Why I Just Shorted IBM

IBM stock has spiked up Friday, yesterday and today because the Company released Q4 and full year earnings which “beat” the Street estimates  – by design and by the heavy application of GAAP earnings management.

But here’s the facts:   1)  Revenues year over year for the full year dropped 5.9%;  quarter over quarter they dropped 1.3% ; this was the 5th year in a row of annual declines and the 19th quarter in a row of year over year quarterly declines; 2) gross and operating margins continue to shrink;  pre-tax earnings (this is important) plunged, literally plunged, 22.7% for 2016 vs. 2015;  3) long term debt increased 3.5% year over year – it was 43.4% of revenues in at the end of 2016 vs. 40.8% of revenues at the end of 2015;  4) cash generated by operations (from the statement of cash flows) plunged 49.3% in Q4 2016 vs. Q4 2015 – it dropped 2.3% for the full year (see below for significance);  5) despite the heavy application fo GAAP management, net income dropped 10% in 2016, with a small quarter over quarter net income gain of 1%, which would have been a decline if IBM had not applied subjective GAAP manipulations.

With regard to IBM’s liberal application of GAAP earnings management techniques, the Company arbitrarily applied a 9.6% “effective” tax rate in Q4 2016 vs. the 12.5% utilized in Q4 2015.  The Company claimed a 3.6% GAAP tax rate for 2016 vs. 16.2% in 2015.   Manipulating the “effective” GAAP tax rate is the very first lesson taught in any high quality forensics accounting class.  I give IBM an A+ for its maneuvers in this regard.   But the “devil in the details” and fact that the cash generated from operations plunged 49% quarter over quarter should raise a huge red flag for any financial analyst (Wall Street pimps of course will turn a blind eye to that glaring financial “tumor”).

The stock popped today on IBM’s announcement that hit would hire 25,000 people in the U.S. in an obvious maneuver to avoid the stock-deadly “Trump tweet.”  However, the Company has continued to maintain on analyst conference calls that the hiring is part of its normal operations and should not be differentiated from its cost-cutting layoff plans.  But the hedge fund algos only care about the 25k hiring headlines.

Interestingly, IBM heavily promoted the success of its cloud business and artificial intelligence business, the revenues from which increased 13% in 2016.  But this business can not be very profitable, otherwise IBM’s gross, operating and pre-tax net margins would not have dropped.  This achievement is less than dubious.

Additionally, 20% of IBM’s revenues are derived from its global business services unit.  As Trump escalates the trade war with the rest of the world, specifically China/Asia, this unit’s revenues, which dropped 4.1% quarter over quarter, will get hit even harder.

IBM is an American corporate dinosaur that is dying a slow, painful death from terminal business cancer.  The Company has done well to survive this long.  Amazon and Oracle have ignited a pricing war in the cloud space that will eat IBM’s cloud business alive.    The cloud business is quickly become a highly commoditized product with no limit to capacity constraints and almost zero pricing power or real product differentiation. It’s quite similar to the fiber optic business that soared then crashed and burned last decade.

IBM’s current legacy, like most large corporations – US corporate debt has tripled since 2006 and is at record levels – is issuing debt to buy-back shares and skimp on payments into its pension in order to generate GAAP net income.   It’s an American tragedy in the making.    The stock market is historically overvalued now and is set up for a big sell-off, which I believe will occur this year.  While the Dow and SPX have been flirting with record all-time highs, IBM sits 18.6% below its all-time high reached in 2013.   It was IBM’s turn to be used as prop for today’s Dow rally, as IBM has been one of biggest contributors to today’s Dow gains.  As I’ve shown above, there has been zero fundamental factors behind IBM’s stock move over the last three days.

This is the type of analysis that accompanies my weekly Short Seller’s Journal.  If you would like to try it, you can subscribe using this link:  Short Seller’s Journal subscription. I provide my own market analysis in which I remove “alternative facts” from the weekly economic reports.  I also provide short-sell ideas, including suggestions for using options.


8 thoughts on “Why I Just Shorted IBM

  1. I like the fact that you have the cojones to short into this market.
    I have been trading for thirty years and the last two years have been
    a nightmare trying to short equities and or indexes. I’m not ashamed
    to admit I have had my face ripped off more than once. The problem
    obviously is that we are not dealing with a normal market. I just read
    an article this morning that central banks are getting ready to start
    collectively buying equities. I just trade in the direction they moving,
    I’m too worn out to be a fighter, now I’m going to be a lover. Best of
    luck on your “Big Blue” position. When you got a hunch, bet a bunch !

    1. Don’t disagree but there’s plenty of individual stocks that tank hard when they miss estimates. M, TGT and KSS are examples. My subscribers are up $20, nearly 19% from when I recommended shorting RL, for instance. Since early August, I’ve had many more winners recommended than losers. You are right, it’s a very tough market to short but certain sectors have been diverging and that’s where I’m focused on my ideas.

  2. Dave, you’re bold and intelligent. But your IBM forecast might just be dangerous and early. Have you seen the IBM chart? It looks bullish. You’re going up against some of the most artistic chart painters. This might just be like your premature forecast for AMZN. It made a lot of financial sense, but it just made no serious money.

    Just spend the money on buying more gold and silver. The long awaited tailwinds have only just begun.

  3. Why short the stock market at this point? Does that mean gold and silver will go nowhere first before it goes somewhere? That is to wager that a deflationary stock market collapse might happen first before an inflationary currency collapse. There is a real chance that reversed events might happen. There might be just too much counter party risk for shorting. Who is going to pay the winner in full when he is right? Buying gold and silver seems more conservative despite the annoying price suppression from now and then.

    1. The entire U.S. system has catastrophic counter-party risk. The more hidden debt than there is on-balance-sheet debt. Why do anything. My view is that this market is set up to shit the bed – hard. If you see things differently, so be it. We can agree to disagree.

  4. I just disagree with shorting the markets despite the many bearish reasons. The counter party risk just makes it even more asymmetrical on the downside. Why not just drink a few beers and stack gold and silver and maybe dabble on some marijuana stocks until the smoke clears? The upside for gold and silver will be astronomical. The long awaited tailwinds are here.

    All of the paid establishment bears are talking about a China crash. You are a lot smarter than Jim Chanos and Kyle Bass, Dave. You are just not willing to stretch on the table like so many sell outs did. So they imply that Shanghai might crash before the Dow does and say nothing regarding gold and silver? Kyle Bass at one time was a gold bug, now he is just a Democrat cross dresser.

    The Dow is above $20,000 and IBM is almost at $180 now.

  5. As an unfortunate user of IBM products – they bought rational just over a decade ago and are hell bent on destroying what were probably good products back in the day – I wish you well and IBM nothing but carnage. I call it shitware and the documentation is so bad its virtually worthless – by design so they can charge 5K for “training”. I seriously think it may eventually lead to me bailing my job and retiring early if I am required to work with such inferior products. Also, this is for large government boondoggle projects that are fatally flawed from the get go and the idiots in charge require the use of such shitware which in my opinion is done to sabotage the effort to get real work done. Just one big make work circle jerk. Fk IBM!
    Oh, and if Trump whacks H1-Bs and puts an import tax on software created abroad, IBM will crash bigly.

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