TAKING STOCK: Illinois bonds and Walmart

Dear Mr. Berko:

I bought 600 shares of Walmart Stores in 2006 at $45, intending to hold it forever because I always believed it was such a fine and upstanding company. Now Walmart is involved in a terrible bribery scandal in Mexico. I've lost faith in the company and worry that this may hurt its future growth. These executives should be jailed. My broker also agrees and strongly urges me to sell because the scandal could expose other illegal activities and because he says 2012 is the last year that long term capital gains will be taxed at the low 15 percent rate. I would like to hear your thinking before I sell my shares of this company that once held my trust. My broker also wants me to use this money to buy $25,000 of Illinois tax-free municipal bonds for $28,500 that will yield 3.1 percent for 10 years. That is a good yield, but I am concerned about the safety of this bond even though he says it is A+ rated by Standard & Poor's. He says the bond has little risk because it's guaranteed by the entire State of Illinois. Please tell me what I should do here too.

RP in Jolliet, Ill.

Dear PR:

Everything in Mexico is corrupt, even the Church. Just ask Carlos "Pudge" Slim, the world's wealthiest man, who is Mexican born, Mexican bred and when he dies, he'll be Mexican dead. Pudge owns Mexico's largest corporations, America Movil, Groupo Carso and Telemex, and they didn't rise to prominence and power being a "goody two-shoes!" In fact, Pudge was recently fined $1 billion because America Movil was a bad Mexican citizen. The fine wasn't contested but rather casually accepted as a cost of doing business. And 1.5 percent of the combined trillion plus dollars in revenues generated by those companies is budgeted annually for bribing judges, politicians, unions, contractors, government bureaucrats, bankers, civil servants, police, the army and executives at Mexico's many large and small industries.

However, if every corrupt businessman in Mexico was put in jail, there would be nobody left to lock the gates. So get off your high horse, be realistic and look in your own backyard. Illinois may be the most corrupt state in the nation, but corruption in Congress exceeds the corruption in Mexico by orders of magnitude, though our politicians are more polished at it.

So keep your Walmart (WMT-$58). At least it's not involved in drugs, assassination, prostitution or arms trafficking. WMT will be taken to a Mexican court, publically slapped on its wrist and charged a multi-million dollar fine, and it will continue on its merry way. Its revenues and earnings will continue to grow 7 percent a year and its current $1.59 dividend (yielding 2.7 percent) will probably grow 4-fold in the next decade.

And that disingenuous broker urging you to sell WMT is a bootlicker and a ponce, though correct in telling you that 2012 is the last year for long term capital gains to be taxed at 15 percent.

Those 10-year Illinois bonds were recently issued with a 3.625 percent coupon at $1,000 per bond, so 25 bonds would cost a buyer $25,000. And they can still be bought at $25,000, not $28,500. But change brokers: this sycophant should petition the court to have himself legally declared a cockroach. Furthermore, those bonds are not rated "A+" but "A-," and S&P, whom I wouldn't trust to feed my goldfish, may rate them BBB+. Considering Illinois's precarious financial position, even a BBB+ rating is too generous, especially when a Moody's man privately told me they should be rated Ba3, five grades below S&P's BBB+.

The state's financial problems in are so grave that only Puerto's Rico's tax-free bonds have a higher yield. Illinois has over $9 billion in unpaid debt, and its pension fund only has 45 percent of the money needed to cover its liabilities by the end of 2012. That's when the fit may really hit the shan. The state's financial difficulties should continue to worsen.

The legislature isn't worried about default, because it believes Congress will rush to the rescue and indemnify the bondholders. There's no reason to own those bonds but good reason to keep your WMT.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Wed, Jun 6, 2012