Annex Bulletin 2013-05                            July 19, 2013

A partially OPEN edition



Apple Falls from Treetop (Analysis of latest market and business results of top 15 IT companies)



Updated 7/19/13, 9:00AM HST

Analysis of IBM Second Quarter Business Results

IBM 2Q: Quo Vadis, Big Blue?

Who is manipulating the IBM stock?

IBM 2Q Preview: They say, "once burned, twice shy;" On Wall Street, it apparently takes five times

HAIKU, Maui, July 19, 2013 - There is at least one good thing IBM had going for itself leading up to its second quarter earnings release July 17. Its stock did not have that much more to fall. It appears the market has already built the 2Q announcement fallout into the price. They say, "once burned, twice shy." On Wall Street, it apparently takes five times.

Ever since April 2012, Big Blue shares have been dipping after each quarterly release. It was just a matter of how deep and how fast. And then wishful thinking would return. Which is why the IBM stock chart looks like a crosscut saw.

The main reason, of course, has been the company's lack of revenue growth. The profits have been good. But you can't keep living off financial engineering forever. We warned about that in Apr 2012 (
Big Blue Feet of Clay). Eventually, you have do sell something tangible, buy something exciting.

Which is actually what IBM did in early June. It acquired SoftLayer, a company that specializes in Cloud-based solutions. Big Blue hopes SoftLayer will accelerate its ability to integrate public and private clouds.

At the same time, IBM announced formation of the new Cloud Services division under Erich Clementi, Senior IBM VP. The new division incorporates IBM's existing cloud offerings and those of SoftLayer. IBM expects to reach $7 billion in Cloud revenue by 2015 (see
Watson, Labs: Key to IBM Future, Annex's 3-Year Forecast for IBM).

Obviously, this is a step in the right direction. But how will it help the second quarter? It won't. The SoftLayer deal does not even close till the 3Q13. Besides, even at $7 billion, the Cloud is still a tiny part of IBM's overall revenues.

Which is why investors seem to be bracing for another disappointment. At least this time, Wall Street has not set the bar very high.

Alas, a fair warning. The foregoing analysis is based on logic and REASON. Which is not at all helpful these days on Wall Street.












"Where ignorance is bliss, 'tis folly to be wise," Cambridge University professor and poet Thomas Gray wrote some 250 years ago.  He must have been extremely prescient. Because his famous quote describes perfectly the current state of affairs on Wall Street.

"Check reason at the door," perhaps the sign above the New York Stock Exchange should read.  "You are entering a House of Greed."

And Greed, of course, has no room for wisdom. So back to Thomas Gray (1716-1771).

SeekingApha Columnist:

IBM And The Media Attempt To Obscure Its Declining Business Results

It appears this writer is not the only one who thinks IBM is relying on what I call "financial engineering" to make itself look better than it is. Check out this piece from Seeking Alpha (see the link below).  I could have written it. But chose not to.  Because it would have been repetitive. 

"IBM is now a different beast from that which it once was. Its sales have been anemic for some time. Yet it is so committed to earnings "growth" that it overtly asks us to ignore basic arithmetic and basic accounting principles, in order to create a false picture of its operations, as I will attempt to show below based on Wednesday afternoon's earnings release.

This behavior is opposite to its prior image and antithetical to its obligations to investors. Worse, because no analyst has missed the reality of a downturn in IBM's businesses, the only people fooled by clever press releases and fawning media attention will be casual retail investors who believe the headlines that IBM had a good quarter and is truly doing better than the smart money had expected.

In fact, IBM has had a poor quarter and a poor first half, but just does not want to admit it."

But the Seeking Alpha article's author was wrong though when he blamed the media for the IBM stock's miraculous rise despite disappointing results.  He should have pinned it on moral corruption of Wall Street. Why?

Because the IBM stock had already moved up five points in after-hours trading even just as the IBM teleconference with analysts was getting under way.  The media had had no time to write their stories as yet. But the analysts did have a chance to call or text their trading desks. I saw firsthand how that was done back in the 1990s when IBM used to do "live" earnings announcements in New York.

Being stupid is not a sin. If someone tries pulls the wool over your eyes, shame on deceiver, not you. But if your eyes are wide open and you let it happen, as these Wall Street analysts did, that's moral corruption. And that needs to be highlighted.

Originally, I thought I would refrain from commenting about yet another disappointing IBM quarter lest I sounded repetitive. But after I had seen this SeekingApha piece, I felt it was necessary to chime in with my own two-cents' worth. Little did I know that the next day, Wall Street would provide more fodder for my publishing canon...

Who is manipulating the IBM stock?

What a difference a day makes! A day after IBM stock moved up five points despite its disappointing 2Q results, the Big Blue shares dropped right back to where they started. As I write this, they are trading around $194. (They closed at $193.54, down nearly five points, slightly below the pre-earnings release close on Thursday).

Which begs the question: Who has been manipulating the IBM stock? Probably someone who needed a nice five-point bounce up in order to unload gobs of the stock that's not likely to go anywhere any time soon. Indeed, yesterday's volume of IBM shares went through the roof.  It was more than double the daily average.

If the SEC computer does not pick up this kind of an "anomaly," and the government agency does not launch an investigation to see if they can figure out who and how manipulated the IBM stock in the last two days, then they will be simply a part of the problem. The SEC will be another reason why people should check reason at the door before trusting Wall Street with their money.

Happy bargain hunting

Bob Djurdjevic

Volume XXIX, Annex Bulletin 2013-05
July 19, 2013

Bob Djurdjevic, Editor

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