The Chart du Jour

Duped for Now: IBM

April 27, 2001

By, Barclay T. Leib

"Connoisseurs of zaitech, or financial engineering, long ago turned their attention to IBM. Even more than the Japanese companies that pioneered the art form in the 1980s, Big Blue has shown that superficially brilliant growth in earnings per share is not necessarily dependent on superior business results. When top-line growth disappoints, ingenuity must fill the breach."

So wrote James Grant of Grant's Interest Rate Observer not that long ago as he commented that IBM had simply removed the line labeled "Operating Income" from its earnings report. In recent quarters the company has actually made a substantial amount of its earnings growth from non-operating sources. Grant continued:

"How did Team Gerstner find the blood of net income in the stone of declining operating income? It reduced the tax rate (to 29.8% from 34.4%), lowered the allowance for doubtful accounts as a percentage of total receivables and harvested gains by changing key assumptions on pension returns. The three strokes together added $858 million, or $0.47 per diluted share, to 2000 net income."
And Mr. Grant is of course right. IBM is a company still awaiting a collapse in its accounting house of cards. And yet the company keeps getting away with it -- even through its most recent quarterly earnings report disseminated last week. As one hedge fund manager said to me in front of that report:
"Sure, everyone knows that IBM's numbers are manufactured, but they've gotten so good at this, you just can't fight them. The company has it down to a science not to miss those quarterly estimates Wall Street puts out, and when they meet those expectations, even from dubious sources, guess what? The stock goes up."

And so it is with some chagrin that we turn to a technical view of IBM at present.

Chart constructed using Advanced GET End-of-Day

As much as it pains us to propose that greater fools will continue to win here, our Fibonacci rhythm suggests that IBM could easily vault to one more new all-time high near 150.

Yuck, and ugh. When all is said and done, this is such an unfortunate use of time and energy -- particularly given the potential Armageddon that lurks on the other side of such a move.

But the real trick for fundamental bears is not to get run over before a stock is "ready" to technically go down -- to stand aside for a bit longer while the financially-illiterate mob rules. Unfortunately, in that holier-than-thou way steeped in the knowledge that he will ultimately be correct, Mr. Grant has never been able to time his advice in a particularly useful manner.

Here at, we would certainly not advise going long IBM. Its fundamentals as a growth company simply stink. But we would advise great caution and patience trying to time a short entry into it.

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