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DJURDJEVIC COLUMNS
Forbes
June 1997
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?
Zero!
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.
BOB
DJURDJEVIC
-----
Mr. Djurdjevic is president of Annex Research, a Phoenix, Ariz. consulting firm. He writes about economic and global affairs. Visit him at http://www.djurdjevic.com.
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).