Pushing on a String. For several years now, IBM has been plowing shareholder capital into buying back shares. IBM has bought 800 million shares on the open market since 2004, retiring 500 million (most of the difference went to management). It's an aggressive buyback program, and it works wonders for earnings per share as long as you have a healthy, vibrant operating model.
Ah, but here's the rub: IBM does not have a healthy, vibrant operating model. Organic revenue growth is nonexistent, and its attempt to "buy" growth via acquisition has failed miserably. The company spent $17 billion in acquisitions over the last five years, yet 2012 revenue will come in at the same level it was in 2008, about $103 billion. It's certainly a red flag, and it suggests that IBM's vaunted sales force is having a tough time convincing customers to sign new contracts.
Margins have expanded dramatically in recent years, with operating margins soaring from 16% to 27%. It's the result of cost cutting, not because IBM has pricing power (deflation is a powerful trend in IT). The impetus for expanded margins: The jobs of about 30,000 U.S.-based employees have been outsourced, primarily to India. In 2005, U.S.-based workers comprised more than 40% of IBM's workforce; today it's 21%. Out of 433,000 worldwide employees, there are only 92,000 employees left in the U.S., while there are over 120,000 in India.
But let's set aside the outsourcing issue, as it's understandably sensitive -- those 30,000 "resource actions" (IBM's euphemism for layoffs) came during a deep and difficult recession. I don't want to distract from the core issue here -- namely, that IBM's operating model is structurally flawed. ...
By outsourcing jobs to India (and to a lesser extent, Brazil and China) IBM has driven a huge increase in operating efficiency, dramatically lowering costs. Unlike Costco, however, it doesn't pass the savings on to customers. It inures to the benefit of shareholders, which, of course, includes management.
Customers are now paying a 100% markup on cost, much higher than in years past. Even if we assume a large markup in software (23% of total sales), it still leaves services and hardware with markups of 70%, by my estimates. My guess is that such rich markups are part of the reason why IBM has been unable to generate and sustain organic sales growth.
By now you should be getting the gist of the story: Hyper-aggressive management, incentivized by a boatload of stock options, sets a $20 earnings goal for 2015 to be achieved through a combination of cost cuts (outsourcing) and stock buybacks.
But there's a big, obnoxious assumption embedded right in the middle of that equation: revenue. Absent revenue growth, management's plan doesn't work. It can't cut its way to $20 per share in earnings and it's having a helluva time buying revenue growth via acquisitions. The fact that IBM's revenue line is so demonstrably poor raises one's suspicion about the value proposition offered to customers. If customers were happy with the value of the service packages they sign up for, wouldn't there be some decent organic growth? ...
What Should IBM Management Do? In my view, IBM management doesn't have a whole lot of options. The competitive landscape has changed almost overnight, leaving IBM's core franchise exposed. IBM's model of selling end-to-end solutions with rich margins is becoming less competitive. In the short term, financial engineering can help IBM meet earnings targets. It can prop up the revenue line with more acquisitions and the net income line with more share buybacks; it can even tuck expense into "restructuring charges," which are likely to balloon in the quarters to come.
Selected reader comments follow:
IBM hits record EPS and stock value, but they tell us it is a poor year and offer no or very small raises. The executives get compensated based on EPS, the employees get compensated on some target that is never published to us. I think our target is revenue based.
Bonuses are such a joke.
I have seen work off-shored and watch the quality and responsiveness go down. Then we US based employes have to pick of the slack. Why? For one our offshore counter parts can not work over 40 hours a week. Two, a lot of them are not very good. IBM has made a conscious decision to trade cheap labor for lower quality.
They expect us to do cutting edge development but we can only get a new machine every 3 - 5 years.
An e-mail came out earlier this year we could no longer buy monitors. The monitor on the laptop was good enough.
Office supplies are locked up. You have to know the magic person with the key. I end up buying my own paper and pens.
