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The vast majority of small business owners rely on credit to fund the operations of their businesses: to make payroll, buy supplies, and smooth out their operational cash flow.

Any disruption to the supply of credit to these firms can be very damaging to our economy. According to SmallBusinessNotes.com:

America’s small businesses - some 20 million strong - are the strength of our nation’s economy. They account for 39 percent of the country’s gross national product, create two out of every three new jobs and produce two and one half times as many innovations per employee as do large firms.

Well, those 20 million small businesses are about to find their supply of credit seriously disrupted. Why? As of May 30th, 2009, one of the largest small business credit card issuers, Advanta Corp. (ADVNA) and (ADVNB), stated that all Advanta Business Credit Card accounts will be closed indefinitely. This includes purchases, checks and balance transfers to and from the accounts.

It’s important to note that this closure has nothing to do with the account holder’s credit score; the axe is coming down on all accounts.

So why am I telling you this, and what does it have to do with the S&P 500 hitting the 350 mark? My business, Freund Investing LLC., is one of the millions of small businesses that is affected by Advanta’s decision. Indeed, I received my second reminder of the impending change from Advanta just today:

Dear Customer,
Your Advanta Business Card account is funded by an independent trust which owns the balances you owe on your account and provides funding for new transactions. We expect the trust to stop funding activity on our accounts. The trust also restricts our flexibility to fund activity on your account. Unfortunately, as a result, effective May 30th all Advanta Business Credit Card accounts, including your account, will be closed.

This means that you will not be able to use your card or account for new transactions, including purchases, checks and balance transfers beginning on May 30th. We understand that you may have written checks on your account before May 30th and we will make every effort to honor those checks that are presented to us for payment by June 3rd. If you use your Advanta card to make automatic recurring bill payments, you will need to make alternative arrangements for those payments promptly.

It is important to understand that you are not required to pay your entire balance at this time. You may continue to pay down your account balance over time, as allowed under your Advanta Business Card Agreement.

We have also reduced the credit line on your account to the amount of your current outstanding balance effective immediately. We will send you additional information about why we have taken this action in another letter.

You will not lose the rewards that you have earned. If you participate in a Cash Back program, you will receive a check for the amount of any accrued rewards more than $1.00 as long as you make the required minimum payments and your account remains in good standing. If you participate in a Business Rewards program, you will have at least 60 days to redeem your points as long as you make the required minimum payments and your account remains in good standing.

We deeply regret the impact this action will have on your business and very much wish it was not necessary.

We are committed to assist you through this process. Additional information will be available at www.advanta.com/notice. If you have any other questions or concerns, or if we can assist you in any other way, please feel free to contact our Customer Service Center. You can email us your questions 24 hours a day at www.advanta.com/secure or call us toll free at (800) 7..., Monday - Friday 8:00 am to 8:00 pm and Saturday 8:00 am to 5:00 pm Eastern Time.

Sincerely,
John F. Moore President, Advanta Bank Corp.

Luckily, Freund Investing, LLC, has never relied on credit granted by companies like Advanta; unlike most small businesses.

I am informing you all of this because I want everyone to understand that what you hear on TV is not an accurate portrayal of the real world. This very ominous sign for small businesses - the lifeblood of our economy - is the real world.

It’s important to keep these realities in mind before buying into the “green shoots” argument, and any other number of silly terminologies designed to make you feel safe dumping your hard earned cash back into equities.

The real world economy is worsening at a rapid clip; jobs are continually being lost, General Motors (NYSE:GM) is nearing bankruptcy after being in business for over 100 years, most banks are insolvent (which we could argue about ad-nauseum), real-estate prices continue to decline, and treasury yields are becoming dangerously high - threatening to destroy any “green shoots” previously identified in the real-estate market.

If there’s one thing that’s a certainty: the markets will absolutely follow suit. In my estimation, we’re about 9-12 months away from the real bottom. The bottom will, in my opinion, drop 40% to 60% from the current levels. This means the S&P 500 will have dropped to between 357 to 536 by June 2010. I hope I’m wrong, but the real world evidence doesn’t look too promising.

Not only do I believe that it’s about to get much worse; I’m acting on it. Both myself and my clients are sufficiently hedged against such a scenario, and I suggest you do the same.

Disclosure: Freund Investing Managing Member Ryan Freund holds no position in any of the companies mentioned in this article. Freund Investing has a solid Disclosure Policy.

Source: Be Prepared for S&P to Hit 350 by June 2010