Tuesday, February 26, 2008

Big Blue helps market see green, but beware

IBM raised its earnings estimates today, just in the nick of time, as the market was still soaking in the sharp rise in inflationary indicators as well as record-breaking oil futures at $101 a barrel or more. Yet, this should really make any saavy investor pause to question the market reaction.

Is it really as financial media outlets say, that IBM's outlook is better and therefore the global market itself is better or, is it that investors are still very optimistic about the market and any reason for celebration is taken? I would suggest the latter.

If you look carefully, IBM's executives point out most of the earnings per share (EPS) increase of 5 cents is attributable to a giant $15 billion share buyback. This change in IBM's earnings is really just a pure mathematical increase, rather than some economic indicator.


Think of this as a simple fraction. If you hold the numerator the same, and decrease the denominator, the final result is a larger number. The numerator, earnings, is not expected to change. However, the stock buyback with affect the number of outstanding shares, and therefore decrease the denominator.

Frankly, I expect IBM's stock to fall back from today's bump.

But, for investors looking to jump in, it does seem like a good time. Other investors are just as optimistic as you, and maybe you can get in on a big bump day like today.

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