Their pay in the BRIC countries is lower then other companies so what they are basically doing is training there and the folks then leave for other home companies taking any expertise that the US IBMers have taught them.
They have decimated their sales staff as well, do a little searching and you will find many sales folks who have had it with their practices.
The quality of the software products and the IGS staffing they are using in Brazil, china and India have left a trail of broken and patched up systems all over the world.
Of course the stock has done well in the short-term, but if you are thinking that IBM is a good long term investment... I have a bridge to sell you. The only people that have prospered by IBM's so called vision is the board of directors and some lucky upper management folks. When IBM comes crashing down, it won't matter to them.
In order to get a RA, at least in my group, you need to be a three performer, so if you plan anything with your manager you may have to accept a three to be considered, at least that is what I am told. And, if you're a 3 you get no bonus anyway. 6 months pay if you get it would be way more than that anyway, but if they decide not to give you the RA, and you want to leave you accept a three, end up retiring anyway with no extra or bonus, if you stay no raise if there is any because your a three. This is what happened to my buddy. He wanted to retire this year, asked to be laid off, accepted a three for last year and received no bonus pay. Then they had no resource actions for our group, so he got nothing.
There is no beating these pigs. Those that hold the cashola makes the rules. Get the best deal you can and split. I cut myself a double-3 deal, got paid to leave with a year medical. A no brainer.
Now if you do that since you are retirement eligible, under these new 401K match rules, can they screw you out of whatever match you have earned? I have not seen that specific scenario covered in any of the info on the new 401K match rules that I have seen.
The management approach of raising the alleged bar each year, with no commensurate increase in compensation, is really just a form of management by intimidation. It's debatable whether it is a good technique for increasing productivity, but it's a fine way to encourage talented people to leave the business.
That would be a dishonest approach. IBM has a policy of "Respect For The Individual", they told me so.
1. You plan to retire between ages 55 and 59.5. ... What many investors don’t know is that with a 401(k), the 10% penalty on distributions does not apply if you are at least age 55 (rather than 59.5) at the end of the calendar year in which you left your employer. ...
2. You’re planning a Roth conversion ...
3. Your old 401(k) has better investment options...
4. You have employer stock in your 401(k)...
Cons: A shadow of its past. IBM has so many all star employees that would do anything for their customers, but the company just does not seem to value that part of the business.
Work until you have been totally spent, it's not about quality, it's about numbers. Oh, then wait until your number is called and you are sent packing. Then hope that you get a half decent package.
Difficult to be loyal to a company that is simply going by the numbers. outsourcing many jobs, then come with excuses to not give bonuses.
They have a 5 point scale, 1, 2+, 2, 3, 4 (1 being god like). Most fall into the 2 area, occasional 2+. Just makes everyone equal and not a great way to show the differences.
Advice to Senior Management: Establish a better review system based on a 10 point scale or something similar. Many pins and needles when an RA is rumored, there is nobody safe.
Cons: Poor management structure - matrix no one can figure out who actually is accountable or in charge. Incredibly pitiful (complex, difficult to use, myriad of security and login features, etc. etc) internal business and HR types processes, procedures for employee everyday use. Unbelievably poor support for employees on their computers and software. My boss was without his computer for about 3 weeks - the employees computer is required for access to everything they need for our work. I personally lost my Lotus Notes (required e-mail system) for 5 business days with no way to get to it accept drive to an office and login on a walk-up station. Lotus Notes owned by IBM is a far weaker e-mail system than MS Outlook. Lotus Notes and all other internal software and systems are very cumbersome and not user friendly.
IBM has recently made many moves to cut costs at the employees expense and loss of productivity. It is truly a self service organization. There is constant pressure to improve your utilization (a term used for maximizing billable hours). Management pressures many ways to not take your vacation, holidays, etc to improve your utilization - it's part of the culture.
IBM in the last month announced they are going to withhold 401k contributions to the end of the year (netting IBM a very large $10's of millions in time value of money/interest) and not funding those that aren't still with IBM by Dec 15th of any given year. A quick analysis of this - nets IBM $84 Million annually +/- 50%.
