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Have a Plan in Place, Just in Case

Here are some stocks that will do well amid a U.S. debt default -- and others that stand to get clobbered.
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Tension is running high in Washington as members of Congress and President Obama continue to play what I can only describe as a high-stakes game of chicken. Who will blink? At this point, I'm hoping someone will. The question is: Who, and what will it mean? If neither side does, and if the U.S. defaults, the results could be painful -- a drop in the stock market, rising interest rates and a shot to the country's credibility. The ripple effect of all this will do far more damage than the government shutdown has done.

But let's step back from all the doom-and-gloom imaginings. Yes, a default will make things difficult for many -- but, as we found out with the sequester, life will go on. Consumers will continue to brush their teeth, wash their hair and consume food and water. They'll continue using energy, whether to heat their home or to get to work. People will continue to connect with othersvia Facebook (FB) and other means, be it via a smartphone or a tablet. I suspect we will also continue to buy those guilty pleasures en masse -- alcohol, tobacco, coffee and sweets -- that give us a boost when we're down.

It comes as no surprise to me that investors are cycling back to consumer non-discretionary names like Proctor & Gamble (PG), Clorox (CLX), Kellogg (K) and Campbell Soup (CPB), as well as utility companies like American Water Works (AWK), Consolidated Edison (ED), Northeast Utilities (NU) and Pepco Holdings (POM). Two exchange-traded funds to consider, which play directly in those two areas, are Consumer Staples Select Sector SPDR (XLP) and Utilities SPDR (XLU).

The guilty-pleasure companies include Molson Coors Brewing (TAP), Altria (MO) and Reynolds American (RAI). Aside from being vendors of inelastic products, these companies also offer favorable dividend yields -- some as high as 5% to 5.5%, in the case of Reynolds American and Altria.

If we turn the looking glass over and look at the flip side of inelastic goods and services, we're pointed toward those things the consumer will opt not to buy should the price or pain point become too high. These are more commonly known as consumer-discretionary companies -- such areas as fine and casual dining, clothing and other items that consumers can do without for periods of time. Examples of those include Nike (NKE), Under Armour (UA), Del Frisco's (DFRG), Red Robin Gourmet (RRGB) and many, many others.

Beyond this, we'll see higher interest rates should the U.S. default, and we're also suffering from a "put off what I can today" mentality -- and the combination of these could take the wind out of both the housing rebound and the automotive market. That makes positions in Toll Brothers (TOL), Ryland Group (RYL), Lennar (LEN) and other homebuilders vulnerable to a sharp pullback. We can say the same for General Motors (GM), Ford (F) and key automotive suppliers such as TRW Automotive (TRW), Federal-Mogul (FDML).

Again, that's one game plan should elected officials not get their collective heads together before the default deadline. It will be moot if a deal does come together, but in my experience it's better to have a plan ready and not need to enact it than it is to be caught flatfooted with no plan at all. Of course, any deal that is struck will be subject to scrutiny. As the saying goes, the devil is in the details.