Mousetrap 3/31/2012 -- never a straight line

Condition Bear Market Rally
S&P Target 1210
Small Portfolio IAU & XLF 15.48%
Hedge XLU -2.51%

Position Date Return Days Call
GCI 7/14/2011 16.22% 261 Hold
CSGS 10/3/2011 19.78% 180 Hold
NLY 10/25/2011 -0.19% 158 Hold
DD 10/27/2011 16.68% 156 Hold
KBR 10/27/2011 22.36% 156 Hold
VG 10/27/2011 -32.83% 156 Buy
TTM 11/30/2011 61.21% 122 Hold
BT 1/4/2012 15.93% 87 Hold
PDLI 3/7/2012 4.43% 24 Hold
CLF 3/19/2012 -3.85% 12 Hold

S&P Annualized 5.63%
Small Portfolio Annualized 18.96%
Mousetrap Annualized 21.23%
Hedged Annualized 18.22%

Just a quick word on health care.

The healthcare sector has the second best money flow of the nine sectors I track – after financials. Both financials and healthcare are bearish sectors, and the moneyflow in those two sectors more than compensates for the weak money flow in utilities.

Hence, my model remains bearish.

That said, healthcare has been in the news so much that it’s worth a comment.

Most folks who track the stock market know that the raging bull market stalled within a few weeks of Obamacare being passed in 2010. Then we had the flash crash, the QE2 rally, another collapse last summer, and finally the operation twist rally.

We are slightly ahead of where we were when healthcare was passed. If it is repealed now two things will likely happen:

1) The market will pop upward, and
2) Forward operating earnings will go down.

The pop up is rather obvious, but the forward earnings guidance isn’t.

Basically it works this way: HIRING stalled when Obamacare was passed because of the uncertainty involved in the actual cost of new-hires to business; because hiring stalled capital expenditures stalled as well.

But employees and capital expenditures are two massive costs to business. Thus, we ended up with wildly inflated earnings margins.

If Obamacare is rejected by the Supreme Court, companies will begin to hire AND make capital expenditures – which will drive down earnings.

You can never look at just one thing in the market. There are too many variables, and some of them cannot be known in advance. The market is counter-intuitive precisely because so many things depend on each other that bad news can be good, and good news bad for your portfolio.

The Mousetrap model remains hedged.

I’ve also resolved a long term question I had about how to rotate stocks in the portfolio. Do I sell the worst positioned stock when a new “best value” shows up, or do I wait for a sell point on an existing stock and replace it with the best value available? After tracking all twenty stocks that have been purchased by the model (not just the ten currently held), the annualized return rate of all twenty stocks is 40.35%

Here are the numbers:

Stock Date Entry Current Return Days
BKI 5/31/2011 24.94 33.97 36.21% 304
CFI 6/22/2011 8.29 10.98 32.45% 282
SE 6/27/2011 25.68 31.55 22.86% 277
AWR 7/5/2011 34.17 36.14 5.77% 269
CLH 7/6/2011 52.41 67.33 28.47% 268
GCI 7/14/2011 13.19 15.33 16.22% 260
AGO 8/5/2011 12.36 16.52 33.66% 238
DISH 8/10/2011 20.81 32.93 58.24% 233
GTAT 9/8/2011 11.85 8.27 -30.21% 204
CSGS 10/3/2011 12.64 15.14 19.78% 179
NLY 10/25/2011 15.85 15.82 -0.19% 157
DD 10/27/2011 45.336 52.9 16.68% 155
KBR 10/27/2011 29.054 35.55 22.36% 155
VG 10/27/2011 3.29 2.21 -32.83% 155
AMGN 10/27/2011 56.369 67.97 20.58% 155
TTM 11/30/2011 16.73 26.97 61.21% 121
WHR 11/30/2011 46.433 76.86 65.53% 121
BT 1/4/2012 31.19 36.16 15.93% 86
PDLI 3/7/2012 6.09 6.36 4.43% 23
CLF 3/19/2012 72.03 69.26 -3.85% 11

When you add in the reduced trading costs of longer holding periods, and reduced costs of long term capital gains for stocks held more than a year, the ideal holding period is far longer than the “pull” strategy, and therefore a “push” strategy is called for. Current stocks will be held until they hit a sell position on the model.

Interestingly, VG made most of its losses in the first three days that I held it. Waiting for a “push” rotation strategy should reduce the times I get cut catching a falling knife. It will still happen, but hopefully not as often.

Finally, the longer holding period justifies expanding the model to twenty stocks. I will do so by simply replacing a sold stock with the top two values available, rather than one. This will take some time, but I’m working on my retirement here. I have plenty of time.

Tim