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Dear Mr. Berko: As you can see from this stationery, I own a large company. We have a pension plan with a market value of $86 million.

The current manager has done moderately well in the past year (up 8.2 percent) but was down 26 percent last year, so we still have a long road to travel home. We recently discussed his market philosophy for the next year, and he is bearish on equities so he intends to keep 85 percent of our portfolio in long-term corporate bonds. I disagree and feel that interest rates are headed higher, but he may be right about our economy.

I would appreciate your thoughts on long-term interest rates and employing Merrill Lynch to manage this account. We鈥檝e been talking to Merrill for the last six months and it seems to have the investment style that we are comfortable with.
CEO
Cleveland

Dear CEO: I believe your current manager may be right about the stock market, but he is as wrong as Corrigan concerning the direction of long-term interest rates. If this ninny keeps 85 percent of your company鈥檚 pension in long-term bonds, I鈥檓 certain as sunset that in the coming 18 months, those bonds will fall like coconuts from tall palm trees.

Interest rates are headed higher, and any man is a fool to own long-term bonds in this market. South Korea recently raised interest rates; Australia, Norway and India have, too. These rate increases are the tip of the iceberg and may soon become the norm. Many of our institutions have recently raised rates by 5 to 10 basis points, and there鈥檚 more to come.

Of course, with higher interest rates, we will get a dose of inflation. The TARP funds, the stimulus package and health-care legislation have tripled our national debt with no letup in sight. And prices will soon increase to reflect the continuing avalanche of new money in circulation. It scares the bejabbers out of me. And I鈥檓 willing to wager my entire mint-condition collection of Barbie Dolls that rates are now beginning to head higher.

Those folks at Merrill Lynch are so persuasive that they can convince a shark to become a vegetarian. But no, not in a million years would I allow them to manage your pension plan.

Early this year, the Securities & Exchange Commission accused Merrill Lynch of manipulating investment procedures for many Florida pension fund clients to significantly boost their commissions, which lowered pension-fund returns. I expect that Merrill will be facing multiple lawsuits by some 40 to 60 Florida pension plans and will find it impossible to defend its self-serving behavior. According to a recent article in the St. Petersburg Times, the St. Petersburg firefighter pension fund claims 鈥渁ggressive trading over index funds because active trading generated higher commissions, recommended weaker-performing money managers when the payoff for Merrill was better, and misled customers about their fund鈥檚 performance.鈥� And this is just in Florida

For the future of you and your employees, I鈥檇 steer away from the Merrill boys. But I would recommend that you find a new money manager, and be hasty about it.

Address your financial questions to Malcolm Berko, c/o The Daily Journal of Commerce, P.O. Box 8303, Largo, FL 33775, or e-mail him at [email protected]. 漏 2009 Creators.com