Mousetrap 1/1/2012 -- buying CLF

Secular Hold IAU & XLF 0.77%
Condition Bear Market
S&P Target 940
Hedge XLU -5.25%

Position Date Return Days Call
SE 6/27/2011 16.21% 188 Hold
CLH 7/6/2011 19.72% 179 Hold
GCI 7/14/2011 -1.76% 171 Hold
CSGS 10/3/2011 17.02% 90 Hold
NLY 10/25/2011 -2.68% 68 Hold
DD 10/27/2011 -5.33% 66 Hold
KBR 10/27/2011 -4.84% 66 Hold
VG 10/27/2011 -27.97% 66 Hold
TTM 11/30/2011 -1.66% 32 Hold
CLF 1/3/2012 0.00% -2 Buy

S&P Annualized -11.06%
Mousetrap Annualized 3.32%
Hedged Annualized -5.69%
Secular Annualized 1.31%

I’m planning to add CLF (Cliff’s Natural Resources) to the portfolio on Tuesday morning with a limit order of 62.35.

Nothing new for the new year. We’ve had our 4th quarter 2011 rally, and the model is still showing a decline in 1st quarter 2012, with a target on the S&P of 940.

I’ve closed some discretionary long positions, and am looking to increase my short positions (none of which are a part of this model). As I mentioned the other day, Len (the timing expert) is now short term bearish.

Time to grit our teeth and watch the next leg on this roller coaster ride.

The problem with this market is that it is not a market – that is, market forces are not driving it. While earnings and money flow are allowing my model to hold its own, the “market” as a whole is being continually whipsawed by geopolitical whims. Operation twist has given Europe some breathing room, but Merkel has to agree to some kind of easing or none of Bernanke’s delays will mean anything.

To recap the macro events, here’s where we are:

In 2010 Bernanke initiated Quantitative Easing 2, buying short term treasuries and promising a zero interest rate policy into 2013. This exported INFLATION to the third world and DEFLATION to Europe.

Third world inflation pushed Arab economies over the edge, and families that were devoting a third of their income just to eat, suddenly found out they couldn’t do even that – and so they revolted against their governments.

European deflation killed the export industries and increased the burden of sovereign debt loads even as the ability to pay them disintegrated. The PIIGS were pushed to the edge.

In 2011 Bernanke initiated Operation Twist, which is selling short term treasuries and buying long term ones. This is actually a stalling tactic to ease deflationary pressures in Europe. Bernanke HAD to do this to keep Europe from going over the edge of the deflationary spiral and pulling us down with it.

But Merkel, Germany’s chancellor, isn’t cooperating with any plans for Euro quantitative easing.

All that has happened is that Bernanke changed the sequence of the bear market. Instead of America dragging the world down in 2010, Europe will do so in 2012. It was a valiant effort. Merkel can still act, but she is running out of time.

And typical market timing tools are not equipped for these kinds of external events.

2011 was relatively flat for the stock market – but most people still lost money in both directions: getting stopped out of short positions and then stopped out of long ones.

2012 should give us a trend or two, but the fallout for the global economy will not be pretty.

Tim