Is Warren Buffett calling a bottom?

Berkshire Hathaway's acquisition of railroad Burlington Northern may boost the transportation industry -- and that could be a good sign for the economy.

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By Paul R. La Monica, editor at large

Warren Buffett said his firm's purchase of railroad Burlington Northern Santa Fe is an "all-in wager" on the U.S.

NEW YORK ( -- Warren Buffett said he's making an "all-in wager on the economic future of the United States" with the purchase of railroad Burlington Northern Santa Fe. Let's hope it's a bet that Buffett wins.

The Oracle of Omaha stunned the markets Tuesday with the announcement that his holding company Berkshire Hathaway (BRKA, Fortune 500) was scooping up the remaining 77% of Burlington Northern (BNI, Fortune 500) that it didn't already own. He's paying $100 a share, a 31.5% premium to Monday's closing price.

Unsurprisingly, shares of Burlington shot up nearly 30% Tuesday. Choo-choo! And even though the Burlington deal may not spark a massive wave of consolidation in the railroad industry, don't tell that to traders.

Shares of the other big three U.S. railroads -- Union Pacific (UNP, Fortune 500), CSX (CSX, Fortune 500) and Norfolk Southern (NSC, Fortune 500) -- all rose by at least 5% Tuesday. Smaller railroad Kansas City Southern (KSU) was chugging along with a more than 7% gain.

But if the Burlington deal ignites legitimate interest in the rails as well as the transportation sector at large, that is undoubtedly good news.

Many financial experts believe that the performance of railroads, truckers and other transportation companies is a good leading indicator of how the economy and broader market will do.

To that end, it's been an encouraging sign that the Dow Jones Transportation Average, or the DJ Transports for short, has outperformed the Dow 30 since the market hit its low point for the year in early March.

However, transportation stocks have also experienced a bigger slip from their highs in recent weeks than the Dow industrials. So if Buffett is calling a bottom for this sector, it might be the case that he's making the same call for the overall U.S. economy.

"Burlington Northern is one of those companies that should do better as the economy rebounds. The deal is affirmation of the notion that things are getting better. Railroads and other transports are as cyclical as cyclical gets," said Ted Parrish, co-manager of the Henssler Equity fund.

Parrish does not own shares of Burlington Northern but his fund does own shares of shipping firm C.H. Robinson Worldwide (CHRW, Fortune 500), which is one of the 20 stocks in the DJ Transports. He said the endorsement of the transportation sector by Buffett could provide a nice boost in confidence for the group.

The reason that a rebound in the fortunes of railroads, truckers and air freight carriers speaks well for the economy's prospects is fairly simple. Increased demand for transportation services is probably a sign that companies are manufacturing and producing more goods that need to be shipped to warehouses, retailers and -- eventually -- consumers.

So if Buffett is getting ahead of that expected rebound by purchasing Burlington Northern now, he must be fairly confident about the chances of a recovery.

"Buffett is a pretty canny investor, as he has shown over many decades. If international trade is picking up and there starts to be more life in consumer spending, having a bigger investment in railroads makes a lot of sense," said Bob Baur, chief global economist with Principal Global Investors in Des Moines, Iowa.

So as stodgy as railroads and other transportation companies may seem in this era of instant gratification consumption, the sector is still vital to the nation's economic health.

Buffett admitted as much in Berkshire's statement about the Burlington acquisition. "Our country's future prosperity depends on its having an efficient and well-maintained rail system," he said.

Of course, Buffett may be early, or dare I say it, even wrong about his bet on a broader economic rebound. Granted, that's highly unlikely given his track record.

But it's worth pointing out that while the Burlington takeover news helped spark a big rally in the DJ Transports Tuesday, it wasn't enough to lift the whole market. Stocks were mixed, with the Dow finishing the day lower and the S&P 500 and Nasdaq up slightly.

For some reason, the enthusiasm about the deal was confined just to the transportation sector. Not even the news of another big merger late Monday, the acquisition of tool maker Black & Decker by rival Stanley Works, was able to get investors in a cheery mood.

That makes sense since it's still highly uncertain just how strong the economic recovery will be.

As long as the job market continues to remain anemic -- the announcement of 8,000 job cuts by consumer healthcare products behemoth Johnson & Johnson Tuesday is an unwelcome sign -- it's hard to get too excited about the state of the economy.

And unfortunately, not even Buffett has enough of a Midas touch to get the unemployment rate moving lower again.

"The market is really focused on the short-term and Buffett and Berkshire are making a very long-term investment. Investors are nervous because this is a time of transition in the economy. People realize that it's going to take a while for the economy to improve," said Kate Warne, market strategist with Edward Jones in St. Louis.

Talkback: Do you agree with Warren Buffett that the U.S. must have a strong railroad system? Share your comments below. To top of page

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