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The coming recession, the plight of small business and Anne of Green Gables

Small business is the backbone of the economy, says this U.S. advisory, yet big guys get bailed out at the expense of smaller ones.

Maybe this can be written off as special pleading. Some parts of it may even sound a bit like a left-wing harangue (although we assure you that could not be further from the truth). But this advisory is mad as heck and it isn’t going to take it anymore. Not in print, anyhow.

This U.S. advisory believes that small and medium-sized businesses are being left stranded in the wake of the spreading credit crisis. It also believes that the powers in Washington bail out their corporate buddies before they think of the little guy.

You might call that special pleading because the advisory, The KonLin Letter, specializes in low-priced stocks, i.e. smaller businesses. And it might sound like a cannonade from the left to say: “President Bush has turned has back on small businesses in favor of the huge multinational companies doing business globally.”

But the editor makes a convincing case about the plight of small business… and we can attest from many readings of this market letter that he is not, and has never been, sympathetic to any left-wing group.

He also has a Featured Stock of the Month that is one of those smaller businesses that must buck up in the face of all this adversity. It does so with an assist from a staple of Canadian literature.

A tsunami of deflation destruction

The editor of the advisory begins with a restatement of the credit crisis, a story that most investors will have heard more than once by now. But not always in such colourful terms: “The financial tsunami left a path of deflation destruction.”

Mainly due to greed, he adds, the banking industry continues to write off subprime mortgage losses, and “the worst is yet to come with enormous downside pressure on the stock market.”

This is the worst housing recession since the Great Depression, he states, and it continues to seep into the broader economy, shrinking access to credit as it goes.

But he also brings some telling statistics to bear. The Institute for Supply Management’s (ISM) Non-Manufacturing Index, which tracks the health of service businesses, dropped a full 41.9 per cent to its worst reading since October 2001. New orders dived and employment fell to a six-year low. “With 14 of the 17 surveyed industries contracting,” adds the editor, “it shows that the six-year expansion is on the verge of stalling out and triggered a heavy market sell-off.”

What’s more, the Philadelphia branch of the Federal Reserve Board (the “Philly Fed”) has a Manufacturing Index that sank to –24, the deepest contraction since the 2001 recession. Most important, says the advisory, the Economic Cycle Research Institute’s (ECRI) leading U.S. index is already in recession territory, at –9.1 per cent.

Subprime auto loans

Not only is housing in trouble, so are the garages that go with it. There have been many subprime loans on autos, and delinquency on those is at a 10-year high. Consumer confidence is at a 17-year low. “This is a bearish omen!” claims the editor, almost unnecessarily.

Yes, we know there are statistics and damn statistics, but it is precisely these kinds of numbers that are convincing more and more people that the United States is either about to enter a recession — or is already there.

And it must be said that this advisory was quoting such statistics many months ago, when many others were assuring us that the subprime troubles were only temporary.

Unfortunately, says the editor, this recession hits hardest at that part of the business community that can least afford it — but which has the most to give back to the economy.

Small business gloom

The coming recession is battering “the small and mid-sized companies who generate more than 50% of the country’s GDP and account for 80% of new jobs,” says The KonLin Letter.

It is at this point that the editor chides Mr. Bush for favouring the big multinationals over small businesses. He continues: “Small business gloom deepens as it plummets to a level not seen since January 1991. Small businesses are closing up all around us due to Washington’s ignorance of the carnage it has caused. If the private sector goes belly up, so does America!!!” (See, we told you this is not a left-wing publication.)

The editor has no truck with Washington’s big $168 billion “political” stimulus package. It’s nothing more than buying votes, he claims. It amounts to redistribution of wealth and will not re-ignite the needed expansion. He also has few good words for the refusal of Congress to make the “pro-growth” tax cuts of 2001-2003 permanent.

Official Washington is not the only place to mistrust: so is business TV and its talking heads. “Don’t listen to CNBC’s so-called financial experts’ hype,” adds the editor, “growth is clearly contracting.”

