Featured Trades: (TRADING A 'LOST DECADE')

3) How to Trade a 'Lost Decade.' Having concluded that you should be selling rallies in the US markets, I would add the proviso that you shouldn't sell just yet. Counter trend rallies can last for years, and this time we have QEII on the side of the bulls, which we are only two months into.

Helicopter Ben is also getting an assist from history. The third year of a presidential term is historically the best for the stock market. For the past 100 years, the stock market has risen by an average 13% during the third year of every administration, nearly double the long term historical average. Since 1961, that gain has been a blistering 18%.

This happens because administrations do whatever they can to boost the economy going into elections with voter friendly, tax cutting policies. So, third year GDP growth is high, averaging 4%, versus the long term average of 2.44%. Isn't democracy a wonderful thing? Therefore, don't keep a hair trigger on selling or shorting strategies. Give the markets a chance to breathe. The Dow could make it all the way up to 14,000 and still be in a long term secular downtrend.

I think the US has entered another lost decade, but expect a lot of volatility along the way. If you are wondering why I am sending you so many long term, deep, 'Think' pieces these days, it's because there is nothing to do here. It is too late to buy, but too early to sell. Keep your powder dry, and live to fight another day.

A New Trading Strategy?

Featured Trades: (DRINKS WITH THE PRESIDENT)

1) Drinks With the President. President Barrack Obama certainly arrives at a party like a rock star. Three silver GM Suburbans flanking an armored black Cadillac limo screech to a halt with lights flashing, and all of the roads in the immediate vicinity closed to traffic. A dozen sunglass bedecked Secret Service agents leap out, immediately scanning the perimeter. The president bounds out and briskly walks to the plush Atherton home, where he enters through the kitchen of former EBay executive and California state controller, Steve Wesley.

For a mere $30,400 donation to the Democratic National Committee, I received a sweaty handshake and an assembly line photo with the once South Chicago community organizer. A Koch brother I am not. The event came on the heels of the President's 45 minute private audience with the Golden State's own version of royalty, Apple's (AAPL) Steve Jobs.

It was all part of a broad swing through the Western states to rally the faithful, and to top off the DNC's coffers, which has raised a record $50 million in California this year. Perhaps Obama just wants to be among friends. While his national job approval rating languishes at 47%, it is 55% here, and an eye popping 72% among Democrats.

With a short two weeks until the election, the online betting site, Intrade (click here for their site at http://www.intrade.com/ ), is giving an 89.5% probability that the Republicans will win control of the house. But to me, this is all starting to take on the flavor of a consensus trade that I love to fade. The Democratic Party has become the BP of American politics. Expectations of its imminent demise may be greatly exaggerated, but not for the reasons you expect.

Since the 2008 election, some 4 million 'millennials', 'generation Y's', or 'echo boomers' have gained the right to vote. Have you spoken to your kids lately? The only issues they care about, the environment, global warming, gay rights, and ending the war, are overwhelmingly Democratic ones.

Another 2 million immigrants have also joined the rolls. Thanks to the racist rants by many Tea Party candidates '? last week Nevada Senate candidate Sharon Angell said she thought many Mexicans looked like Asians'?I would be surprised if any of these voted conservative.

Sure, only 30% of these groups vote at all. But when election results swing on majorities that can be counted in the hundreds '?think Florida in 2000, Ohio in 2004, and Minnesota in 2008'?they could make a decisive difference.

The Tea Party has already demolished any chance of a conservative win in the Senate by putting candidates the Republican leadership charitably describes as 'wingnuts.' Witchcraft practicing masturbation advocate, Christine O'Donnell, took a safe Delaware seat from a 20% lead to a 20% deficit virtually overnight. Sharon Angell converted a campaign unseat the Senate majority leader, Harry Reid, in Nevada from a pushover to a dead heat.

With Sarah Palin's aid, Alaska's Senate candidate, Joe Miller, ousted mainstream Republican Lisa Murkowski in the primaries, prompting her to launch an independent write in campaign and a three way split that could throw the election to the Democrats. The net net is that the Tea Party crashing on to the political scene has so far been hugely positive for Democrats.

The polls we see reported daily are only taken of participants with land lines. So they may be undercounting both cell phone addicted, texting millennials, and immigrants. How many of your kids have land lines? My bet would be none. That could be another reason why the final results may differ from what we are being led to believe.

Now, let me throw one big unknown out there. Thanks to the Supreme Court's Citizens United vs. the Federal Election Commission decision, this is the first election to see unlimited anonymous corporate donations since the sixties. As a result, the number of election ads disclosing donors has fallen from 97% in 2006 to 32% this year.

California's proposition 23 is a perfect example of what this means. Billed as the 'Save California jobs bill,' the measure was placed on the ballot and promoted by $6 million in financing from Texas base energy giant Tesoro Petroleum (TSO). And what is the company's plan to create California jobs? Suspend the state's stringent environmental regulations so it can build a new oil refinery in nearby Martinez.

On top of this, you can toss into the mix Obama's proven, but unquantifiable ability to engineer last minute surges among supporters. The bottom line is that things may not be all they appear to be in this election. Global markets are discounting a Republican win in the House of Representatives that may be much closer than advertised, or may not happen at all.

