Featured Trades: (JGB), (YCS)

2) The Fat Lady is Also Singing in Japanese. A political slugfest in Japan could also be signaling the end of the great bull market in the JGB market, which I have been pissing on from the greatest possible height (click here for 'Why the JGB Market May be Ready to Collapse').

Political kingpin, Ichiro Ozawa, is challenging prime minister Naoko Kan a scant three months after he landed the top job with promises of increases stimulus spending to revive an economy that has been comatose for two decades. If Ozawa wins, he could push Japan's debt/GDP ratio above 200%, a level that would prompt the IMF to warn the country that it is over its debt limit. That in turn would lead to downgrades of Japanese paper by the ratings agencies.

You could easily see the entire house of cards falling apart after that. Since I posted my last piece on the topic, the yield on the ten year JGB has leapt from 0.89% to 1.19%, while 30 year paper has rocketed to 1.97%. I always thought that a selloff in the Japanese bond market would happen along with the collapse in the yen. But with the Japanese currency still flirting with 15 year highs at ??83.7, it looks like the country's bond vigilantes are unwilling to wait.

No, there is no readily available short JGB ETF which you can use to cash in on this move, as there is for the yen (YCS) but you can bet that one will magically appear when the trend gets going. There is a JGB contract listed on the CME, but the real volume and tight spreads are to be found in futures markets in Osaka and Singapore.

(SPECIAL ELECTION ISSUE)

Featured Trades: (CVX), (XOM), (COP), (BP), (RIG), (DO),
(BTU), (JOYG), (SHAW), (CCJ), (DVN), (CHK), (FSLR),
(NOC), (GD), (ZMH), (UNH), (HUM), (PFE), (DV), (STRA), (COCO),
(TBT), (TMV)

2) My Call on the Election. Like Sherlock Holmes, I like to consider every alternative, and eliminate the obvious. I think that if the Republicans take the House, it is unlikely that we will see any major legislation pass for the next two years. Gridlock will reign supreme.

While traditionally, Wall Street favors a new ice age in Washington,? I think things are different this time. The last time we had gridlock, Bill Clinton was president, the budget was near balance, unemployment was stable at 5.5% (click here for the raw St. Louis Fed data), and China was this far away place where you bought cheap suits and spicy food.

Gridlock today would mean that critical problems like high unemployment, failing wars, and soaring deficits would be ignored. Instead, a Republican majority in the House would bring control of every committee, which would launch into nonstop Congressional investigations of everything under the sun. At the top of the list: fraud and corruption in stimulus spending and the destructive aspects of Obama's health care plan. Think of it as the Lewinsky scandal times ten.

Warning: this will not inspire the confidence of equity investors. It also might cause holders of the dollar and Treasury bonds to reassess their positions. When did equities peak this year and start their six month slide? April 25, about the time the Republicans began claiming victory in the November elections. A second decade of zero equity returns, anyone?

What do I think is going to happen? I'll take the other side of the trade and bet that the Democrats suffer close to the average loss endured by every ruling party in the midterm elections for the past 50 years, which is 27 seats. Painful for the Dems to be sure, but below the 41 seats the right needs to achieve majority rule.

As for the Senate, the Republicans have no chance of winning whatsoever. In Nevada, Sharron Angel is trying to unseat the Senate majority leader with a plan to end social security in a state loaded with retirees. In California, where jobs is a huge issue with an unemployment rate of 12% and a broader jobless rate of 18%, Barbara Boxer is pointing out correctly that Carly Fiorina fired 30,000 workers, shipping most of the jobs overseas, then paid herself a $100 million bonus. This does not sell well in the populist Golden State. That's two key seats thrown away right there.

The Republicans could have won the Senate, but blew their opportunity in the spring when the Tea Party forced the selection of candidates from unelectable extremes. Want to review the 1964 civil rights act? No problem. How many immigrant voters have they picked up, two million of which have joined the voter registration polls since the last election and have an extremely high election day turn out? I would venture to say none. How many millennials in their early twenties, which are devoutly pro environment and anti war? That's another four million. Sure, a lot don't vote, but enough may to make a difference in swing states like Ohio and Florida.

I have been scanning the horizon looking for a policy on which the Republicans could ride to victory. So far, I have seen none. They have become a single issue party, that of tax cuts for those making over $250,000 who on average own $7 million in assets. They say they want to cut spending, but won't say where. Until other ideas are enunciated, voters will assume this is just going to be another Bush replay.

In an election where making jobs is the principle issue, the party has the worst job creation record since Herbert Hoover. According to the Bureau of Labor Statistics (click here for the link) during 1992-2000 Clinton created 23 million jobs, while Bush could only find 3 million from 2000-2008. Allowing for population growth, those missing 25 million jobs were created in China, stimulating their economy, not ours.

Even Obama's vitriolic opponents concede that the guy is a terrific campaigner. To win elections in November, you want your opponents to peak at the end of August. Remember the Republican fanfare after Sarah Palin's nomination in 2008 and the bleed that followed? We may be seeing a replay now. Look at Obama's move today, which puts the Republicans in the awkward position of having to oppose tax cuts for small businesses and the middle class, a brilliant political pre election move. A time honored way to win elections is to steal your opponent's issues, something Clinton was good at.

Having spent only a year in the White House Press Corp, after which I wanted to take the longest possible shower, I can't pretend to ever know the ways of Washington and elections. Thank goodness my career led me out of the dreaded Beltway and landed me in the deep canyons of Wall Street. I wouldn't write about politics at all if it didn't have such a big impact on your financial future. A fact-oriented person like myself is uncomfortable in the world of pure opinion, spin, and hyperbole. But it does, so I must. I just look at the data, reach the obvious conclusions, and call them as I see them.

