Stocks: A Big Blue Bounce

News of IBM's big stock buyback and improved profit guidance lifted major indexes Tuesday, trumping a run of negative economic reports

by Ben Steverman

Technology titan IBM (IBM) can do a lot of things, according to its ubiquitous TV commercials. Apparently, it can also divert investors’ attention from a stomach-curdling run of economic data with the promise of a big-bucks stock buyback plan, along with a few soothing words about its profit outlook.

That seemed to be the case Tuesday, as major stock indexes closed higher as news of Big Blue's $15 billion stock buyback plan generated buying interest in both IBM shares and the market as a whole.

The news from the Armonk (N.Y.)-based technology services outfit followed the release of three dismal economic reports showing a jump in producer prices and drops in consumer confidence and home prices. Together, these data supported concern that the economy may be suffering from stagflation.

Also, several retailers, including Macy's (M), Target (TGT) and Home Depot (HD), reported mostly weak earnings and sales figures Tuesday, painting a bleak picture of the American consumer's mood.

But IBM’s good news trumped the negative economic headlines in the minds of investors. In addition to its repurchase plan, the company improved its 2008 EPS guidance to "at least $8.25" from a range of $8.20 to $8.30. IBM also announced product enhancements for its mainframe software lines.

After starting in negative territory, major indexes finished with solid gains on Tuesday.

The Dow Jones industrial average was up 114.70 points, or 0.91%, to 12,684.92. The broader S&P 500 gained 9.49 points, or 0.69%, to 1,381.29. And the tech-heavy Nasdaq composite index added 17.51 points, or 0.75%, to 2,344.99.

Action in the broader market was positive, with 22 stocks rising in price for every nine that declined on the New York Stock Exchange. NASDAQ breadth was 19-11 positive.

The day started out unpromisingly. Before the Wall Street open Tuesday, news hit that the U.S. Producer Price index surged 1% in January, far more than the 0.3% economists had been expecting. "Core" PPI -- excluding food and energy -- rose 0.4%. After dropping in December, energy prices rebounded 1.5% last month as gas prices jumped 2.9%. Food prices rose 1.7% and are up 8.3% from a year ago.

Investors worry the fear of stagflation -- high inflation at a time of slow economic growth -- may hinder the Federal Reserve from cutting interest rates enough to stimulate growth.

"Ongoing strength in headline inflation and the continued upward drift in core rates should keep [the Federal Reserve] hobbled by inflation risk, despite the greater focus at the Fed on downside economic risk," Action Economics says.

"There is growing risk that inflation will accelerate if the economy recovers in the second half of 2008," says Aaron Smith of Moody's Economy.com. The jump in prices might force the Fed to stop or reverse its rate cuts, which "would increase the length and severity of the downturn now under way," Smith wrote.

In other economic news Tuesday, the Conference Board's index of consumer confidence plunged to 75.0 in February from 87.3 in January. That's much weaker than forecast and the third monthly decline in a row.

Also, the U.S. Case/Shiller home price index, a measure of housing prices in 20 cities, fell 2.15% in December to 184.86. The decline, which amounts to a 9.08% year over year drop, mostly met expectations.

April West Texas Intermediate crude oil futures rose $1.65 to $100.88 per barrel in NYMEX trading. S&P MarketScope noted rumors an Iranian sovereign fund is buying up to 25 million barrels. A source cited by S&P said he had not seen any headlines to move the market, which started out lower. And, he said, the uptrend shows no sign of slowing with hedge funds continuing to buy.

Among stocks in the news, Home Depot (HD) reported earnings of 40 cents per share, down from 46 cents a year ago. Same-store sales fell 8.3%, while total sales dropped 4.7%.