Despite the title of this post and despite the few words above on the state of IBM today, the purpose of this post is really less about IBM and more about the valuation of equities in general. It is also an opportunity to test the value of the Elliott wave modeling in a completely unbiased way which can only be done by discussing the direction of events before they happen. Applying models to things that have already happened has value but is also prone to being gamed. But using them to predict future events and then measuring the results against predictions should be instructive for everyone, not the least of which will be me.
So I repeat. Right now, there is not one glimmer of bad news for IBM and their share price reflects that. In fact, quite the contrary. It was only a couple years ago that their computer, deep blue, beat the world chess champion. And it was even more recent that their next generation AI computer, Watson, handily beat the best of the world's best human players at the question based knowledge game of Jeopardy. Even more recently, IBM showed its prowess at manipulation of matter at the atomic level by releasing the fantastic YouTube, "A Boy And His Atom". These advances are all fantastic in nature, true science fiction.
But despite all of that I am calling for a massive collapse in the price of IBM shares. I am doing this as the S+P 500 has been hitting new highs nearly every week. The basis of my prediction has nothing to do with the so called fundamentals of the shares. Fundamentals are, for the most part, nothing but sales materials for Wall St. stock peddlers. So don't ask me what the PE, PS, PB, growth, etc. is because I specifically have avoided reviewing these things before making this post.
The reason for this seemingly reckless behavior is to prove a long standing point of mine: stocks have no real value. Corporations exist primarily for the benefit of the employees, not shareholders. In fact it only makes sense that those doing the work will be the ones rewarded for their effort. The main reason I am now calling for a massive correction to begin within a year is my interpretation of the Elliott wave model as applied to the IBM chart. Referring to the chart below, check out the main, multi-decade ascension of IBM's chart with its rise to 1, decline to 2, parabolic (i.e. 3rd wave style) rise to 3, massive vee style a-b-c collapse to 4 and now the building of what I interpret to be the 5th of 5.
Notice also the Elliott wave perfection of a sideways retracement from 1 to 2 and then a vee type retracement from 3 to 4. This is known as alternation in Elliott wave parlance. In short, if the last correction was vee the next will be sideways and vice-versa. Also note how a line between 1 and 3 is almost exactly parallel to a line between 2 and 4. This formation of parallel lines is classic Elliott wave modeling. Note how 3 went exponential, again classic EW thinking and also how 3 of 5 has been the strongest wave of that impulse. Now, I could be a little premature here, I will agree. The chart could still be working on 3 of 5 instead of 5 of 5 as I'm claiming it to be. But the 5th wave often stops at the resistance line formed by 1 and 3 and so I think it is a good time to start talking about a massive a-b-c pullback to the prior 4th which is down near $50.
While I do not know what the fundamentals of the company are at this instance there are a couple of fundamentals that I am aware of that also give me confidence to write something so seemingly crazy as this post. The first is that I think IBM shareholders will be a victim of herding nature. Since IBM is so true blue and so trusted, retirement fund managers will all have invested in it by now; it is considered perfectly safe. But no stock is safe from wild price swings. Retirees will be asking for their money back in the coming 5-10 years so that they can pay bills during retirement and that means fund redemptions must necessarily increase. This means shares must be sold. Unfortunately, there is no new crop of young people with good jobs to buy up the shares. In other words lots of sellers and few buyers. Even Bernanke will run out of funny money to buy shares with at some point. That means lots of supply and little demand.
IBM is also an international company which will suffer more than US-specific companies as the global debt Ponzi collapse escalates. How can IBM continue to do well when Europe and the Euro are at grave risk of break up and collapse respectively in the next 2 years? I also think that IBM will one day be subjected to "success attacks" a-la-Apple where the government, which is dying a slow death, begins to demand more taxes from the internationals like IBM. IBM has clearly avoided repatriation of revenues (like any intelligent multinational should) and kept that money in tax havens. The increasingly desperate government will start clawing away at anyone within range and I'm pretty sure they are already jealous of IBM's wealth and looking for ways to steal it from them. Government will vilify the likes of IBM when IBM resists the theft.
Bottom line, I think IBM is an easy short sell on the first sign of high volume sell off. In other words, all you have to do is listen for the rumble of hooves running away from the shares and it will likely be pretty low risk to bet against the continued ascension of IBM shares. I'm sure the jackals of the financial world are out there right now looking for any sign of weakness that would signal that a low risk attack is possible.
Again, the point of this post is not to recommend any kind of investment but rather to further test my views of how financial markets really work in this world. I wish IBM all the success in the world not only because of the amazing technology that they have been developing but also given that I worked there for 10 years and am vested in their pension program as a result.
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