Don't Sell IBM Short--And Uncle Sam Means It

Published: September 29, 2008

by Timothy Prickett Morgan

So much for your grand plan to make your retirement nest egg in one fell swoop by selling shares in IBM short. Last week, the list of companies in which short-selling is no longer allowed swelled, and now includes Big Blue.

Two weeks ago, when the U.S. economy was led to the window ledge, the Securities and Exchange Commission created a list of 800 financial services, insurance, and related companies in which short-selling would be prohibited. (Let's face it, short-selling has created some of the mess that we are in, and these days, shorting financial stocks is like fishing in a stock pond with live bait early in the morning.) Subsequent to the SEC's list of no-short stocks, the New York Stock Exchange and the NASDAQ were asked to start building their own list of companies that might be hit with short-selling, and Big Blue was added because of the fairly large amount of financing IBM does for hardware, software, and services through its Global Financing unit. While IBM's assets are nothing compared to the gargantuan figures that are being tossed around on Wall Street and in Washington these days, Global Financing had $35.2 billion in assets at the end of June and $25.2 billion in liabilities, most of which is related to reseller financing of IT gear as well as leases for equipment to end user companies. Global Financing's leverage hovers around 7, which is a heck of a lot better than the 30 to 1 ratio that derivatives of mortgage-backed securities were said to have.

Shorting IBM's stock would seem to be a low-odds proposition anyway, unless you were betting that the rest of the year and maybe the next one or two were not going to be so hot. And in that case, if the global economy gets really bad, Global Financing will be the least of IBM's worries. And in such an environment, borrowing huge sums of money to buy back to do financial engineering to prop up earnings per share might not seem like the brilliant idea that the bright boys at Big Blue thought it was.

The SEC is expected to lift the ban on short-selling on October 2, but it seems reasonable that the ban will be extended until the financial turmoil is over and it is also likely that as many companies as possible will be clamoring to try to get onto the list to cover protect their stocks. It might just be easier--and sensible--to make short-selling illegal. I never did like someone betting on a company hitting hard times and then profiting from it. This compounds losses, best I can figure. I prefer to make money the old-fashioned way--like Wall Street used to before all the quants came in.

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