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The Signal of Recovery? – Warren Buffet Buys an Ailing Railroad Company

Warren Buffet’s move to buy a railroad company has garnered a lot of attention. His purchase is not only seen as an investment, it is also widely viewed by others as a sign that the recession has bottomed out. As many know, Warren Buffet is known by many as one of the greatest investors today. His firm, Berkshire Hathaway has a significant amount of “cash hoard” from his previous initiatives.

How Much Did Warren Buffet Buy the Company For?

The firm will be buying the Burlington Northern Santa Fe Corp. at $44 billion ($100 per share). During the last year, the stock price of Burlington has dragged the performance of the Dow Jones Transportation Average. Financial analysts believe that Buffet has paid 18.2 times Burlington’s estimated earning for 2010. The move is not characteristic of the revered investor especially with his past history of not paying a premium when investing new capital. As a result, many think that the explanation behind this is that the man sees hidden potential in the company.

Contrary to Market Trends

Transportation is an ailing industry. As of the November 2 market close, its stocks were dragging behind the entire stock market in the United States at a margin of 15.94 percent. In addition, the number of passengers that the rail services are depressed, a key indicator of an economic downturn.

The Association of American Railroads announced that for the week ending Oct. 10, there was weak demand for goods all over the United States. On the West Coast, it was down 15.4 percent and on the East; it was down by a staggering 19.7 percent.

Given all this, Warren Buffet’s decision to invest in the railway industry come a surprise to everyone. However, even if it proves to be a good move in Buffet’s part, it isn’t necessarily an indication of an economic recovery.

Financial Overhaul Weakens as the Economic Shock Fades

About a year after the Lehman Brothers collapse, its shock waves across the globe seemed to have subsided. It can be remembered that the investment bank’s problematic demise intensified the deep recession in the US economy. In addition, it helped pave the way for the government’s significant role in managing the economy through corporate bailouts and other programs.

The Lehman Brothers is also significant because previous to its demise, the public relied mainly on markets to right themselves. Its failure made government intervention not only acceptable; it was also seen as a necessity. However, even if the impact of Lehman Brothers in terms of regulatory reforms is big, to a surprising degree, there are a lot of aspects in the financial industry that hasn’t changed. Because of this, many people are looking for bargains through comparison shopping.

Banks are Still Taking Risks

Major US banks cannot let go off their old habits. As profits got off their lows, executives are regaining their swagger. Right now, a lot of banks and other financial institutions are selling exotic products that pushed the economy on the brink of collapse last fall. In fact, their appetite for risks has even grown.

Collectively, the top five banks in the United States can potentially lose more than $1 billion any day in the second quarter of 2009 if their bets go sour. According to Peter Solomon, a former vice-chairman from Lehman Brothers, “there’s no fundamental change in the way banks are run or regulated…there’s just fewer of them.”

On the Regulatory Front

Even as financial industry is regaining its footing, lawmakers cannot seem to keep up. Democrats are getting bogged down by the infighting between bankers, federal regulators, and even other lawmakers who believe that expanding the government’s control on private firms might create more problems over the long term.

Washington officials say they heartened that the financial market seems to be healing but at the same time, they realize that new rules need to be established. It is important for them to get out of the current limbo to get the economy back in shape.

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