Wal-Mart is down another 3% or so today, after falling nearly 5% yesterday. The drop in share price comes after the New York Times published a more than 7,000-word article over the weekend that accused Wal-Mart of $24 million in bribes to Mexican officials. The alleged payoffs helped facilitate the retailer's growth in Mexico. (Wal-Mart de Mexico is the largest private employer in that country.)
Wal-Mart could face billions of dollars in fines. Most disturbing to shareholders, the highest echelons of Wal-Mart's management are alleged to have known details about the scandal as early as 2005… and covered it up instead of reporting it. Even Wal-Mart Chairman S. Robson Walton – son of founder Sam Walton – is alleged to have received an anonymous e-mail about bribes to Mexican officials.
I (Dan Ferris) have thought about this a lot the past two days, since I have Wal-Mart in both my Extreme Value and 12% Letter newsletters. It's perhaps the most well-known of my "World Dominator" stock picks.
I have a lot to say about this, but here's what I'm wondering this morning…
Who got hurt?
Let's say Wal-Mart is guilty of all the accusations… that it spent $24 million bribing Mexican officials to expedite the process of permitting new land for Wal-Mart to build new stores. Who was hurt by that?
The Mexican economy unquestionably benefits from a strong and growing Wal-Mart. The company employs more than 200,000 people in its nearly 2,100 Mexican retail and wholesale locations.
What taxpayers on either side of the border were hurt? Again, the alleged bribes focused on speeding up the permitting and zoning process… bureaucratic constructs of dubious value.
And would-be competitors? In practical terms, anybody with a prayer of competing with Wal-Mart can afford to pay bribes, too. I cannot imagine major Mexican retailers Sears de Mexico and Sanborns (not to mention a slew of smaller competitors) aren't doing exactly the same thing. A reader brings this up in the mailbag (below)… but corruption is notoriously rampant in Mexico. Wal-Mart executives couldn't be the only ones putting cash in those open hands.
A rapidly growing Wal-Mart is great for the company and its shareholders… great for the Mexican economy… and great for the officials who took the bribes since they'd never make that much money otherwise.
I'm not saying bribery is a victimless crime… I'm just having trouble finding the victim.
I imagine we'll get a lot of nasty mail telling me how awful and immoral I am. But I'm just asking a simple question… the kind of question you ask if you're truly paying attention in life. In practical terms… who was harmed by the alleged bribes?
Much of what is illegal is harmful to no one except the government in its attempts to force you to behave a certain way. Most "public corruption" is an offshoot of stifling regulation. If people didn't feel the need to work around government meddling in areas where it offers no value… this "problem" would vanish. Aren't licenses and permits mostly legal means of extorting cash for the public coffers? What if we simply allowed the company that paid the most to develop the land? Wouldn't that be more civilized, since property tends to be traded fairly and lawfully… unless it's stolen by governments and given out in exchange for favors?
One final thought about Wal-Mart. I read a report recently by GMO, the money management firm co-founded by prolific market commentator Jeremy Grantham. The report noted that two-thirds of all corporate value lies 20 years or more in the future. In other words, businesses are valued based on future earnings. Most of that value lies 20 years out.
Will anyone remember the Mexican bribery scandal in 20 years? I don't know… but I doubt it. Even if the fines destroy an entire year of Wal-Mart's operating income (more than $26 billion last year)… the damage to the company's valuation would evaporate after two decades. If the company paid out a dividend of that size, the stock would soar… yet that would have about the same effect on the business' earnings power as a fine the same size.
I imagine the headlines will get worse and a big Wal-Mart executive or two will have to step down. But I doubt this will hurt Wal-Mart's business much. It'll remain a World Dominating, relentlessly growing retail network of more than 10,000 locations worldwide.
This is a letter sent regarding the bribes.
It's simply incredible to read about the Wal-Mart bribery story. What a pile of garbage. Anyone who has ever lived, worked or run a business in Mexico knows this is a way of life. At the local, municipal level, officials regularly charge a fee (mordida) for building permits. That's a fact!. 'Sin pagos no hay permisos.' Which translates into 'no payments, no permits.' It's the same as using a turnpike or toll road in the U.S.
"Now representatives Cummings and Waxman are going to stick their noses in. It just makes me sick. It is astonishing that the U.S. government enforces the FCPA when for decades Washington D.C. has, and continues to use, food, money, weapons etc. to bribe and prop up foreign governments for their support. Talk about hypocrisy! When are Americans going to wake up?
"In addition, the New York Times published this investigative expose. The newspaper is 8.09% owned by Inmobiliaria Carso, a wholly owned investment vehicle of Grupo Carso of Mexico. Grupo Carso also owns Grupo Sanborns and Sears de Mexico, two large retailing operations that are in fierce competition with Walmex. Connecting the dots may be an interesting exercise. Mexican business tactics may have arrived on the U.S. business scene." – Paid-up subscriber Steve
Ferris comment: Kudos to you for making the connection between the Times story and Wal-Mart's Mexican competition. If Wal-Mart is doing it, so are Sears and Grupo Sanborns. I wonder who would be the winner in a Mexico without bribery? It'd be stupid to bet against Wal-Mart. And I agree with you that the U.S. government prosecuting bribery and extortion is particularly rich.
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Schiff Report
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Redneck Skeet Shooting
Larry Levin Report
Even though there was no U.S. economic data released today, the market found fault with everything from Holland to China. Things looked bleak all over, but of course the only “story” was the Mexican Wal-Mart bribery scandal. Yes, the stock price fell and the implications may be huge for the über-retailer, but Wal-Mart has lagged behind the broader market rally since 2009. Yes, the stock has rebounded about 25%, but it’s by less than a third of the growth experienced by the broader index.
But that doesn’t matter, because the Wal-Mart story is infotainment and that makes for much better television than say the threat of global financial meltdown when the ink runs dry. Bribery and corrupt government officials are sexy - the fallacy of forced liquidity is not.
While the folks on TV may be reporting the wrong story, the folks in the print media are just plain wrong. Case in point, the latest issue of Barron’s where the front cover said “Outlook: Mostly Sunny”
What Barron's is referring to here is the latest Big Money poll that it conducts semi-annually. The actual title of the article is “Reason to Cheer”
Are you kidding, a reason to cheer, about what? Benny and The Inkjets cranking up the printing presses for an impeding QE3...Europe on the brink of financial implosion and wide scale instability...so-so earnings...future scenario’s like MF Global still missing billions because of regulatory malfeasance?
I’ll take a pass on the sunglasses, thanks anyways.
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Are Pawn Shops Running Out of Gold?
Last Thursday, EZCORP Inc., a pawn shop owner and operator in the United States, reported earnings and in that release they had some very interesting things to say that relate to the gold market. Take this line from their press release where they discuss why they are lowering guidance.
This revision in guidance is due to slightly slower than expected growth rates in the U.S. pawn business for both loans and sales (including scrap sales) as a result of customers’ using a greater proportion of general merchandise instead of gold to satisfy their immediate cash needs.
Furthermore, apparently the company had this to say on their conference call: “ ”Frankly, yes, their piggy banks are certainly emptier than they’ve been and what they have, they’re hanging on to.”
Read more here…http://libertyblitzkrieg.com/
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This is a 27 year marine veteran blasting the 2 party system. It's a joke of a way to find a leader.
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The Bernank is going to tell us today that there won't be additional QE. The market isn't going to like it. Metals and their stocks will get hurt some more. People will panic then in about 6 weeks, we will get a surprise of more QE. I don't see how we can keep rates low without it. The Fed bought 62% of all treasuries last year. Who is going to pick up the slack?
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