IBM Sends Stocks Higher

Updated from 3:36 p.m. EST

Stocks in New York finished higher Tuesday after a mammoth share repurchase and increased profit outlook from IBM (IBM Quote) helped investors get past disappointing economic data.

The Dow Jones Industrial Average jumped 114.70 points, or 0.9%, to 12,684.92, while the S&P 500 advanced 9.49 points, or 0.7%, to 1381.29. The Nasdaq was up 17.51 points, or 0.8%, to 2344.99.

This represents the third straight win for the broad indices, and the Dow and the S&P have now each booked gains since the beginning of the month.

The major averages had started lower, but they recovered after tech heavyweight IBM set plans to buy back up to $15 billion in stock, a move that could tack 5 cents a share on to this year's profits. The company predicted last month that it would earn $8.20 to $8.30 and now believes it will make at least $8.25.

Shares of IBM, a Dow component, ended up 3.9% to $114.38.

Georges Yared, chief investment strategist with Yared Investment Research, said IBM's buyback signals the company thinks its stock is cheap, helping to boost trader sentiment.

"Any time you can give me a piece of good news, whether it's a string or a whole rope, I'll take it," he said.

Stocks' initial downturn came after the Labor Department said the producer price index rose 1% in January, more than twice the 0.4% increase expected. The core rate, excluding food and energy prices, rose 0.4%, doubling economists' projection.

Year over year, the PPI jumped 7.4%, the biggest advance in more than two decades, and the core number surged 2.3%.

Though traders are still expecting the Federal Reserve to cut rates again when it meets next month, any data suggesting higher inflation tend to rattle investors, especially because central bankers have made a point to continue saying they're monitoring upward price changes.

Rate reductions, while meant to boost the economy in slower times, can also produce inflation, and a key part of the Fed's mandate is ensuring price stability. For months though, policymakers have been trying to keep the mortgage-market meltdown from derailing the financial system, leading to a series of easings.

Fed Vice Chairman Donald Kohn, speaking in North Carolina, called the PPI numbers "disappointing" but said he didn't expect the recent elevated inflation rates to continue.

Similarly, Ian Sheperdson, chief U.S. economist with High Frequency Economics, doubts that the headline PPI number marks the start of a sustained trend. The index, he said, "does not drive Fed policy in either direction."

Sheperdson said he is more concerned about new data from the Conference Board, which reported that its consumer confidence index slid 12.3 points in February to 75.0 -- a harsh drop that indicates mounting American pessimism regarding the U.S. economy.

The reading represents the lowest level since late 1993, excluding the start of the Iraq War five years ago, said Lynn Franco, director of the board's research center.

The board's consumer-expectations index also fell to 57.9 from 69.3, a 17-year low that Sheperdson called "absolutely disastrous."

This figure is "what counts because it leads to spending," he said. "If sustained at this level ... discretionary spending could fall by as much as 4%." He added that "recession is becoming more likely by the day."

Treasury prices were mixed. The 10-year note was up 7/32 in price to yield 3.87%. The 30-year bond shed 2/32 in price, yielding 4.66%.

During the prior session, the major averages broke from their uncertain movements to finish decisively higher after Standard & Poor's affirmed its top ratings on bond insurers Ambac Financial (ABK Quote) and MBIA (MBI Quote). On Friday, rescue hopes emerged for Ambac and also inspired a last-minute rally.

Goldman Sachs reacted to the good news at Ambac and MBIA on Tuesday by raising its price targets on both monolines, as well as smaller rival SCA Capital Assurance (SCA Quote). Still, Ambac shares lost 1.8%, and SCA gave up 3.3%. MBIA, however, erased early losses and finished up 4.8% after Moody's affirmed its rating on the company.

As for earnings, retailers were in focus. Home Depot (HD Quote) said its fiscal fourth-quarter profit sank 27.5% year over year, missing Thomson Financial's estimate, as the crumbling housing market continued to hurt sales. The home-improvement goods seller also issued a lower-than-expected outlook for the coming year. Shares of the Dow component ticked up a penny to $28.83.

Home Depot's numbers came a day after smaller rival Lowe's (LOW Quote) also posted a decline in year-over-year earnings.

Apparel retailer Nordstrom (JWN Quote) tacked on 4% after reporting better-than-expected fourth-quarter results after the previous close. But the company also offered a subpar outlook for both the current quarter and all of fiscal 2008.