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June 1997

Is Big Blue Back?

By Bob Djurdjevic

Is the Big Blue back?  Of course, it is back.  From oblivion.  And from the 10-year doldrums of its stock.  Haven't IBM shares just set a new record high? ($90 1/8 on May 28). 

No surprise there.  I said in a March 1996 column (that's right - 15 months ago), that the Big Blue's five "crown jewels" alone were worth at least $90 per share, even though they accounted for only 64% of the company's revenue.  Back then, IBM's stock was trading at $53 per share.

But Wall Street has bid up the IBM stock for the wrong reason.  And it is now asking the wrong question ("is the Big Blue back?).  It should be wondering "how long will the illusion last?"

For, IBM is again mortgaging its future as it did in the early 1980s, when it created an illusion of prosperity by padding its operational earnings with a $30+ billion-sale of its huge lease base.

This time, IBM is doing it with big stock buybacks. 

How big? 

Try over four Albanian GDPs-worth.

Four Albanian GDPs?  Who cares about Albania? 

Albanians do, of course.  But maybe YOU should, too.  For, a civil war nearly broke out in that country over a financial scam.

"It's not a scam," argued a reader of a piece in which I used the term referring to stock buybacks .  "It is what's taught in all the best business schools."

"Then 'all the best business schools' are a part of the scam," I replied.

And here is why... How many new products or jobs did IBM create for the $17 billion of its stock buybacks?


So the economic scoreboard reads: IBM/Wall Street $17 billion; America/Main Street 0.

"The stock market IS a Ponzi scheme," explained Dr. Michael Hudson, a renowned economist who heads up the Institute for the Study of Long-Term Economic Trends (ISLET) in New York.  "It reflects a flow of funds."  Everyone SEEMS to be getting rich, he says, even if there is little or no actual earnings growth to support the prices. 

Enter the new IBM.  It spent billions of dollars on its price/earnings ratio instead of future earnings.

Worse, IBM's stock buyback is only a part of some $170 billion which U.S. companies squandered in 1996 on repurchasing of their own shares.  That's over 40 Albanias frittered away!

Once you understand that, you can begin to sense the awesome power of the financial "tsunami" which will crash on America's shores once this pyramid scheme collapses.

Meanwhile, over 80% of Big Blue's first quarter gross profit came from DECLINING businesses.  And IBM's operating profit was DOWN 7%, as was its net after adjustments for non-operational gains.

No wonder six senior vice presidents and the IBM controller sold $33 million of IBM stock by exercising their stock options last fall and in early 1997.  The "Big Blue Seven" knew IBM shares' rise was fueled by stock buybacks, not good earnings.  These insiders may have blazed a trail which others should follow - straight for the hills.  Before the "tsunami" hits.



Mr. Djurdjevic is president of Annex Research, a Phoenix, Ariz. consulting firm.  He writes about economic and global affairs.  Visit him at

For additional Bob Djurdjevic columns on geopolitical

subjects (published in The Washington Times, Chronicles

and other publications), visit the Truth in Media Web site

("Index of Djurdjevic's Columns" section).

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