The Two Best Stocks To Own in a Global Meltdown
By Tom Dyson
March 1, 2007

Tuesday was one of those ultravolatile trading days that come along once in a while. I spoke Wednesday morning to a friend in London. He's a fund manager at a large European hedge fund.

"It's bad... really bad," he said. "And tomorrow is month end. So we're going to have to report this loss."

His fund is "long only." The financial tsunami struck markets around the world and wiped out his fund's gains from the last few months.

"It could get worse too. Everyone has so much leverage these days because they've become conditioned to the low volatility. There could be a big adjustment. Plus, tomorrow is month end, maybe the hedge funds will stretch to get their money back?"

He told me everyone was panicking... especially in Germany. "There was a problem with sell orders in a handful of German stocks. They didn't get processed yesterday. Then, when the market opened this morning, the stocks fell by 20%, and then bounced back."

Let's call a one-day 3% move in the stock market – up or down – an "Ultravolatile Day"… or UVD for short. Since 1950, there have been 115 UVDs in the S&P... an average of two per year.

Between 2002 and 2003, the Nasdaq experienced 51 UVDs... and the S&P had 21 UVDs.

As you can see, UVDs – like we saw on Tuesday – really aren't that extraordinary. And because they aren't, there's no need to change our investment strategies because of them. These things happen. The only reason the mainstream press is making such a big deal out of this one is because it's been a long time since we last saw one. The last UVD was in March 2003... nearly four years ago.

If you're still worried Tuesday's drop signals the start of a new bear market – or you just want to hedge – here are two liquid stocks you need to own:

1) The Japanese Yen ETF (FXY)

On Tuesday, FXY rose by 2.2%. The Japanese, through their incredibly low interest rates, have sponsored much of the global speculation. It's called the Yen Carry Trade, and we wrote about it yesterday.

To liquidate positions, speculators need to buy yen. And this makes FXY rise when everything else is falling.

2) I-shares Lehman 20-year Bond Fund (TLT)

On Tuesday, TLT was up by 1.3%. When investors get scared, they flee to safe investments... like Treasury bonds.

U.S. Treasury bonds have the highest-possible credit rating, are extremely liquid, and, right now, yield around 4.5% annual interest. When the going gets tough, Treasury bonds go up. TLT is an ETF for the 20-year Treasury bond. You can buy options on TLT as well.

Tuesday was probably just another day in the market... and I'm not going to change the way I make investments as a result of it. But if you think it could be the start of something bigger… or you want to hedge some of your exposure to stocks, FXE and TLT are good places to start.