IBM is willing to try to market themselves in many areas they really have limited or no knowledge or expertise in (many areas of the "Smarter Planet"). Personally witnessed this from involvement in many marketing efforts. IBM uses high dollar marketing executives who are very capable but limited knowledge of the basics in the markets they are pursuing.
IBM's acquisition process can in many instances slash/trash and burn acquired companies. The company I worked for was purchased and has in a few years been basically put out of business - former company employees laid off, attrition seeing the handwriting on the wall with very few survivors.
Advice to Senior Management: Read the Cons and do something about these practices before IBM declines.
Advocates contend that this approach is a relatively painless way to shrink the government's budget gap and to shore up the federal retirement program, which they contend is financially troubled. But liberal lawmakers and pundits have panned the idea, arguing that it would result in lower benefits for Social Security recipients, millions of whom depend on the program as their main source of income.
What does chained-CPI mean? The government currently calculates Social Security's cost-of-living adjustment, or COLA, each year based on how inflation affects urban wage earners and clerical workers. Known as CPI-W, this index measures changes in the prices of a fixed basket of goods that are deemed to be representative of regular purchases by wage earners.
In contrast, the chained-CPI assumes that as prices increase, consumers make substitutions in what they purchase. The common illustration is that if the price of beef increases but the price of chicken is stable, consumers will purchase less beef and more chicken. ...
Who would be hurt? In general, people who would be negatively affected by the use of the chained-CPI would be retirees and other beneficiaries who receive most of their income from Social Security and who aren't in a position to switch to other goods and services when prices rise.
For example, Medicare premiums and out-of-pocket medical expenses take up a large share of many retirees' budgets. Many retirees have no alternative to Medicare, so for these people the only "substitution" for medical care paid under the program is to go without it. ...
For more than a third of of all older beneficiaries, Social Security provides 90 percent or more of total income, while for non-married beneficiaries that figure rises to 46 percent. These are the people who would suffer most under a chained-CPI, a group that encompasses more than one-third of all Social Security beneficiaries and almost half of all single participants in the program, many of whom are elderly widows. ...
The bottom line: The elderly poor, singles, widows, widowers, and non-whites will be most negatively affected by shifting to a chained-CPI approach to calculating Social Security cost-of-living adjustments. If you count just those retirees whose Social Security benefits represent 90 percent of their total income, that's over 13 million Americans.
We, the petitioners want IBM to keep the automatic contribution at semi-monthly and NOT an annual contribution.
IBM, by moving the automatic contribution from semi-monthly to an annual contribution effectively denies employees who are terminated in resource actions up to the cut off of December 15 of the given year, the matching contribution from IBM. Furthermore, the movement of the automatic contribution to the end of the year denies interest generated for the employees 401(K) account. Sign this petition to tell IBM to REVERSE this decision, immediately!
And if you are an active IBM employee, please Join Alliance@IBM CWA Local 1701.
Web site: http://www.allianceibm.org; Twitter ID: @Allianceibm; Facebook: Allianceibm CWA
For the vast majority of people, the health care law won't mean sending more money to the Internal Revenue Service. But the wealthiest 2 percent of Americans will take the biggest hit, starting next year.
And roughly 20 million people eventually will benefit from tax credits that start in 2014 to help them pay insurance premiums.
A look at some of the major taxes and fees, estimated to raise nearly $700 billion over 10 years...
Health-care cost growth will slow to a new low. ...
Your Medicare taxes will increase. (If you earn more than $200,000 per year, or as a couple $250,000 per year). ...
Your insurance plan will be explained in plain English. ,,,
Primary care providers in Medicaid will get a 73 percent raise. ...
The Obamacare exchanges will open for business.
As the Boomer generation approaches retirement, many hope that the health care law will fill the void. "It is a game changer," says Ron Fontanetta, a health care group practice leader at Towers Watson. "It will provide health care access to pre-65 retirees in a very significant way."
