Featured Trades: (JUNK BONDS), (JNK), (HYG), (PHB)
SPDR Lehman High Yield Bond Fund ETF
iShares iBoxx High Yield Corporate Bond Fund ETF
PowerShares High Yield Bond Fund Portfolio ETF

2) Are Junk Bond Investors Paying Rolls Royce Prices for Jalopy Securities? One of my more prescient calls of the past two years has been to move readers into the junk bond arena (click here for my '2009 Annual Asset Class Review'). My argument then was that the market was discounting a default rate of 14%, but that the realized default rate would be a tiny fraction of that.

This turned out to be true, prompting the (JNK) ETF to deliver a parabolic 80% return, not bad for a bond fund. Similar gains were seen in the other junk ETF's, like (HYG), and (PHB). However, it looks like this market is returning to the bad old days that we saw at the last top of this market in 2007. Inferior credits are now flooding the market with dubious conditions, lax covenants, but premium terms, taking new issuance up to an unbelievable $172 billion during the first nine months of 2010. Banks may not be willing to lend, but investors of every stripe are more than happy to. Investors are once again paying Rolls Royce terms for jalopy credits. Apparently the reach for yield knows no bounds.

If you haven't started to sell off your position in this area, I would begin to do so. What seemed like a riskless yield with (JNK) at 18% last year doesn't seem like such a bargain now at 10.8%. Use the current strength in the equity market to take profits at these very rich prices. When credit quality once again becomes an issue, these will be the first securities to drive into the ditch.

Rolls Royce Prices for Jalopy Securities

SPECIAL $5/BUSHEL CORN ISSUE

Featured Trades: (GOLD), (SILVER)

2) Silver Blasts Through $21! Gold hit a new high too at $1,284, and the yellow metal seems hell bent on taking out $1,300 before it takes a rest. The street was bubbling today with rumors of some leveraged gold traders getting margin calls on their shorts. A major incentive last week was Japan's massive $21 billion intervention in the foreign exchange markets to drive down the yen. Some believe that this is only the opening shot in a global attempt at quantitative easing in the run up to the November elections that will debase all paper currencies to the benefit of all hard assets.

The silver move carries broader implications in that with 50% of demand coming from the industrial sector, strength here suggests that the economy may be stronger than the 'double dippers' realize. I never have been of the double dipper persuasion myself, instead believing that we would get real growth, but growth that is a shadow of its former self (click here for 'Here Comes the Square Root Shaped Recovery').

However, I did expect several double dip scares. That's why I was pulling the fire alarm about equity exposure in April (click here for 'How Can the US Go Up and China Go Down' ). Such a scare certainly showed its ugly face this summer. Perhaps investors are looking at the chart below of ten year returns by asset class showing that gold has been trouncing all comers since 2000, with the yellow metal bringing in a blistering 343% return, versus a 31% loss for the S&P 500.

Featured Trades: (GOLD), (ABX), (AU), (GLD)
SPDR Gold Trust Shares ETF

2) More Reasons to Buy Gold. As a four decade observer of the global financial markets, I often see a situation where the higher a price goes, the more reasons for it to rise come out of the woodwork. That is happening with gold now.

Yesterday, I learned that Anglo Gold Ashanti is spending $1.375 billion to take its gold hedges off. The obvious implication here is that they have studied the long term supply and demand for the lustrous product, and believe that the downside risk no longer exists. When an organization with far more massive resources than I reaches such a conclusion, should I follow suit? Barrack Gold (ABX) did the same a year ago, and the move was one of the sparks that ignited the jump in the yellow metal from $950 to $1,200.

And then I read in the Financial Times today that central banks are planning to buy 15 tonnes of the barbarous relic in 2010, flipping them from net sellers to net buyers for the first time in 20 years (click here for my piece predicting this seven months ago). For the past decade, central banks averaged 442 tonnes/year in sales. Gone are the perpetual rumors of the elusive 400 tonne IMF sale that overhung the market. It seems the list of emerging market central banks loading up on gold is growing by the day. I think the outlook for the value of my gold teeth is looking pretty good these days.

