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What IBM Is Telling Us About the Market's Mood


Investors are shooting first and asking questions later. The bellwether, which generally had a solid quarter, traded down after reporting that outsourcing deal signings were down 14%.

No folks, Apple (AAPL) wasn't the only company to report earnings after the close yesterday.

IBM (IBM), a far better global economic bellwether than the trend-driven Apple, delivered its own third-quarter numbers yesterday.

Here are the major stats:

1. Revenue of $24.3 billion came in above the $24.1 billion consensus
2. Earnings of $2.82 a share grew by 18% and beat Wall Street's expectations by $0.07 a share
3. Full-year earnings guidance of at least $11.40 a share was slightly above analysts' forecasts
4. Revenue from BRIC countries (Brazil, Russia, India, China) grew by 29%
5. IBM's growth markets (which include the BRIC category) grew by 16%
6. Outsourcing deal signings were down 14% at $5.7 billion

Number six is the dirty detail that took IBM's stock down after the bell yesterday, though Apple's disappointing guidance and gross-margin numbers certainly didn't help the market's overall mood.

Now what's interesting is that IBM signed a big outsourcing deal on October 8. Had that transaction been completed by the third-quarter's end, IBM's outsourcing signings would have actually been up 14% instead of down 14%.

Let's look at how IBM CFO Mark Loughridge detailed the situation on the conference call:

The performance that we get in the fourth quarter isn't going to be any different whether we had signed it on September 30 or October 8. The reasons it delayed out to October 8 were, frankly, pretty good reasons, because we expanded the scope and got a lot more opportunity, a very successful deal for us.

This is exactly the kind of item that gets forgiven in a bull market -- or even in a normal market. It wouldn't be reasonable to think investors would be willing to wait to see the fourth-quarter deal numbers to get a glimpse of how well IBM's outsourcing business is doing.

After all, any business dependent upon signing large contracts, and that includes IBM's outsourcing unit, is going to be somewhat lumpy when it comes to getting deals signed.

Common sense dictates that IBM's fourth-quarter outsourcing signing numbers should be huge from this one major contract signing. If that turned out not to be the case, then a stock decline would be more than justified.

But given the foul economic mood, investors are shooting first and asking questions later -- they're not going to wait 90 days to get a better look at IBM. The negative reaction to an otherwise solid quarter is more a sign of frazzled nerves than decaying fundamentals.

What investors should take away from this situation is that actual earnings misses are going to result in bloodbaths. The market's been climbing a wall of worry, but bad news of any kind won't be tolerated. IBM is a fairly reliable company when it comes to making the numbers, and if it's not getting the benefit of the doubt, no one else will.

Thus, this is probably a good time for those with weak stomachs to be taking profits in the hot momentum names like Netflix (NFLX) and Amazon (AMZN).

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No positions in stocks mentioned.
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