Retirees who have not reached age 65 are more at risk -- they don't qualify for Medicaid, and if their former employers don't offer retiree health benefits, they will not have a group discount.
Also, it doesn't take much for a health insurance company to say that they have a pre-existing condition and deny them coverage, says Paul Fronstin, head of health benefits research at EBRI. Even if Boomer retirees can get a private health insurance plan, it will be very costly.
Based on their age alone, Boomers have to pay prices that are five to seven times higher than younger Americans, according to AARP. But if early retirees can wait until the ACA takes effect, it will change the playing field, says Fronstin. ...
The ACA also will change the labor force. Currently, Boomers may continue working longer than they want to keep health insurance, especially if they have pre-existing conditions. "ACA could change the dynamics in all kinds of ways," Fronstin says. "You could have people going to part-time work instead of full time. It is giving people choices."
Over decades, she made her living assisting elderly people in nursing homes in jobs that paid just above minimum wage and included no health benefits. So even as her feet swelled to such an extent that she could no longer stuff them into her shoes, and even as nausea, headaches and dizziness plagued her, she reached for the aspirin bottle or made do with a teaspoon of vinegar. She propped her feet up on pillows and hoped for relief.
"Before I got sick," she said, "I hadn't been to the doctor in 20 years."
After she collapsed last year and landed in in a local emergency room, doctors diagnosed her with congestive heart failure, high blood pressure and hypothyroid. They ordered her not to work. She arranged a Social Security disability benefit, and she enrolled in Medicaid, the government-furnished insurance program for the poor. She used her Medicaid card to secure needed prescription medications. Her ailments stabilized.
But this year, the state determined that the $819 a month she draws in disability payments exceed the allowable limit. By the federal government's reckoning, her $9,800 annual income made her officially poor. But under the standards set by Louisiana, she was too well off to receive Medicaid.
"But dependency on government has never been bad for the rich. The pretense of the laissez-faire people is that only the poor are dependent on government, while the rich take care of themselves. This argument manages to ignore all of modern history, which shows a consistent record of laissez-faire for the poor, but enormous government intervention for the rich." From Economic Justice: The American Class System, from the book Declarations of Independence by Howard Zinn.
In his 60-year career, Mr. Bogle has witnessed what to him is a concerning shift from a world where long-term investing was the mantra to one in which short-term speculation is running rampant.
And so, on the one-year anniversary of this column, I caught up with Mr. Bogle to discuss the difference between investing and speculating and, in the spirit of the holidays, what it means to have "enough."
"People look at investing more or less as trading stocks or mutual funds or God forbid ETFs, and that has nothing to do with investing," he says. ...
Consider: Annual turnover of U.S. stocks climbed from about 15% in 1951, when Mr. Bogle entered the investment business, to 100% in the 1990s to 280% in 2008 before dipping slightly to 250% in 2011.
The problem with all that trading, he explains, is that, like casino gambling, it's ultimately a loser's game after transaction costs, advisory fees, sales loads and administrative costs are factored in. ...
He writes: "... we Americans like to buy things—in abundance—before we have the cash to pay for them. We focus on today's wants rather than tomorrow's needs. Even our wealthiest citizens never seem to have enough. We compare ourselves with our neighbors and, since the realities of life can be so hard to overcome, we look to speculation—even at long odds—to lift us out of the everydayness of our lives."
The regulators that allow it to do business in the U.S. -- the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Office of Comptroller of the Currency -- should see that the line in the sand was crossed last week. On Dec. 19, the bank paid $1.5 billion to global regulators -- including $700 million paid to the CFTC, the largest fine in the agency's history -- to settle claims that for six years, the company's traders and managers, specifically at its Japanese securities subsidiary, manipulated the London interbank offered rate and other borrowing standards.
