Time to Buy Cheap Blue-Chip Stocks

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Charles Lewis Sizemore, InvestorPlace.com

NEW YORK ( InvestorPlace) -- After the stock market tanked Monday, thanks in part to Standard & Poor's historic downgrade of the United States' credit rating, investors are left with one enormous question on their lips: What do we do now?

Well, I have three tips for you -- and they may not be popular. That's because I advise running against the herd by selling gold, avoiding Treasuries and hiding out in blue-chip stocks.

Why run against the herd? Well, one big reason is the Treasury market itself, which should be linked most closely with the S&P downgrade. In a normal world, this would cause yields to rise, as investors would demand a higher yield in response to lower credit quality. Yet in the upside-down world of today's market, yields instead fell. Investors sold off their stock positions because of the bond rating downgrade ... then promptly plowed their money into downgraded bonds. The 10-year Treasury now yields under 2.4%.
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  • But don't panic. Nothing fundamentally has changed in the economy. It was bad before the announcement, and it still is bad today. S&P's announcement changes nothing. The Federal Reserve has said it will continue to accept U.S. Treasuries as collateral and that, as far as the Fed was concerned, Treasury debt still counts as AAA for the purposes of bank capital requirements. In other words, the people that run the international banking system don't appear to be all that worried.
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  • Still, investors are scared, and the markets are in chaos. You need to do something, right? Well here are a few suggestions:

    1. Stay out of Treasuries. Do I think the U.S. government is at risk of default? Absolutely not. I have no doubt the bonds will be paid. But at a pitiful 2.39%, investors are locking in a cash return that is almost sure to disappoint -- and almost certainly capital losses to boot. When the markets return to some semblance of normal, yields will rise back to a more sensible range of 3% to 4%. That means that investors buying today at 2.39% will see their "safe" Treasuries decline in value. More adventurous traders might want to short Treasuries in the futures markets or using an inverse ETF like the iShares Lehman Short Treasury Bond ( SHV).
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