Business Cycle Investing - Summer

About a month ago, I started a series on the 4 seasons of a business cycle and stated that we were in the spring season. A few events happened that needed to be covered so I put the series on hold and today I am continuing the series and am discussing summer. At the end you will find 2 paragraphs from Warren Buffet's, Berkshire Hathaway, Annual Report, February 2010 that state investing principles concerning understanding valuations and emotion.

The summer season is when the economy is growing in a fairly normal fashion and jobs are being created. Our economy is growing now with little job creation which means that we are currently in spring. The signs of summer can be seen by:

1) The Federal Reserve says the economy is normal or growing at about a 3% sustainable rate.
2) Jobs are being created.
3) CD and Money Market interest rates are rising as the Federal Reserve raises interest rates.
4) The economic mood is very good and people are willing to spend.
5) The Federal Reserve will increase short term interest rates incrementally at each meeting going over 3%.
6) The US Tressury yield curve will flatten out such that the spread between long and short term rates shrink.
7) Business inventories will return to a normal level.

The key shift in investments that needs to occur is money that is viewed as low risk should shift into money market funds. So money that today is invested in mortgage backed securites needs to be moved. The stock market does well as companies are growing normally once again. I am looking forward to it.

Excerpt from Warren Buffet's, Berkshire Hathaway, Annual Report, February 2010

We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries. We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.

We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion. Nevertheless, at yearend 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.