Thursday, May 29, 2014

Financial Engineering: The Trouble With IBM

The title of this post is the title of a Bloomberg article linked to below.  I have written extensively about IBM since Buffett made an investment in the firm.   As I have noted on here before, technology is generally a horrible investment.  That’s why one of Buffett’s rules is to steer clear of technology.  In IBM he broke his own rule.  IBM is a company in very serious trouble.  As is the entire IT industry.  In fact, I wrote over three years ago that IBM may well be putting in its last stock market top.  Forever.  Since that post IBM’s stock hasn’t budged.  There is ample reason to believe the longer it sits here, the more likely it is putting in a major trend change. 

This current article isn’t anything particularly interesting except for one point made about three-fourths of the way into it.  And, the user comments below the article that point to many serious issues within the company as recognized by many.

Here’s the article quote I want to cite.

“That phrase, financial engineering, is a catchall used by critics for the variety of ways IBM has made earnings per share go up even as revenue goes down. The spectrum of maneuvers starts with common practices like dividend increases and share buybacks, and extends to more esoteric tactics like designating major costs as “extraordinary” and devising ways to pay lower tax rates. The most transparent companies present their performance according to generally accepted accounting principles, or GAAP. IBM’s 2009 annual report didn’t use the phrase “non-GAAP” at all; the 2013 report used it 125 times.”

I have noted many times on here over the years that it will only be an understanding of fundamental analysis that saves anyone from the Frankenstein of quantitative finance that dominates Wall Street today.   Yet, I seriously am unaware of but a handful of people who really know how to tear apart a balance sheet or financial statement.    None of them work on Wall Street.  I don’t really talk about this but I consider myself an expert at doing so.    But it is incredibly time consuming.  I certainly am not “the expert” but I know the games companies play because I have taken the time to be taught by experts.   Just like most anything else, it’s a skill and it can be learned by anyone.   Mind you, the games corporations play in today’s world are extraordinary. 

And the games don’t just include corporate financial statements.  But extends to the financial and economic underpinnings of modern economies and the games politicians play.   I haven’t written on here probably one hundred times that we are in the biggest financial bubble in history just for grins and giggles.   In fact, those remarks, written countless times before the 2008 collapse are now starting to become recognizable by everyone with an intent of discovery.   Central banks have literally pumped tens and tens of trillions of dollars into the system by dropping their trousers over the last five years.  Where is the recovery?  Not the propaganda but the real recovery?  More people on government assistance, more people on food stamps, more people in nonliving wage jobs, more people on disability, more people out of the work force, food inflation through the roof, another M&A bubble, another private equity bubble, another housing bubble in high-end homes and rental properties, a massive stock market bubble with thousands of companies at valuations never before seen.  Ever.  And on and on.  The system is more unstable than ever.  Printing money rightly stabilized the system in 2008 but it didn’t fix anything.  It simply made the situation worse.   It didn’t fix anything because the problems were created by politicians and not central banks.   Central bankers are simply the enablers to the dysfunction in the rotten and corrupt global political governance.

The whole system is rotten and wildly incompetent.  That people sit back and allow banks, corporations and politicians to continue on their same path of destruction is going to create dire consequences.  Because these are the state actors that created this mess.   The political parties and status quo thinking that created this mess isn’t going to ever get you to the championship game.  Something Schumpeter noted long ago.  That is, society has to first rid itself of the ignorance of the status quo that creates economic crises before any true solutions can be implemented.

My point in the comments leading up to this is the keyword of non-GAAP found 129 times in IBM’s 2013 reporting isn’t even on the radar screen of anyone in the mainstream financial system.   This is startling yet representative of the times in which we live.  Corporate financial reporting is in a state of contrivance like never before.   Earnings are often anything but sustainable and often more financial engineering than economic success.  Wall Street itself  only is alive today because financial standards were relaxed or contrived.  Or, some may say, simply engineered.  (By the way, as has been posited on here countless times over the last six years, Wall Street would eventually trade competitors out of financial markets and be left batting assets back and forth between hedge funds, banks, central banks,  etc.  This is becoming more and more evident.  And that means the engineering behind asset prices is likely to become more and more interesting.)  

These are economic rules of law that mean nothing anymore.  They have been shit upon and destroyed by corporations and politicians just as our Constitution has been destroyed by corporations and politicians.   Footnotes to earnings and explanations to non-GAAP business results now often span dozen to even hundreds of pages in corporate financial reports.  Think about that.  What exactly does that mean?  What does it mean to report non-GAAP 129 times?  It’s quite simple.  It means what is reported through the mainstream financial media isn’t representative of reality.  Reality is contained in the dozens and hundreds of pages of legalese and financial engineering that very few people can actually even understand.  And, more importantly, very few managing pensions, investments, loans, mergers and our nation’s money on Wall Street ever reads. 

Instead, market, bond and company valuations are driven simply by endless money printing.  IBM, as just one small example, is valued astronomically higher than any Dow stock in 1929.  That is, right before the market collapsed 95%.   Yet, that has no bearing on its valuation or on anything else under the sun.   Thousands of companies are in the same situation.  

Finally, if you are like me, you often read news not for the news itself but for the comments below the news article.  The comments are far more informative and telling than the often shoddy journalism of the mainstream media. 

This article’s comments do not disappoint.  They simply confirm what most people already know.  That is, corporate surveys over the past decade or so have pointed to record low employee morale.   And late last year federal employees joined the club with record low morale.   No one enjoys being kicked like the rented mule of corporate or political bureaucrats.  No one enjoys being a wage slave or forced into mundane, meaningless work for the benefit of their masters.  Or worse, no one enjoys being manipulated into doing things that are inconsistent with our value systems.  And no one enjoys hearing economists glow about productivity improvements whilst U.S. workers slave away under the longest work week in the world.   We work more today than advanced societies did 2,000 years ago.  Literally.

Our corporate masters are extracting unprecedented rent out of their wage slaves and rented mules (contract workers).  And, they chalk it up to productivity gains and increased profits.  It’s just another example of engineering business results with unsustainable factors.  The comments below this article point to that reality.  This isn’t just an issue with IBM.  It’s an issue with private, for-profit capital, the investor class and corporations controlling democracy instead of democracy controlling them.   It’s an issue of being considered chattel to be used, abused and manipulated by corporations as persons.  This while real persons are denied their natural rights.  IBM and countless other major corporations operate on the illusion of cutting their way to prosperity.  Temporary prosperity. might I add.  Because at some point you can’t bleed a turnip.   You actually have to produce accountable business results.  More of that austerity enforced by the unaccountable plutocracy.   But, instead of austerity enforced by the political class, it is  austerity driven by corporate capitalism driving employees into deeper and deeper wage slavery.  All while the plutocracy in this nation is living large.  For now.

Seemingly everything touched by politicians or corporations is a result of financial engineering, deceit, manipulation or outright lies.  In other words, the disconnected ego’s intent to control.  

Control is nothing but an illusion created by the ego.  And that illusion only last as long as truth can be subverted. 

posted by TimingLogic at 9:43 AM