The Chart du Jour

Big Blue to Follow GE

October 18, 2001

By, Barclay T. Leib

Chart produced using Advanced GET End-of-Day

Anyone who knows anything about accounting knows that IBM has been cooking its books for some time. Here are the simple facts:

Bill Fleckenstein, writing tonight at gets it so very right when he points out:
"A couple of months ago, IBM was supposed to earn around $1.15 and revenues were expected to be $22.5 billion. They came in at about $20.4 billion. Earnings were $0.90, supposedly beating the $.89 estimate. What I'd like to know is, where was the preannouncement? You didn't see it either? That's because there wasn't one. IBM engages in the game of whispering to analysts to guide the numbers down, a practice that was supposedly outlawed by Regulation FD.

[The only problem is that} all the hardware businesses have been weak, while the service business grew 5% sequentially, one of the slowest rates in some time. But surprise, surprise, IBM service income jumped 20%. With respect to accrual rates in the services businesses, there is no dearth of shenanigans for deciding how to match revenues and expenses."

If Gateway can go from $80 to $4 (lease accounting games now more fully revealed in that stock), the stock of IBM can certainly go from $102 to $74.58 when the public finally takes the time to peer under its hood and actually note its true real earnings growth problems. Indeed, as pictured above, $74.58 is our natural Fibonacci target for this stock, and ideally, we'd envision this level being reached by early February.

The fact that neophyte investors drove this stock up today because IBM "beat the street by a penny" still speaks to the silliness and froth that continues to exist in today's market.

For our money, an obvious stop-loss level now exists on IBM above Wednesday's high against which one can lean with a low risk short sale. If IBM then starts to join GE in a significant slide, watch out for the Dow Jones to slide as well. If you think things feel ugly now, imagine how they will feel if and when IBM touches $74.58 and GE reaches $25.50-26.50. Ouch!

Technically on the Dow by the way, and with reference to Japanese Candlestick charting, the Dow just left three small range days that took the form of so-called "Hanging Man" and "Spinning Top" formations. Wednesday's market decline brought an "Engulfing Pattern" of so-called "Dark Cloud Cover" that also broke a steep uptrend line from the September lows.

Needless to say, this is not a bullish combo of candle formations if one consults any text on this subject.

Chart produced using Advanced GET End-of-Day

Although we abhor the thought, should we get just one case of Anthrax in a water supply system somewhere across the vast U.S., this could represent a final catalyst to truly undue America's overall confidence in itself. And if that occurs, backing of Blue Chip stocks like G.E. and IBM is going to come undone as well.

The geo-political biochemical threats we all could do without. But unfortunately these stocks deserve to get shot anyway -- given all their unfortunate accounting gimmickry.

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