IBM’s scary signal

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I usually take Zero Hedge bearishness with a boulder of salt but today it has a post that cuts right to the heart of the problem with the US sharemarket rally:

Moments ago IBM reported revenues and EPS that both beat expectations and yet the stock is sliding after hours. We may have an idea why, and it has to do with the scariest chart in IBM’s history, which we first revealed three months ago and which just got scarier.

It’s not this chart of IBM’s ninth consecutive decline in revenues, which was scary enough in its own right:

Nor this chart showing the ridiculous amounts of money IBM has spent each quarter on artificially boosting its EPS through stock buybacks, reducing the total number of Big Blue shares to below 1 billion for the first time in years:

IBM revenue Y-Y change_0

Or this chart showing that every dollar of debt IBM has raised since 2012 has gone toward buying back stock and then some:

IBM Q2 qtrly buybacks_0

Nor even this chart showing that the Net Debt of IBM has risen by a ludicrous 55% in the past year to a record $36.8 billion (but… but… record cash on the sidelines)…

IBM buybacks vs debt issuance since 2012_0

It is this chart, indicating that as of Q2, IBM had a higher total debt/equity ratio than just after the Lehman collapse and, after last quarater’s already record high ratio.

IBM Net Debt_0

One of these days even the criminally corrupt and always amusing chimps at S&P and Moody’s will finally have to notice what is going on here.

IBM equity debt_0

That’s pretty self-explanatory. As Westpac’s Elliot Clarke explained some months ago, this is increasingly widespread behavior:

Capital structure management has also provided significant benefits for US corporates over this period. Specifically, the free availability of debt capital to well-rated corporates has allowed for persistent, cost-effective share buyback and dividend programs. This has had a two-fold effect: reducing the number of shares available, all else equal; and also incrementally increasing the total return available to the remaining shareholders. Together with the tight cost management noted above and expectations of a new technological age, capital structure management has then provided the substance for the strong, broad-based US equity market rally.

sfa

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Previous cycles suggest this will get worse before it implodes but we are definitely entering the business end of the cycle.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.