Markets Hold Despite Poor Jobs Report, Oil’s Shine, and Rising Interest Rates!

During the gold rush its a good time to be in the pick and shovel business”

― Mark Twain

In 1848, gold was discovered at Sutter’s Mill. Thousands learned of the possibility to find treasure in a river and decided it was time to join the hunt. On a percentage basis, very few were successful in mining for gold, silver, copper, or any substance worth money. The people who benefited from the gold rush were not the explorers. It was the sellers of picks and shovels. Owning the tool vendors is a consistent economic theme which can form the basis of an investment strategy.

Looking at the last twenty five years of the modern economy, many entrepreneurs started companies. Consumer based enterprises have difficult paths to enduring. For every McDonald’s, there are 100 chains which never quite gain consumer acceptance. Investors prefer companies that own dependable structural advantages which are sources of profits. Instead of Pelaton, which built a big consumer business, Adobe is adored. Why? It sells the editing and creative tools which are mandatory for content creation. Activision is a big game publisher where shareholders have earned nice returns. They don’t quite compare to Amazon, which owns Twitch, the largest platform for gamers. Let’s look at a few other industries to explore the picks and shovels thesis a little deeper.

In the energy area, there are hundreds, maybe thousands of exploration and production companies. With one out of five wells drilled actually hitting something of value, the odds are not great with E&P. Instead, an integrated company which owns refining, pipeline, and marketing assets (gas stations) is a more predictable business. The largest energy companies own all parts of the value chain, including producing wells. Even better, the assets are integrated in an efficient way so they are logistically ideal.

In the agricultural area, there are many different kinds of crops available to grow and harvest. Farming is a difficult business, and there are large distinctions between the kinds of products available. The best place for profits in agriculture is owning the farmland. Land where there is a large water source is crucial for the entire agricultural value chain. Leasing good land is essentially selling picks and shovels.

In the financial world, hundreds of companies want to go public every year. The exchanges, think NASDAQ and NYSE, sell the dream in a big way. Ring the bell, go to the big board, show up in New York and appear in Times Square so you get your company exposure all over the world. Yes, for one day. Companies pay for the listing every single year. You can invest in the company which owns the exchange. By doing so, you are selling the picks and shovels. Let others chase the dream. Predictable profits is where good businesses are found.

In the markets last week, the September jobs report was a stink bomb with only 194 thousand jobs created (estimate around 500k). The softness provides Fed Chairman Powell an easy out to do nothing. Doing nothing is something the Fed is excellent at. One might argue they specialize in it. In the meantime, with unemployment at 4.8%, Powell can stick to his plan of starting the taper in November. If he pushes it back some, well, the jobs report was a little weak.

Turning to energy, oil briefly broke $80 per barrel as all of a sudden, the sector is gaining admiration. We will see if it holds. The ten year treasury ended the week at 1.60%. Banks and insurance companies will see similar popularity if interest rates continue higher. On the earnings front, the headline reports came from Pepsi, Levi’s, and Constellation Brands. Looking ahead to next week, the banks kick off reporting season with JP Morgan Chase first up. Commentary about credit quality and inflation expectations will be watched closely. Thanks for reading the blog this week.

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Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

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