The Big Blue Canary In Armonk

The IBM (IBM) unbeat goes on. Its sales plunged again for the 14th straight quarter while its net income was down by 14% from last year. Even management’s dodgy ex-items earnings guidance for 2015 was lowered by 6% with only one quarter to go.

Nor is this a passing swoon. IBM’s Q3 revenues were actually back to 2002 levels. As the Zero Hedge chart demonstrates, it is hard to find a worse trend in revenue since Bethlehem Steel disappeared a few decades ago:

But the ugly sales charts above aren’t the half of it. The real story is that IBM’s relentless decline is proof positive that financial engineering is a destructive toxin that is leeching the lifeblood of the nation’s business enterprises.

Indeed, IBM is a Big Blue Canary. The abysmal facts of its self-destruction over the last decades should be a wake-up call to the bubble-blind Keynesians who run the Fed.

But these academic theoreticians and power-obsessed apparatchiks haven’t noticed—–even as they continue to jabber about the sheer noise emitted by the BLS. When it comes to what is actually important—–like the health and stability of the financial system——they have no clue about the manner in which their so-called “extraordinary” policies of ZIRP and QE have actually booby-trapped the financial system with explosive time-bombs.

Thus, IBM’s share price plunge of 35% since its peak valuation of $215 two years ago is a hint of things to come—-a warning that even the casino gamblers will dump and run when the destructive and unsustainable effects of financial engineering become sufficiently evident.

Stated differently, IBM has lost $100 billion of market cap since its 2013 peak. But that wasn’t due to a fundamental deterioration in its business model or a quantum change in the competitive environment in which it operates.

Instead, even the fast money gamblers in the hedge fund sector finally caught up with the long term damage to its earnings potential and competitive viability that resulted from its massive, sustained foray into gross financial engineering.

So doing they have provided a powerful demonstration that today’s towering stock market valuations did not arise out of a return to prosperity on main street. Instead, like in the case of IBM’s share price doubling between 2011 and 2013, they have been vastly inflated by central bank and tax policy induced diversion of massive amounts of corporate cash to the stock market in order to goose share prices and the value of executive stock options.

Needless to say, IBM’s C-suite was no outlier. Its repudiation as dramatized in the chart below lies in the future for most of corporate America.


IBM data by YCharts

It cannot be gainsaid that financial engineering has left great enterprises like IBM and Hewlett-Packard (HPQ) financially crippled and lacking the resources to effectively compete, innovate and grow. Despite a steady stream of bolt-on acquisitions, for example, IBM’s revenues have dropped by 22% from a peak of $107 billion in 2011 to $83 billion during the LTM period just reported.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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