SPECIAL GOLD ALL TIME HIGH ISSUE

Featured Trades: (YEN), (FXY), (YCS)
ProShares Ultra Short Yen ETF

3) Japan Draws its Line in the Sand for the Yen. The Bank of Japan ambushed the foreign exchange market, gaping the yen three hands from the high ?82's to the ?85's by dumping hundreds of millions of dollar in a matter of minutes. It is the first time the central bank resorted to such a drastic move in six years.

As a career dollar/yen trader, I have seen this movie play many times. Wait for the market to take on a maximum position short, slam the market the other way, literally taking the money away from the speculators through trading losses. The first several attempts usually fail, and traders pooh pooh the effectiveness of such a strategy. But in the end, the government always wins out, as it can print unlimited amounts of money for free.

Sure there is an inflation risk down the road if the BOJ does this in an unsterilized manner. But after two decades of deflation, I doubt if anyone in Japan can even spell inflation.

Japanese prime minister Naoko Kan set up this move by handily beating challenger Ichiro Ozawa for control of the ruling? Democratic Party of Japan (DPJ) in elections on September 14. There was a time in my life when I could go on for pages about the intricacies of the factional infighting that is going on in the sushi bars of Nagato-cho, where the country's government is located. That time is long past, and I'm sure you don't care anyway. Suffice to say that from the foreign exchange market's point of view, inaction won and intervention lost.

While it is Kan's officially stated policy to weaken the Japanese currency, bold action seemed unlikely in the confusion and chaos that now ruled supreme in the government. A challenge of a sitting prime minister only three months after a successful election is unprecedented in Japanese politics. This emboldened speculators and momentum players enough to push the yen up to a new 15 year high of ?82 and change, and they clearly had ?80 in their sites. It also spurred China to step up its purchases of JGB's as a reserve asset, further pouring gasoline of the flames. In the meantime, the strong yen is wreaking havoc on the country's export oriented economy, with companies are marking down profit forecasts by the day.

Capturing profits in such high risk, volatile conditions as these is way beyond my pay grade. You really need a 24 hour global trading desk with several million dollars of IT back up to do this. I think the big play setting up here is on the short side. I continue to believe that the yen, along with Japanese government bonds and the 30 year US Treasury bond are the world's most over valued assets, and will be the core shorts of most hedge funds for the coming decade. To understand why, please review my earlier work (click here for 'Why the World's Worst Economy Has the World's Strongest Currency'? and click here for 'Who's Been Buying All Those Japanese Government Bonds').

We may not have seen the peak in the yen yet, but this is starting to resemble what a peak looks like.

Japan is only Praying for a Weaker Yen

Featured Trades: (EMERGING MARKETS), (ECH), (IDX), (TF), (EZW), (GXG), (EIRL)
iShares MSCI Chile Index Fund ETF
Market Vectors Indonesia Index ETF
Thai Capital Fund Inc.
Global X/Interbolsa FTSE Columbia 20 ETF
iShares MSCI Ireland Capped Investable Market Index ETF
PowerShares Water Resources Portfolio ETF

1) The Big Win in Emerging Markets. Take a look at the three year ranking of world stock markets below, and the themes that I have been pounding on the table about in this letter for the past 18 months will practically jump off the page at you.

Emerging markets shout out loud and clear, with the US down in the dumps at an 8.96% loss, and the lower echelons are populated with the widely despised PIIGS showing double digit losses. In fact, emerging markets occupy 18 of the top 20 spots.

Two of my picks, Indonesia (IDX) (click here for the call) and Chile (ECH) (click here for 'Chile is Looking Hot' ) grabbed the number two and three positions.? Thailand (TF) comes in at number seven (click here for that piece), while South Africa (EZW) (click here for 'On Safari for Trades in South Africa'), ranked ninth.

I missed the number one performer, Colombia (GXG), which brought in an annual 25.14% return for the last three years. But who new Juan Valdez was going to dump his job as a coffee grower and head up the Latin American desk at a major macro hedge fund (click here for 'Hedge Funds Head for the Frontier') ?

I have no doubt that emerging markets will maintain growth rates a multiple of ours for at least another decade. The $64,000 question is that a decade into the move, how much of this is already in the price? Buy on dips.

From Coffee Growing to Hedge Fund Trading?