Reasons to keep investing

Investors might have little hope for 2009 if January is any indication of what’s to come. The Dow lost 9% this month. But I dont want anyone giving up.

deeper look at the indices showed that one-third of S&P 500 stocks finished January higher, as did a third of the S&P Mid-Cap 400, some quite substantially. Palm [PALM 7.67] added 150% to its share price, while Shaw Group [SGR 27.80 ] jumped 36% and Morgan Stanley [MS 20.23] 26%. Google registered a double-digit gain, too.

And this is just a small sampling from the list of companies that thrived during the worst January in history. Walgreen [WAG 27.41] and Wyeth [WYE 42.97], Symantec [SYMC 15.33] and Sallie Mae [SLM 11.45], Peabody Energy [BTU 25.00], National Oilwell Varco [NOC 48.12], Monsanto [MON 76.06 ] and many more returned profits to their shareholders.

There’s always a bull market somewhere. And if not an entire market, then at least some stocks. So don’t take your cue from the averages. They’ll blind you to opportunity.

This isn’t, of course, an endorsement of the present market. Im not a fan. He wants you playing defense with high-yielding and recession-resistant stocks. Think BP [BP 42.47], Tupperware Brands [TUP 20.56], Kraft Foods [KFT 28.05]. Watch UPS [UPS 42.49 ], Emerson [EMR 32.70 ] and Clorox [CLX 50.15], too. Poor quarterly reports might knock these names down enough to bring their dividend yields up. And Im all about accidental high yields right now.

Everyone is going to have to focus on preserving capital until we find some stability in the markets, and the economy. There’s been a lot of talk about President Obama’s good bank/bad bank plan, which would set up a federal institution similar the Resolution Trust Corp. used during the savings-and-loan crisis to help ailing financials, but concerns about the plan’s details pushed stocks down on Friday. There is, though, still a good chance that we’ll get an updated version of the RTC, so investors need a strategy if that happens.

Rule number one: If the word “nationalize” is mentioned, say in regard to Bank of America [BAC 6.58] or Citigroup [C 3.55], expect more bad months to come. The government should be helping, not managing, these banks.

I even go so far as to say that Washington should take a “forbearance” approach to this problem, looking the other way while doling out cash. Give banks the money they need to get on their feet, and let them renegotiate the loans that are so badly hurting their balance sheets. In exchange, the government gets a promissory note of sorts, a guarantee that the money will be returned. Only if some firms couldn’t pay it back would the good bank/bad bank plan then be put to use. Defaulting banks’ assets would be seized immediately and their healthy assets sold to good banks like JPMorgan Chase [JPM 25.51] and Wells Fargo [WFC 18.90].

As for the bad assets, those toxic collateralized debt obligations at the center of this credit crisis, Lets go back to my earlier idea of a government-sponsored trading desk. The desk would bring together buyers and sellers, who right now are unwilling to budge on price due to fear of being stuck with worthless paper. The government would buy from one side at a reasonable price and sell to the other at a slight profit. That way a value could finally be put on these CDOs, holders of them wouldn’t get hit with such a big loss and those who want the paper would see there’s less risk in the market.

Why do i think this will work? Because this is exactly how we emerged from the savings-and-loan crisis. Excluding the trading-desk idea, that is, which is my alone. So im convinced it would work. In the meantime, though, keep playing defense.