Eliminate the Obvious, and Consider Every Alternative

Calling Them as I See Them

1) Summer is Over. There is no better feeling than sitting by the campfire at night, listening to the coyotes howl, watching the stars twinkle, and feeding my broker research into the flames one page at a time. The research from Goldman Sachs (GS) seemed to burn especially well. Perhaps it is the esteemed firm's close association with Satan so alleged in Congress that makes its product particularly incendiary. The Merrill Lynch research? You might as well throw a bucket of water into the embers.

Alas, summer has come to a close. Driving back to San Francisco was the usual five hour nightmare on Labor Day. But this time I was joined by 50,000 refugees from Burning Man, toting home dusty bicycles and coming down from hopefully enjoyable acid trips, driving an assortment of vehicles modified to look like spaceships, warthogs, and gigantic fish. The Highway Patrol had a field day.

For me, it's back to worrying about the next move in interest rates in Australia instead of the bears raiding the ice chest, focusing on Saudi Arabia's crude output figures instead of whether the bacon is burning, and analyzing the thunderstorm that may hit the financial markets rather than the one that is just clearing the nearest High Sierra ridge. So it's time to clean up the Coleman stove, empty the sand out of the sleeping bags, and mend the holes in the tent before returning all to storage.

Featured Trades:?? (AUGUST NONFARM PAYROLL)

3) The Bad News In the August Non Farm Payroll. One of my favorite math professors always used to tell me that statistics were like bikini bathing suits. What they reveal is fascinating, but what they conceal is essential.

If there were ever a chart that showed how the pulse of the economy was flat lining, this is it. The scary thing is not the past, but the prologue. The expectations bar was so low, that anything short of Armageddon had to deliver a stock market rally, which is promptly gave back on Tuesday. Apparently, this is how long it takes for traders to figure out a loss of 54,000 jobs is actually a 'real' loss of 154,000 jobs when population growth is taken into consideration. And we know that these figures omit the millions subject to mandatory furloughs, pay, and benefit cuts. It is back to school season again, and for many municipalities that means it's time to fire more teachers, cops, and firemen.

The 200,000 monthly job gains normally seen at this stage of the economic cycle will not arrive for years, if ever. Over employment in these fields is still legion when compared to the corporate world. While the 67,000 new private sector jobs are laudable, it is not the sort of growth that bull markets are built upon. At this rate, it will take 120 years just to bring the unemployment rate down to 5%. No matter how much money the government throws at the economy, those 25 million mostly blue collar jobs that we shipped to China from 2000-2008 are never coming back. The only question is how many more jobs the Middle Kingdom relieves us of as they relentlessly work their way up the value chain.

The new management in America is all about staying thin and agile, and that involves only hiring a new worker at the point of a gun, lest one become saddled with all of the secondary costs and entitlements that entails. Expect more of the same in coming months, and if you have a job, keep it all costs.

What Statistics Conceal is Essential

Featured Trades: (SOVEREIGN DEBT), (PCY), (LQD)

2) Sovereign Debt Was a Great Place to Hide.? I am constantly asked where to find safe places to park cash by investors understandably unhappy with the risk/reward currently offered by the markets. Any reach for yield now carries substantial principal risk, the kind we saw, oh say, in the summer of 2007.

I have had great luck steering people into the Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY) for the last year, which is invested primarily in the debt of Asian and Latin American government entities, and sported a generous 8.5% % yield (click here for my initial call at XXX). . This beats the daylights out of the one basis point you could earn for cash, the 3.70% yield then available on 10 year Treasuries, and still exceeded the 5.70% yield on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single 'BBB', or better, US corporates.

The big difference here is that PCY has a much rosier future of credit upgrades to look forward to than other alternatives. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in the region going back to 1820 is in? the backs of their minds.

You would think that a sovereign debt fund would be the last place to safely park your money in the middle of a debt crisis, but you'd be wrong. PCY has minimal holdings in the Land of Sophocles and Plato, and very little in the other European PIIGS. In fact, the crisis has accelerated the differentiation of credit qualities, separating the wheat from the chaff, and sending bonds issues by financially responsible countries to decent premiums, while punishing the bad boys with huge discounts. It seems this fund has a decent set of managers at the helm.

With US government bond issuance going through the roof, the shoe is now on the other foot. Even my cleaning lady, Cecelia, knows that US Treasury issuance is rocketing to unsustainable levels (she reads my letter to practice her English). Moody's has been rattling its saber about a downgrade of US debt on an almost daily basis, and it is just a matter of time before this once unimaginable event transpires. When it does, there could be a stampede into the debt of other healthier countries, potentially sending the price of PCY through the roof.

Since my initial recommendation, my total return on PCY has been 30%, not bad for an insurance policy. Money has poured into PCY, doubling it to a record $707 million in assets. The yield is down to 6.11%. If we get a sudden sell off in Treasury bonds, a scenario that may have already started, I think it will take the rest of the fixed income universe along with it. I therefore want to take the money and run.

I lived through the Latin American debt crisis of the seventies. You know, the one that almost took Citibank down? Never in my wildest, Jack Daniels fueled dreams did I think that I'd see the day when Brazilian debt ratings might surpass American ones. Who knew I'd be trading in Marilyn Monroe for Carmen Miranda? Given the advanced age of this bond bubble, I'm now thinking of swearing off women altogether.

Time to Swear Off Women Altogether?