Trader Talk

Banks Hurt by Europe; EDS/HP No Threat to IBM

Three points about today’s trading:

1) Financials again down on weak earnings from European banks like Societe Generale and Credit Agricole; and Oppenheimer’s Meredith Whitney continuing to take down 2008 and 2009 estimates on brokers.

2) Bulls hoping that strengthening in the dollar would lead to a decline in commodity prices are again having a hard time arguing their point today. Once again, we have modest strength in the dollar and while industrial metals are a tad weaker, energy commodities are rallying.

Credit Suisse attempted to explain this in a note this morning, by pointing out that:

a) commodities have risen 40% of the time when the dollar has strengthened; and

b) industrial commodity prices normally only fall significantly when global Industrial Production is below 2 percent year over year, compared to 4 percent now.

3) All those people arguing that the EDS/Hewlett-Packard deal would be a big challenge to IBM are missing the point: IBM is way, way ahead of even a combined entity.

IBM recognized very early the recognizing the competitive advantage associated with selling a bundled solution--software, hardware, services, financing, all together.

To compete effectively in global services, you need scale -- IBM has it, Hewlett and EDS don’t. That’s why they needed to do this deal.

How far off are they? Here's the total service revenues for the three companies:

IBM : $54 billion

EDS : $22 billion

Hewlett : $17 billion

Bottom line: even merging the two, they are not even close to exceeding IBM's service revenues.

IBM is at a 6 year high today.

Questions?  Comments?