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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: valueminded who wrote (34280)	10/21/1998 10:51:00 AM
From: Knighty Tin	Respond to of 132070

Chris, You have hit upon the crux of the greater fool theory. If IBM buys back stock and the price goes up, it increases eps, though it creams shareholders' equity when they really aren't growing the business. But, if the price of the stock declines, they have blown their cash and taken on debt to buy something worth less, and that hurts them. As long as the suckers keep thinking the eps are real, IBM and several other companies will continue to play this scam. I think a lot of people who started investing during this bull run read books and newsletters that said that stock buybacks were good things. They are, if the co. buys when shares are cheap and if they do not finance the purchases with debt and if most of the buyback does not go to cover employee options. Nobody seems to put any restrictions on it nowadays, and buying at the top is stupid whether you are an individual, a fund or a company. I think part of the tax flim-flam has to do with the shift to service business revenues which are mostly imaginary. When you sell a mainframe computer, you get the money fairly soon (unless you lend to your customers to fund the purchase, as IBM does, which means you get the glory of a future one-time writeoff and eps today <G>). When you sell a service contract, the actual money may not come in for several quarters, years, or ever, giving you another wonderful one-time writeoff. How that works on the tax books, I am not totally certain, but we all know that there is one set of books for shareholders and another for tax reporting. GAAP vs. Statutory Rape. Also, as long as investors think one-time writeoffs are good, what is the downside? <VBG> MB