But how has all this played out on the stock market, and where is it likely to go?

A long way to go down

In February, the Dow Jones Industrial Average had its fourth straight losing month. When this issue of the advisory went to press, a sell signal of 12,150 was predicted, but the events of the past week have already trumped that.

They carried the index down as low as 11,740, then back up to yesterday’s closing at 12,145. Don’t be surprised to see it tumble below 11,000 and even lower than 10,000, says the advisory, with support as low as 9,720. That’s a long way to go down before you start looking up again.

The advisory paints similarly dizzying pictures for the S&P 500, the NASDAQ index and the index of particular interest to investors in low-priced stocks, the S&P 600 Small Cap Index. For this index, the advisory set the sell signal at 360, with the next landing stage at 300, then 262 and finally, 233. Two days ago, the index closed at 354.10. Yesterday, it rose to 361.52.

Not least, the advisory looks at commodities, and finds more reason for pessimism. Oil, he belives, is topping out. Looking at the Commodity Research Bureau (CRB) Index, he concludes: “Greed clearly has the upper hand in commodities for the short term.” Sentiment is at peak bullishness, but the index is parabolic, which means it’s headed for an exit point. “A reversal to the downside can be as dramatic as the current run-up.”

After all those discouraging words, let’s turn to a company that is making its mark with words of a more edifying kind.

The theatre and Anne’s diary

Logica Holdings Inc. (OTC-LGHL) is in the Internet Security and Information Technology business, but in a very literary way.

Under its umbrella, it has companies that reflect “a growing global market for secure, social networking and downloadable entertainment content,” explains the advisory. One of them is Plays on the Net (POTN, or playsonthenet.com). This is a global online guide to theatre. It allows writers to share their work and explore new ideas. It has also become a leading online e-store and theatre information site, with more than 5,000 books for sale and audio book titles from BBC Audio, Time Warner, Random House, Harper Collins, Naxos and Little Brown.

Then there is Curtain Rising (curtainrising.com), which is being developed as a global theatre community. It has a wide-reaching central database for locating productions, archiving reviews and purchasing tickets for performances. Over 8,000 theatres around the world participate (no less than 15 Canadian theatres are on the network, including the Stratford Festival, but not the Shaw Festival).

Not least, the company has a ground-breaking site entitled Anne’s Diary (annesdiary.com). This site is set up in part to combat a rather dark side of the Internet. It is, says the advisory. “the world’s first secure social networking site for girls ages 5-14, preventing children from chatting with anybody whose identity has not been verified.”

A new standard for websites

The name was indeed inspired by L. M. Montgomery’s Anne of Green Gables stories, since the purpose of the site is to foster a community of girls interested in literature and creative writing. It has paired with a number of safety and security leaders in the technology field to develop a state-of-the-art biometric login system based on fingerprint recognition.

The alarming rise of Internet crimes against children has been well documented and this company’s “safe technology will set a new standard for all websites aimed at young people,” adds the advisory.

You might think that such literary-minded online ventures might not be among the most dynamic investments around, but the company has significant revenue potential, says the advisory. Monthly subscription fees, merchandise sales, affiliated income and click through income are all growing. It is also growing due to its close involvement with law enforcement agencies. What’s more, adds the advisory, “the popularity of such sites as YouTube and MySpace confirms that people are eager to create their own content and share it with others.”

The company has raised $1.5 million through direct investments, private placements and convertible debentures. 70 per cent of its 19 million plus shares are held by insiders. As the subsidiaries grow, acquisitions will also be targeted. The advisory suggests a purchase in the $1 area for an initial target of $2.25 to $2.50. Its ultimate target is $4 to $6. When the advisory went to press, the stock traded at $0.70. It closed yesterday at $0.95.

From the ravages of recession and the tranquil stories of Lucy Maud Montgomery would seem to have little in common. But in the investment world, there’s always something new around the next corner. And if Anne can help some people get safely through the recession, so much the better.