Libor is a benchmark index rate, off which trillions of dollars of loans are priced on a daily basis. According to the Wall Street Journal, two of the many victims of the Libor fraud -- a scandal that so far has nabbed Barclays Plc and UBS but will probably include other large global banks -- were the quasi-federal housing agencies Fannie Mae and Freddie Mac, which together claim to have lost more than $3 billion as a result of the manipulation. ...
“The alleged conspirators we've charged -- along with others at UBS -- manipulated the benchmark interest rate upon which many transactions and consumer financial products are based,” Attorney General Eric Holder said in a statement. “They defrauded the company's counterparties of millions of dollars. And they did so primarily to reap increased profits, and secure bigger bonuses, for themselves.”
To see the level to which UBS employees descended, one need look no further than their written communications, as per U.S. prosecutors' document dump. “Mate yur getting bloody good at this libor game,” one broker told a UBS derivatives trader. “Think of me when yur on yur yacht in monaco wont yu.” ...
In levying the record $700 million fine, David Meister, the CFTC's director of enforcement, said that “when a major bank brazenly games some of the world's most important financial benchmarks, the CFTC will respond with the full force of its authority.” That's good as far as it goes, and the CFTC is to be commended for rooting out the global Libor manipulation scandal.
But an even more emphatic message needs to be sent to UBS by its prudential regulator in the U.S.: You are finished in this country. We are padlocking your Stamford, Connecticut, and Manhattan offices. You need to pack up and leave. Now.
People pay income tax only on amounts that Congress counts as income. This excludes the sources of revenue most commonly enjoyed by the richest Americans: gifts, inheritances, distributions from trusts and proceeds of life insurance.
How much tax-free income do the wealthy enjoy each year? While we can all guess — and common sense tells us that the numbers are significant — we cannot know for sure. This income is not only tax-free, but there also is not even an obligation to report it.
To illustrate the perversion of this system, imagine two taxpayers, each earning a salary of $50,000. Suppose, however, that during that same year one of the taxpayers is also the beneficiary of a trust that pays for his mortgage and all other living expenses. Suppose the same taxpayer, during the same year, also receives a $25,000 gift from his aunt and uncle, a $7 million inheritance from one set of grandparents and a $50 million distribution from a life insurance policy from his other grandparents. Even though we can all agree that this taxpayer became significantly more enriched than the other over the course of the year, our income tax system ignores all of this non-salary income and regards both taxpayers as if they were identical. Most surprising, the federal government has expressed no interest in even learning about any of these payments.
Estate and gift taxes will play no role, either. These examples fit well within current exemptions, and even Obama’s plan to increase estate and gift taxes would still exclude from taxation all of the transfers cited above. ...
Everyone agrees that fairness matters when it comes to income taxes. But we cannot have an honest discussion about tax fairness when we are kept in the dark about how much income people actually receive. Only when full reporting is required can we have an accurate picture of people’s true income. Then we can begin to fashion a tax plan that is fair for all Americans.
But he's selling now.
"You have to trust your government. You have to trust other governments. You have to trust Wall Street," says Neitlich, 47. "And I don't trust any of these." ...
Since they started selling in April 2007, eight months before the start of the Great Recession, individual investors have pulled at least $380 billion from U.S. stock funds, a category that includes both mutual funds and exchange-traded funds, according to estimates by the AP. That is the equivalent of all the money they put into the market in the previous five years.
“It has been done in your name, or at least in that of your family,” said Scrooge.
As Christmas Eve approaches, supporters of the “chained CPI” are engaging in increasingly tortured – and positively Scrooge-like – arguments for the President’s callous and economically unsound proposal.
And they’re doing it in the name of the “progressive movement.”
When, in an effort to avert the now infamous tax increases and spending cuts to take effect on Tuesday, House Speaker John A. Boehner proposed his so-called Plan B — which would have nudged up tax rates only for those earning over $1 million a year — rank-and-file Republicans promptly rebelled, storming their party caucus with the rhetorical equivalents of pitchforks.
