Got a couple hundred bucks to spare? What about a couple thousand?

It seems that many investors are jumping into the market after all- but they’re buying beaten down shares of blue chip companies like Citigroup (C) and General Electric (GE).

I had several people over the weekend tell me they were buying shares in those two companies or thinking of buying shares. They had glee in their eyes and were going in “big.”

After all, they told me, Citigroup can’t go any lower, right? (It closed around $1 on Friday.)

And General Electric is General Electric. It won’t go under…will it? It’s been around over a 100 years.

When I mention to these “investors” that Bear Stearns had been in operation since the 1930s and that Lehman Brothers also had a long, storied history and both stocks essentially went to zero- they look at me with blank faces and say:

“But they aren’t Citigroup. The government won’t allow Citigroup to fail.”

Or “GE has all those good industrial businesses.”

Or “GM is America’s car business. The government will keep bailing them out.”

Are These Companies a Good “Gamble”?

Let’s be honest. No one is “investing” in these two companies right now. They’re gambling that the $1 will go to $10 and they’ll make a bundle. Or that GE will surge back up to $30 and they’ll cash in.

But history has shown that once formidable companies that see their stocks crushed, many times don’t see it recover (Lucent, Lucent, Lucent).

Of course, General Electric once traded around $1.5 a share in 1981 and it had a spectacular rise.

Ditto with Citigroup in 1990 when it nearly went bankrupt.

But those were different circumstances and times. Neither was dealing with a credit crisis.

Why “Gamble” When Other Companies Have More Upside?

Citigroup has no earnings right now. General Electric, for now, is earning some money but there is much mystery surrounding the GE Capital side of the business.

Other companies have been beaten down but have little of the danger of Citigroup and General Electric.

I’m thinking of companies like DuPont (DD) and Phillip Morris International (PM). Neither has been caught up in the credit crisis, though both are certainly seeing its effect on their business. Both stocks are down and offer value at these levels. Both pay nice dividends.

Or what about McDonald’s? It’s still selling millions of those Value Meals every day.

But for gamblers, that would be boring. What are your odds of doubling your money owning McDonalds in the next few months?

Citigroup’s $1 share price makes it juicy. It seems “cheap” and the upside seems tremendous.

After all- it can’t go much lower than $1- can it?

[The author of this article owns shares of PM.]

In case you haven’t been paying attention, the stock markets are in the midst of the “Santa Rally” which, as described recently by the Wall Street Journal, usually begins on Christmas Eve and continues for 5 trading sessions after the new year.

If the markets rally in that time period, it is known as a “Santa Rally.”

We’re seeing that right now.

In fact, the markets have rallied hard off the November 20 lows- with the S&P 500 up 24% in that period.

Trading has been light during the Santa Rally- but I expect that to change this week as everyone gets back to work. In the last two weeks, the markets have not been responding to negative news. Will that change this week?

Volatility has also dropped sharply- thank goodness. 500 point drops every few days aren’t good for anyone’s confidence.

Invest Smart

Now is the time to be afraid. With the markets down nearly 40% and investing portfolios shot to h*ll, it makes sense that the last thing you want to do is put more money in.

But that would be a mistake.

Face your fears. Keep dollar cost averaging (as long as you won’t need the money in the next 3 years.)

Yes- it can go lower. That’s why I recommend buying dividend paying stocks so at least you’ll be getting something while you wait for the turnaround.

The Arches are Still Golden

Just think- McDonalds (MCD) restaurants were expanding across the country in the 1970s- even as the oil shock sent crude higher, gold went to new heights and Jimmy Carter announced that the country was in a “malaise.”

McDonalds kept doing its business- which was making food. And customers kept buying hamburgers.

Eventually, the country came out of its funk and the stock markets recovered in the 1980s. How many people had been buying McDonalds stock throughout the 1970s?

If the company has sound management and a profitable business, take another look.

That’s not to say the next year (or two) won’t be tough. It will. But companies have a way of muddling through.

Those are the companies you want to own in your portfolio- even if you’re afraid.

Santa Rally May Be Fleeting

The pundits are more concerned with all of January- then they are simply with the Santa Rally. When January ends higher, the markets end higher for the year 70% of the time.

