<%@ LANGUAGE=VBScript %> <% Set asplObj=Server.CreateObject("ASPL.Login") asplObj.Protect Set asplObj=Nothing %> An editorial comment on IBM's preliminary 3Q08 results  (Oct 9, 2008)

Annex Bulletin 2008-20                             October 9, 2008

A partially OPEN CLIENT edition


"Beat the Street" Drumbeat Continues (Analysis of HP's 3Q08 business results)

Big Blue Stock Sags on "No News" Days (Analysis of IBM institutional shareholdings)



Updated 10/09/08, 7:15PM PDT

IBM's surprise third quarter "sneak peak" fizzles amid gloom and doom on Wall Street

Fear Trumps Fact

There is a total disconnect at the moment between stock market and business fundamentals

"Where ignorance is bliss, 'tis folly to be wise" (Thomas Gray, 1716-1771)

SCOTTSDALE, Oct 9 Ė In a market driven by fear, logic and reason can be dangerous to your financial health.   Or as Thomas Gray put it more than two centuries ago, "where ignorance is bliss, 'tis folly to be wise" (Thomas Gray, 1716-1771).  In a battle of fear and fact, fear will trump fact every time.  And that's a fact.  In short, there is a total disconnect at the moment between the stock market and the business fundamentals.

The preceding point was brought home today by the stock market's reaction to IBM's last night's surprise early announcement of its preliminary third-quarter results.  The news was good.  Big Blue had facts on its side (see below).  And for a while this morning, the facts held sway and coaxed the market upward, including the shares of most major IT companies.  But early gains melted away at the end of the trading day, as the Dow slumped another 679 points (see "IBM, Internet losses lead broad tech plunge at close", Dow Jones' MarketWatch, Oct 9). 

Fear won.  Reason lost.  And least for today.

Good companies; profitable companies; companies with excellent cash flows - like IBM, Accenture and HP - were spurned and punished by panicked investors fleeing the equity markets in search of safe havens elsewhere. 

"And where might that be?" you ask.  It would appear the Treasuries.  But wait a minute... hasn't the Fed just lowered the rate by half a point in a futile effort of trying to stem the Wall Street stampede?  So the buyers may be overpaying for the bonds in the hope of a safety net. But wait a minute, what's going to happen when the government starts actually servicing the debt created by its Wall Street payout? Aren't the interest rates likely to go up to help pay the extra cost?  Which means the Treasuries' price will probably decline.  That's some safety net, isn't it.

See what we meant when we said in the opening paragraph that "in a market driven by fear, logic and reason can be dangerous to your financial health?"

So what's to be done?  What to people do when they face a major natural calamity, like a hurricane or a tornado or an avalanche?  They hunker down, batten down the hatches; hide underground until the storm blows over.  Then they emerge to assess the damage and start rebuilding.

Investors could take a cue from survival tactics of the people who live in the hurricane or tornado belts of the country or in the high mountains.  What you don't do is get out and start running.  Which is what all those people are doing who are now selling their stockholdings.  They'll get blown to bits, just like any living creature would facing a  natural disaster out in the open.

That's what happened in early 2000, when the dot-com bubble burst.   And before that in 1987.  And before that...

So if you look carefully at the above Dow Jones long-term historical chart, you will see that today's Wall Street storm is but a tempest in a teapot compared to the Great Depression, for example, in a relative sense.  It's just that the numbers have gotten bigger.  Alas, memories are short.  So the stampeded out of stocks continues...

Oops... I just realized I am making the same mistake... not taking my own advice.  Here I am, again trying to use logic and reason. Sorry.  Excuse me while I climb down into my bolt hole.  See you on the sunny side of the Street.  Remember, post nubila, phoebus! ("after the clouds, the sun").

Happy bargain hunting!

Bob Djurdjevic

Our Initial Reaction to IBM's "Sneak Peak" Release

SCOTTSDALE, Oct 8 - It is obvious that IBM is trying to stem a precipitous decline in its share prices (see the chart below) by releasing its preliminary 3Q results early. 

It is also clear from the above chart that Wall Street has been very unkind not just to IBM (see Big Blue Stock Sags on "New News" Days - Analysis of IBM institutional shareholdings), but also to Accenture, a company that announced record results only a couple of weeks ago (see Accenture's Quarter "Par Excellence"  - Blowout 4Q Lifts Accenture over EDS to No. 3 in IT World; Bodes Well for Other IT Vendors' 3Q Results).  By contrast, even if HP shares are also down, they have declined at a lower rate than those of the other two major IT competitors.

Clearly, both IBM and Accenture have FACTS on their side (good news earnings reports).  But they are facing severe headwinds on Wall Street driven by EMOTIONS (fear of recession).   So it remains to be seen if facts trump can trump emotions.  Which reminds me of the following quote:

Still, itís better to try and fail than not to have tried at all.  Ultimately, Wall Street will get it right.  Itís just that sometimes one has to hold their charts upside down to see which end is up in the global IT industry. :-)

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Volume XXIII, Annex Bulletin 2008-20
October 9, 2008

Bob Djurdjevic, Editor
e-mail: annex@djurdjevic.com

8183 E Mountain Spring Rd, Scottsdale, Arizona 85255
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