Each January, Gary Shilling, an economist often characterized as a "permabear," issues his predictions for the coming year and suggests related investment ideas. In 2007, Shilling predicted that housing prices would collapse and that stock prices would fall below 2002 levels. Wow -- I wish I'd read his forecast before all that happened.

John Mauldin, a financial writer whose weekly newsletter boasts more than 1 million readers, recapped Shilling's 2010 outlook here. In short: Shilling's outlook for 2010 isn't rosy. He predicts a slow economic recovery, and as a result, his recommendations are very defensive. Even with a dour outlook, he does recommend a few areas to buy in 2010. Three of these recommendations are nonstock investment vehicles, including the U.S. dollar, which he believes will return to safe-haven status if the world economy stumbles.

Let's take a look at the three equity-focused areas -- stocks Shilling thinks might give you some security should 2010 unfold as poorly as he forecasts.

1. Income-producing securities
One way to hedge against the market declines that Shilling predicts is through conservative stocks with high dividends, including utilities and health-care and consumer-products companies. Using The Motley Fool's CAPS screener to search for stocks with high dividends and five-star ratings (to help gauge dividend sustainability), the following interesting companies turned up:



Dividend Yield

CAPS Rating
(out of 5)

Brookfield Infrastructure Partners (NYSE:BIP)




Otter Tail Corp. (NYSE:OTTR)




Procter & Gamble (NYSE:PG)

Consumer staples



Johnson & Johnson (NYSE:JNJ)




2. Consumer staples and foods
Consumers need some things -- like toothpaste, shampoo, and dinner -- no matter how bad the economy gets. Producers and low-cost retailers of these goods, like Wal-Mart (NYSE:WMT), Kellogg (NYSE:K), and (again) Procter & Gamble, should perform well even if 2010 is ugly.

3. Small luxuries
It's the "lipstick index" theory. When times get tough, people still like to buy things that make them feel good, but they choose cheaper items. So while you might pass on that suit from Saks, you'll still reward yourself with a modest but stylish watch from Fossil (NASDAQ:FOSL).

Shilling's got a good track record -- but just because he says 2010 is going to be ugly doesn't mean that it will be. As noted here, many smart economists and investors who predicted a bad 2009 were proven very wrong. Still, it doesn't hurt to get a little defensive.

What are your thoughts on the outlook for 2010? Leave a comment below.

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