Wal-Mart Stores Inc. (NYSE: WMT) is still deep in the soup.  Since the news broke over the weekend over bribes in Mexico involving its current and former top-brass, Wal-Mart shares have slid and slid.  The drop in late Wednesday trading is down only 0.3% to $57.60, but this was a $62.45 stock on Friday.

Wal-Mart’s stock almost never moves this much from start to finish in a 3-day period and the shares are approaching an oversold level.  The problem in trusting any chart at this point is that the news flow and headline risk remains greater than the odds that the headlines will suddenly become good here.

We recently noted that options trades were betting on Wal-Mart shares going down to $56.50 os so by mid-June and ultimately to $55.50 or so by mid-September. Shares were down 4.7% to $59.50 at that time, but now they are down to the $57.60 level.

If we use the December 2012 PUT OPTIONS today, the bets are still strong on the downside.  In the DEC-2012 $55.00 PUTS we have seen 2,730 contracts trade against a listed open interest of only 219 contracts.  There were also in the same month $60.00 PUTS some 5,204 contracts traded so far today against a prior open interest of only 155 contracts.  This may be a hedge or a roll, but the implication is that either Wal-Mart is headed down to $52.50 or so in December.  If the bet is not that the stock falls that far, then it is a synthetic long where an investor is willing to take delivery of shares at just under $52.50 just a few days before Christmas.

What is so interesting about the Wal-Mart news is that investors have not gone out and started rewarding rival Target Corporation (NYSE: TGT).  The king of dollar stores is Dollar General Corporation (NYSE: DG) and it and other rivals have not been amply rewarded.  Part of the blame on a negative retail sector may be on stores like Big Lots Inc. (NYSE: BIG) with its downward guidance effectively having taken shares down from $45 to $35 this week.

Maybe Wal-Mart can get saved by statutes of limitation.  Maybe it can sneak its way out of this.  Unfortunately, the negative pressure that Wal-Mart had been getting away from is back and this pressure is unlikely to go away in an instant.  The good news is that the allegations are all in the past rather than the current corporate culture, but the bad news is that the pressure here could end up toppling management at the highest levels of the world’s largest retailer.

The long and short of the matter is that U.S. companies are expected to uphold certain ethical rules and practices.  Bribes are illegal, even if companies do not get punished for the activity on the foreign soil.

The flip-side to this is that no one will really be able to address (nor really fix) the underlying issue: doing business and Mexico and in Latin America is not quite as straightforward as ‘ethics officers’ would hope.  Outright bribes, gifts, donations, and other business enhancing methods are all just a small part of the business culture once you go south of Texas, News Mexico, Arizona, and California.

JON C. OGG

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