December 27, 2015 Here Is My Handle

Risk/Reward Vol. 289

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

“Here is my handle
Here is my spout
When I get all steamed up
I just shout
Tip me over and pour me out’---lyrics from “I’m a Little Teapot” sung by Children

“So tell me why, haven't I heard from you
Tell me why, haven't I heard from you”---lyrics from “Why Haven’t I Heard From You” sung by Reba McEntire

“And when we say
Yeow! A-YIP-I-O-EE-AY
Were only say-in "you're doing fine Oklahoma,
Oklahoma OK"---lyrics from “Oklahoma” by Oscar Hammerstein II

One of the lessons taught by famed investor and stock chartist, Bill O’Neill (founder of Investor’s Business Daily), is that one needs to be watchful when buying a battered stock early in its recovery. If one charts any such recovery, one sees a cup and “handle” pattern. Indeed, O’Neill doesn’t buy until the cup is complete (that is the price has fully recovered) and a handle has formed. His reasoning is simple. There is too much resistance during any recovery from those who see any price increase as an invitation to cut losses by selling. Those sellers make the trip up the right side of the cup perilous. I faced that peril this week in some of my VNR preferred stock positions about which I crowed last week. I exited a few but I did not “get all steamed up”; nor did I “shout”; nor did those price retreats “tip me over” into a loss. Having read O’Neill, I knew the road to recovery could be rough. What I did do was sell once I approached my sell limit and buy back once recovery appeared on sounder ground. By week’s end, every position was back in black with my original investment up 53% in less than a week.

Despite Thursday’s retreat, the week was a good one for Mr. Market as both major indices finished up 2.75%. Some claim this was a “Santa Claus” rally, but I think it had more to do with the exit of the Federal Reserve as THE dominant market force. Nothing---not a peep---was heard from the Fed last week, and I do not expect much news from the Fed until well into Q1. ‘So tell me why haven’t we heard from the Fed/Tell me why?” Because along with its decision to raise short term rates last week, the Fed set a reasonable and predictable path of rate increases for the next 12 months. These increases are now factored into short to medium term bond prices including the all-important US 10Year Treasury Bond, the yield on which has held steady in the 2.2 to 2.35 range for several weeks. This is very good news for income investors such as yours truly and I believe for the stock market in general.

I continue to add to preferred stock positions and have opened a few others in the mortgage real estate investment trust sector which took a beating these past several months as the Federal Reserve dithered on a rate increase. In addition, I opened a position in Oneok (OKE) an Oklahoma based oil and natural gas pipeline company that issued guidance early last week confirming its intention to maintain a healthy 11% dividend. This was welcome news and caused me to “say/ Yeow! A-YIP-I-O-EE-Ay/ You're doing fine Oklahoma, Oklahoma OK.” Look for other pipeline companies to issue favorable guidance if and when some stability returns to the oil patch; an event which appears more likely now that the US ban on exporting crude oil has been lifted.

I hope you are enjoying your holidays. As the New Year approaches rest assured Dear Readers that this Oscar (like Mr. Hammerstein) will continue to learn and to record. Keep reading this newsletter and find comfort in knowing that in the world of investing “You Will Never Walk Alone.” It may not be all “Happy Talk”, but on occasion we will “Whistle a Happy Tune” for sure. And as for Mr. Market, well he’s just like “Ol’ Man River/He just keeps rollin’ along.”