Thank You For Not Smoking?

Does anyone smoke anymore?

The ‘90s were a decade of tech booms and S&L busts. Of budget surpluses and Monica Lewinski. And tobacco litigation. 46 states sued the major tobacco companies, claiming that smoking raised Medicare costs. Rather than fight it out, the parties agreed to settle. The states dropped their lawsuit, and the tobacco companies agreed to pay over $200 billion to the states over the next 25 years—the largest civil settlement ever.

Many states didn’t just wait for the payments; instead, they securitized them, pledging the expected payment stream and borrowing against it. But increased state and federal cigarette taxes have pushed sales down, and most of these bonds are now junk-rated.

In essence, too many people are quitting. Only 19%of Americans smoke now, significantly lower than the 25% who smoked at the time of the settlement. That’s good for their health, but bad for the health of these bonds.

Recently cigarette bonds rallied, based on a new court ruling that frees up more cash for bond payments—but it’s only temporary. When a product kills off its customer-base, it’s usually a bad investment.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2013-09-18T13:11:18+00:00 September 18th, 2013|Uncategorized|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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