Bloomberg financial report on the outlook for State government tobacco bonds

[sofarsogood]

This Bloomberg report connects the dots about as well as anything I've seen. A good read.

Tobacco Leads Yield Chase as Smoking Decline Abates: Muni Credit - Bloomberg Business

 

[Grimwald]

Thanks for posting. Each of these stories, even if it makes my eyes glaze over, provides more insight into the monetary aspects of smoking vs vaping. They always say "follow the money" and they're always right, aren't they? Too bad this will never make the evening news.

 

[DrMA]

Incredible! ANTZ propaganda is achieving its goals of propping up the failing tobacco bond market.

 

[philoshop]

This article did everything short of providing direct quotes from the state legislatures saying, "Don't worry, we're taking care of that pesky e-cig stuff for you.".

 

[sofarsogood]

Because the government takes most tobacco revenues it is really their business. Passing judgement over a competing product is a conflict of interest. Governments should either abolish tobacco excise taxes or excuse themselves from interfering with the ecig business. In the good old days when people had honesty and personal integrity this arguement would make sense to everybody.

I would like to know more about how the tobacco bonds are structured. Is the collateral for those bonds only master settlement payments or are they also backed buy the good faith and credit of the individual states? I also wonder if the involvement of governments in tobacco revenues could raise Constitutional issues. Or is there a potential lawsuit for abuse of the public trust. It's pretty amazing that the government can be a drug dealer with impunity. But there needs to be a powerful constitutional or common law issue to litigate. May be the courts will rescue us by deciding that ecigs are not a tobacco product after all or we will find something the public cares more about than the money, like the kids. Legally banning posession by kids is a very bad idea because they need protection from tobacco too and their parents, not government should be making that call.

 

[rolygate]

The overall impression I got from the article is that tobacco bonds financed by future MSA payments are a safe, high-paying investment. However, this is not the case if either the FDA deeming proposals are successfully challenged, or if the FDA regs are implemented but a successful black market arises. In either case vaping will destroy the MSA payments in time.

A year on year 4 or 5% shrinkage in stick sales doesn't seem to provide a safe foundation for continuing MSA payments, though perhaps the situation isn't as simple as it looks.

 

[readeuler]

The overall impression I got from the article is that tobacco bonds financed by future MSA payments are a safe, high-paying investment. However, this is not the case if either the FDA deeming proposals are successfully challenged, or if the FDA regs are implemented but a successful black market arises. In either case vaping will destroy the MSA payments in time.

A year on year 4 or 5% shrinkage in stick sales doesn't seem to provide a safe foundation for continuing MSA payments, though perhaps the situation isn't as simple as it looks.

I kind of got a different impression, Roly; I couldn't make heads or tails of it, quite frankly.

Bonds are super-technical, and I don't understand the terminology very well. I'll just talk about what I know about bonds, and how it affected my perception of the article.

Basically, we all want to invest in things with a high yield; a good return on our investment (bonds are sold at a discount to their payout, and how deep this discount is determines how high the yield is). But safe bonds, like those offered by the US Federal government, don't offer great yields because they're so devoid of risk (save the commentary ).

So, if you're seeing a high-yield bond, it's typically very risky, some referred to as "junk bonds" because they're estimated to have a pretty significant risk of default, prohibiting firms with US-backed money from investing in them (like FDIC insured banks, certain firms investing pensions, certain insurance companies, etc). To give you some context, if RadioShack issued bonds lately, they would definitely have been junk bonds.

The very fact that these MSA bonds are offering high yields tells me that they're on shaky ground. The article does say they're estimated at less likely to default than a short time ago, but the article says "In some cases, the higher marks make the debt investment grade", i.e., most of 'em are still junk.

 

[rolygate]

I kind of got a different impression, Roly; I couldn't make heads or tails of it, quite frankly.

Yes, it is a bit messy and non-specific. On the other hand, that's what honest journalism looks like: no real message they want you to take away, just the info from all sides.

But my impression from the ending of the piece, and some of the contributors' quotes (let's not call them experts), is that - overall - these junk bonds are still a good buy because they offer really good returns, and the issuers probably can't allow them to fail no matter what.

As far as I can see, MSA payments have started to slide this year and that process is unstoppable because you can't put the genie back in the bottle. No amount of corruption will kill ecigs permanently, they'll still take over most of the market in the end. (My guess is 60% but it will take a long time to get there with or without laws protecting cigarette sales.)

I think the most obvious thing we can see from the cigarette market is that it is protected, always has been, and always will be. It just makes too much money for too many people, all of them at the top, to be otherwise. Politics is run by the Shelley Silver, John Dalli and Vladimir Putins of this world, after all - not the St Francis of Assisi types

In the end vaping will mostly finish off smoking, and MSA-financed bonds will be worthless as a result. The question perhaps is whether or not the States will have to foot the bill and pay the bondholders. They probably will. The cost of this bungling to the taxpayer will be enormous, but who cares about that - voters still keep voting for the fraudsters anyway. Shelley Silver and his ilk only get collared, after all, when they lose touch with reality and their arrogance outstrips the slightest measure of common sense that keeps them safe from exposure. There are so many of them, stealing so much money off you and me, that the problem is insoluble. Knock one down and two pop up to replace him.

 

[philoshop]

The only winners at the end of this 'game' will be those who have the power to change the rules during play.That's how and why the 'game' was even begun.