One can’t argue with religion — and for some, the unwillingness to bend on marginal rates is just that. But for many politicians, the refusal to raise tax rates rests on a faulty premise.
The Congressional Budget Office projects that if the United States follows a likely scenario in terms of demographic changes, spending and economic growth through 2035, America’s coffers may fall short by as much as $2 trillion a year in current dollars. With a predicted gap so large, any deal to restore the country’s fiscal balance must include at least some new revenue.
But even those Republicans who acknowledge that additional tax dollars will be necessary say we can get what we need without increasing a single tax rate. All we have to do is close up some “loopholes” and “broaden the base”! We can keep in place the Bush-era tax cuts, they say, and make up any lost revenue simply by eliminating various deductions, exclusions and credits.
At first glance, the idea seems great. Who wouldn’t want to root out the tax evaders and finaglers who are shirking the shared burden? And the idea of a broader base of taxpayers paying lower rates across the board sounds so much simpler and fairer for every citizen.
But closing loopholes is neither sufficient to do the job nor as “fair” to everyone as it might seem.
Don’t bet on it.
Even if Senate Minority Leader Mitch McConnell cooperates by not mounting a filibuster and allows the Senate to pass a bill extending the Bush tax cuts to the first $250,000 of everyone’s income, Boehner may not bring it to the House floor. ...
Public opinion is already running strongly in favor of President Obama and the Democrats, and against the GOP. In the latest CNN/ORC poll, 48 percent say they’ll blame Republicans if no deal is reached while 37 percent blame Obama. Confidence in congressional Republicans is hovering at about 30 percent; Obama is enjoying the confidence of 46 percent. And over half of all Americans think the GOP is too extreme.
Yet Republicans haven’t budged. The fact is, they may not care a hoot about the opinions of most Americans. ...
House Republicans don’t run nationally. They run only in their own districts — which, because of gerrymandering, are growing even more purely Republican. Their major concern is being reelected in 2014, and their biggest potential obstacle in their way is a primary challenge from the right.
The combination of a weakened national party and more intense competition in primaries is making the Republican Party relatively impervious to national opinion.
This poses a large strategic problem for the Democrats. It could be an even bigger problem for the nation.
The Great Recession, which decimated retirement assets, played a big role in building this lesser-known cliff. But many corporations could have avoided the problem by shoring up these funds during the boom years. Instead, they siphoned pension assets for other profit-boosting purposes. When the pension deficits started to balloon, many corporations responded by slashing back their benefit programs.
As a result, Americans today are more reliant on government-funded Social Security and Medicare programs than at any other time in the last 60 years.
What’s even more outrageous is that the very same CEOs who have contributed to rampant retirement insecurity are now calling for cuts to these earned-benefit programs for senior citizens.
Nearly 100 CEOs have banded together in an effort to convince the American public that Social Security and Medicare lie at the root of America’s fiscal challenges.
Their “Fix the Debt” campaign features plain-spoken Americans in their ads and sounds moderate because they call for both spending cuts and revenue increases. But the real objectives of the campaign include massive new corporate tax cuts and reduced spending on Social Security and Medicare, which would likely involve raising the retirement age.
American workers, at present, cannot collect Social Security and Medicare until age 66, the highest retirement age among rich countries. In 2020, the Social Security retirement age will rise to 67, assuring that American workers will be toiling longer than those in any other industrialized country for years to come. In contrast, Japanese and Chinese workers can collect their equivalent of Social Security starting at age 60.
The Fix the Debt campaign’s CEO supporters need not worry about Social Security because they’re members of the “I’ve Got Mine Club.” Fifty-four of the CEOs leading Fix the Debt directly benefit from lavish executive retirement programs. Their collective pension assets total $649 million, which comes to more than $12 million per CEO. That’s enough to garner a $65,000 retirement check each month starting at age 65 that will continue for as long as they live, according to a new report by the Institute for Policy Studies, which I co-authored. In contrast, the average retiree receives just $1,237 from Social Security each month.
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