INVESTING: Market still dangerous; stay in defensive mode

After suffering through one of the worst Novembers in the modern era, stock investors should probably take a minute and ask themselves what they should do next.

For now, one action to avoid at all costs is listening to anything a government official has to say. For that matter, throw in CEOs or any other corporate leader from a publicly traded company. The things they say can get you in a lot of trouble.

Three weeks ago, right in the middle of the November selling spree, a few Federal Reserve governors said inflation risks were still quite prevalent and therefore there was no need for further interest rate cuts. These words caused the market to go down even more. By the end of the month, Fed officials couldn’t find enough cameras or microphones to tell us they are going to keep cutting rates. Those words caused the market to go up, although not nearly enough to salvage the destruction.

We are also getting a consistent earful from Treasury Secretary Henry Paulson. One minute, he’s talking about America’s strong dollar policy while the buck loses another 2 percent to the Euro. The next minute, he’s spouting off about some harebrained idea to save the housing market. It is quite clear that America does not have a strong dollar policy, and the only thing that is going to save the housing market is substantially lower prices.

As the fourth quarter comes to a close and we get into January, we are going to hear piles of garbage from hundreds of CEOs as to why their earnings weren’t good and why their company’s prospects will get better fast.

The CEOs don’t have everything figured out. Remember back to September, when Bank of America bought a few billion dollars’ worth of Countrywide Financial when Countrywide was trading at $23 a share? BofA said the worst of the mortgage crisis was behind us and that Countrywide represented a quality investment. Do you think BofA wished it had waited two more months to utter those words? You can buy all the Countrywide you want right now for 10 bucks a share!

When people start feeling pain, it is human nature to want to do something. What these people don’t realize is that there are some things you can’t change. All the kind words in the world are not going to stop winter from coming. Rather than expect the impossible, smart investors will prepare themselves in the fall for what they know is inevitable. Bear markets create opportunities through the heavily discounted prices they bring. Once you embrace that concept, you confidently move through the seasons as they come and go.

If there is one constant in a rule of market evolution, it is that prices don’t move in a straight line forever. This bear market is only a little more than a month old, but there’s already been a lot of damage. Longer-term investors should continue to use periods of strength to become more defensive.