5 'sure things' in a wild market

By Jim Jubak

Psst. I've got a sure thing for you. In fact, five sure things. Can't-miss opportunities. All you have to do is read this column and invest.

Feeling your pockets to see if anybody's lifted your wallet yet? You should be. There is no such thing as a sure thing. Remember, if a deal is too good to be true, it probably is.

But that doesn't mean there aren't opportunities for which potential profits far outweigh the risks.

And those are the kinds of "sure things" I'm going to tell you about today. There's real risk in each, but it's limited and pretty easy to understand, and the potential gains are quite substantial -- although likely to disappoint anyone who's looking for a $1 million payday from a $2 lottery ticket.

Three of these five "sure things" are for the near term. You can put money in them now and profit over the next six months, even if the U.S. stock market and the U.S. economy continue to struggle. In fact, they're likely to do well precisely because the stock market and the economy are struggling.

The other two "sure things" are longer term. You might have to wait six months or more to put money into these. That wait helps remove the bulk of the risk from these plays, turning them from gambles into "sure things."

There's no overarching thesis that links these five. They're just five opportunities I've found that the financial markets are offering us now or will offer us in six months or so. They're not all equally useful to everyone. And they won't all appeal to everyone. This group should offer something for everyone.

1. Municipal bonds

Thanks to the turmoil in the municipal bond market, you can now find tax-free city and state bonds that pay more than U.S. Treasury bonds. As the AAA credit ratings of companies such as Ambac Financial Group (ABK, news, msgs) and MBIA (MBI, news, msgs) have come into question, yields on even the safest AAA-rated municipal bonds have climbed as investors have demanded more cash to take on the perceived extra risk.

On March 6, when a 10-year U.S. Treasury note was yielding 3.59%, I easily found bonds for New York City, where I live, yielding 3.5% for a bond maturing in six years to 3.75% for a bond maturing in 2017. Those issues were rated a safe AA and a supersafe AAA, respectively. Because I don't have to pay the hefty income taxes charged by New York state and New York City on these bonds, the yields on these municipals are equal to 5.2% and 5.6% Treasury yields and 5.83% and 6.25% corporate yields, respectively, for someone in the top tax bracket.

If you live in another high-tax state or city, you'd get the same kind of bump. The near certainty that taxes will go up in the future makes the tax-free income from these municipal bonds even more valuable.

Caveat No. 1: If interest rates rise, you can avoid the possibility of taking a hit to your principal by holding the bond to maturity. But that works only if you buy a bond that's trading at its par value. If you have to pay a premium -- say, $104 for $100 in face value -- you'll lose the premium if you hold to maturity. If you have difficulty finding a bond without a premium in the secondary market, ask your broker to alert you when a new issue is about to hit the market.

Caveat No. 2: Make sure that if you are subject to the alternative minimum tax, or AMT, you buy a bond that is exempt from it. Municipal bonds that fund what the tax code considers "private uses" aren't exempt from the AMT.

2. The Japanese yen

Since the beginning of 2008, the yen has staged an amazing turnaround. After falling by 16% against the U.S. dollar from March 2005 to June 2007, the yen has climbed 8.7% since December. What's up? It's the unwinding of what's known as the yen carry trade.

When the yen was tumbling, traders took out loans at Japanese interest rates near 1%, sold yen to buy dollars or euros and then used those currencies to buy stocks, bonds, real estate and mortgage-backed securities. That gave the traders immense leverage and immense profits. But when global debt markets collapsed at the end of 2007, taking down the price of assets from mortgage-backed securities to stocks, traders sought to cut their risk by repaying their yen loans. That meant selling assets in dollars and euros, then selling those currencies and buying yen.

As traders bought yen, the currency started to go up in price, leading more traders to sell assets in other currencies and buy yen to repay their loans -- before a stronger yen made repaying those loans more expensive.

That's turned the yen into an almost perfect mirror image of the stock market. When stocks go down, the yen goes up as more traders sell assets and buy yen. For example, on March 6, when the Standard & Poor's 500 Index ($INX, news, msgs) went down 2.2%, the yen climbed 1.3% in price.

These days you don't have to buy and sell in the currency markets to go long on yen. There's an exchange-traded fund that tracks the price of the Japanese yen. The CurrencyShares Japanese Yen Trust (FXY, news, msgs) will give you access as easily and inexpensively as buying a stock.

Caveat No. 1: The Japanese government is making noises about intervening in the markets if a strong yen threatens to make exports too expensive. I don't take this threat too seriously because a strong yen cuts the price of oil for the Japanese economy.

Caveat No. 2: I'd expect some strong resistance at the psychologically important level of 100 yen to the dollar. But the continued plunge of U.S. financial shares should be enough to push through this price.

Continued: Check out copper, financial stocks and oil

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