In every postwar election, the party in power has lost an average 27 House seats in the midterm elections. The Democrats can lose 38 and still keep control. Obama knew this the day he walked into office. That is why the most radical parts of his agenda, like health care, were front end loaded. Expect to hear much about the President's surprise, Clintonesque move to the middle in 2011, which was in fact, planned two years ago.

If the Republican celebration that has been ongoing since March turns out to be for nothing, expect the shock to be immediate and global. A Democratic win will take all asset prices down, no matter how much QEII Ben Bernanke throws at them.

Yes, I know, I should stick to my day job of calling every turn in the market. But for the next two weeks, that profession and making political prognostications have become one in the same. I can only say thank goodness that my hometown San Francisco Giants are not facing the Chicago White Sox in the World Series this week.

There is more risk in markets today than traders and investors realize.

You Look Pretty Safe to Me

Featured Trades: (RICE), (CORN), (WHEAT), (SOYBEANS)

3) Watch Rice For Clues to Corn. Those wondering what to do about their ag positions better take a look at the contract for rough rice, which has skyrocketed by 50% since July to $14.50 a pound. Rice is the primary food stuff for 3 billion of the world's 7 billion population, but is predominantly traded and consumed in Asia. That means that it is not widely followed by analysts in the West, and the futures contract for rough rice has been relegated to a quiet, illiquid, backwater of the commodities markets in Chicago.

However, the price of rice may be a valuable leading indicator for the things we do trade in size, like corn (CORN), wheat, and soybeans. Many of the disaster scenarios for the global food supply revolve around Asia, like the melting of the Himalayan glaciers, rising sea levels drowning the Chinese coast, or draughts parching crops in India. Crisis shortages will hit the rice markets there first, then spill over to other foodstuffs here. If China's rice harvest comes in anywhere less than perfect, then it could suddenly become a large net importer and send prices to the 2008 high of $28/pound.

If that happens, you can count on Vietnam and India immediately banning exports, as they did two years ago, sending prices soaring. That's when people hit my local Costco branch, cleaning them out of supplies so they could FedEx 50 pound bags to hungry relatives in Asia. It is all just another facet of the great global bull market in food, which I believe started in June (click here for 'Going Back Into the Ags' ).

Want to Know Where Corn is Going?

Featured Trades: (PEAK LIGHT), (THE FIBER OPTIC CABLE SHORTAGE)

3) Now It's Peak Light. Many of the big telecommunications investments of the last decade were made possible because the cost of long distance transmission was essentially free, thanks to the massive overbuilding that took place during the dotcom boom.

That era may be coming to a close. It has required ten years to take up the slack, but it now appears that we are finally running out of fiber optic capacity. Take a look at the chart below showing an exponential growth of fiber optic demand, while the supply is leveling off. The big driver here has been the explosion of high bandwidth applications, such as online video, gaming, and the profusion of smart phones. That is the conclusion that is coming out of recent telecom industry conferences.

What are the implications for you and me? Count on your phone, cable TV, and broadband bills to go up. Also expect the profit margins of the big carriers, like Comcast (CCS), to shrink. More importantly, this means that there is a great investment opportunity setting up here.

I am always looking for exponential growth in demand to overwhelm linear supply, sending prices rocketing, as we are now seeing across the board in commodities and food. The only thing that could upset the apple cart here is a sudden technological breakthrough that would enable a rapid, cheap growth in capacity, as we saw in the nineties. But there is nothing remotely like that in the immediate pipeline.

I will be looking for companies that are narrow pure plays that capitalize on this trend. If anyone knows of any, please e-mail some ticker symbols to me at madhedgefundtrader@yahoo.com. For now, I just thought you'd like to know that this trend is out there.

About to Become Scarce?

Featured Trades: (RARE EARTHS), (MCP), (AVARF), (LYSCF)

2) Bring on the Rare Earth Wars. One of my many former employers, the Singapore Straights Times, reported yesterday that China planned to cut rare earth export quotas by 30% next year. The story comes on the heels of a voluntary ban of exports to Japan on September 21, after their arrest of a Chinese fishing boat captain (click here for 'Have You Seen Molycorp Lately').

Traders went apoplectic, taking my lead stock, Molycorp (MCP), up a mind boggling 30% in three days, matched by a 27% pop in Canada's Avalon Rare Metals (AVARF), and a 10% gain by Australia's Lynas Corp. (LYSCF). Lynas is now up an unbelievable 473% since I first recommended it five months ago (click here for 'Rare Earths Are About to Become a Lot More Rare'). This is like hitting four back-to-back home runs (I'm using baseball metaphors this week, since the hometown San Francisco Giants are in the play offs).

As China controls 97% of the world's rare earth production, and consumers are desperate to lock in supplies so they can build everything from hybrid cars to iPods to heat seeking missiles, you can expect to hear a lot more about this space. I have already seen the odd story showing up in the mainstream media. Not only that, in the future I expect to see similar developments across the entire resource space, including precious metals, copper, iron ore, molybdenum, tin, nickel, aluminum, and all of the food groups. We are on the eve of the era of The Great Resource Shortage.