Not a lot can be read into this Santa Rally- except that it is making some investors breathe a sigh of relief. Gains are better than losses- even if they don’t hold.

2009 is looking to be a crazy ride- hang on for the ride.

The consensus belief heading into 2009 is that the first half of the year will be nasty- with rising unemployment, lowered corporate earnings and general struggling all around as the American consumer continues to pull in spending.

But then the sun will come out.

Right around the summer time, the thinking goes, the economy will start to pull out of its funk and the second half of 2009 will be robust (and so will the stock market.)

So everyone is “playing” for the second half recovery.

But markets (and economies) rarely behave as “everyone” believes. If anything- it’s usually the opposite.

Let’s suppose, then, that the economy DOESN’T recover in the second half of the year. What then for investors and the markets?

No Second Half Recovery

What got us into this mess? Housing and the credit bubble.

What will get us out? When housing hits a bottom and the credit bubble is completely burst.

Neither has happened yet.

So if there is no recovery in the second half, you can blame it on a housing market (and a credit market) that continues to decline. Given the magnitude of the bubble in recent years, I’m betting the bust will take far longer than most imagine. Also, the Fed is trying to contain the housing bust by tampering with the markets so that mortgage rates fall. Thus, giving homebuyers incentives to re-enter the mortgage market.

Whether or not this “containment” of the housing bust will be successful remains to be seen. We won’t know for several months.

But so far, 70% and 80% off of consumer items in the stores hasn’t caused shoppers to rush to out to buy and I hazard to guess that 4.5% mortgage rates isn’t going to work any magic this time around either.

If housing doesn’t recover, look for the situation to turn more grim in the housing-related industries and sectors which include construction, homebuilders, furniture, home furnishings, and the home renovation stores such as Home Depot and Lowe’s.

Why 2009 Could Be Another Nasty Year for the Stock Market

Do you remember just one year being nasty on the markets? Think back to 2000. It was nasty. What happened in 2001? Another “bad” year.

Ditto for 1972. It was also nasty in 1973.

I’m not saying that nasty years MUST have a twin. In 1987, we had the big crash and 1988 was not that bad. But, again, given the magnitude of what happened in 2008, it’s going to take awhile for the markets to get confidence back.

It means you must be defensive while looking for opportunities.

Fortunes will be made. Just maybe not in 2009. But the seeds will be planted in the next year.

Everyone is planning on a second half recovery. If it doesn’t happen- be prepared.

Does it seem like the stock markets are out of control and careening from lows to highs (or vice versa)?

We’ve seen some swings in the past few months that have made even professional traders blush.

It’s no longer unusual to see 500 point drops (or gains) in the Dow. A 6% loss in the S&P 500 is ho-hum. And 100 loss days on the NASDAQ? Just another day at the office.

But we’re not imagining it. It really IS that volatile out there.

Barron’s reported this week that the S&P 500 has swung 4% in a single trading day only 68 times since 1950.

28 of them have been in the last four months.

How Do You Handle Volatility Like This?
Obviously- if you are daytrading or any other form of short-term trading, it is nearly impossible. You can easily be wiped out in just one trading day (or, as we’ve seen in the last few weeks- in the last hour or minutes of a session.)

The point of this blog is to talk about buy and hold investing, so I’m hoping not many of you are actually daytrading.

But many people run portfolios with stop-losses of say, 15% to 20%, and the volatility in some stocks probably means you’ve had some forced selling. Some stocks will sell off 20% in a session and then rebound the same 20% the next day. And they’re not moving on ANY company news.

If you’ve invested for the long-run, however, you need to be watching your companies for changes in fundamentals but otherwise, you’ll just have to ride out the swings.

Try not to watch the stock market every single day- it will only drive you mad.

Lots of Bargains

Look for buying opportunities in beaten down sectors or add to your positions in companies that are still making money (and intend to far into the future.)

“Cheap” isn’t always “best.” Buy franchise names that make products your grandparents would have used. Those companies have ridden out the financial storm in the past and their products have strong brands.

The volatility will decline at some point. But in the meantime, don’t let it become the focus of your investing. All it is is short term noise. Focus on the bigger picture.