shares are held by insiders.

Says the advisory: “The stock has pulled back to long-term support, offering another major buying opportunity. Each time The KonLin Letter recommended EFSF as the Featured Stock of the Year, it advanced significantly. Savvy traders did exceptionally well due to ample liquidity and a huge short position… like now! Buying at these prices offers huge upside potential with limited downside risk.” It is termed an Aggressive Buy.

As we mentioned above, this stock, unlike so many others, has not gone down over the past week. Nor has it risen dramatically. It stands at $0.21. But for those who persist in adventurous investing, opportunities never dry up altogether, no matter what the markets are up to.

As for the looming recession, this advisory must be given credit for consistency. It has been predicting just such an outcome for many months. Now that an army of commentators has climbed on board the sinking ship, we will hear a good deal more about it in the days to come. How should we respond to all this negative news? Not by giving in to discouragement, but by sharpening our instincts for sound investing.