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Smoking is bad for your health - Tobacco bonds will kill you

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Mon, 06/06/2011 - 16:16 | 1344312 downrodeo
downrodeo's picture

101 reasons to quit smoking now.

Thanks Bruce, for all of your hard work. The snake is eating his tail, and he's almost reached the neck, it would seem.

Mon, 06/06/2011 - 15:48 | 1344239 Bubbles
Bubbles's picture

So what is the expectation for inflation between 2008 and 2058?  Maybe Michigan got a great deal on the 50 year zero coupon bond. 

Mon, 06/06/2011 - 20:36 | 1345347 Bruce Krasting
Bruce Krasting's picture

If inflation tops 8.875% we are dead. We will never make it to 2058.

Mon, 06/06/2011 - 14:56 | 1344042 Whatta
Whatta's picture

Time for states to revisit the tobacco suit and find some legal maneuver to reopen and dig a little deeper into Big Smokies pocket....the American Way.

Mon, 06/06/2011 - 15:47 | 1344237 Joe Davola
Joe Davola's picture

Most likely tobacco road probably has a new strategy all ready and just waiting to run rings around the AG's yet again.

Mon, 06/06/2011 - 17:07 | 1344551 SwingForce
SwingForce's picture

Yes they do, its called split off non-US operations, and all other non-tobacco business. That's why you now have Philip Morris Intl. and Kraft Foods trading as stand-alone entities. Never forget that the tobacco industry has the smartest lawyers on the planet. 

Mon, 06/06/2011 - 14:45 | 1343986 bank guy in Brussels
bank guy in Brussels's picture

Here in Belgium there is lots of semi-anarchist smoking in the local cafés, Belgians being a wonderfully rebellious sort.

And those of us a little older, remember just how great tobacco advertising was ...

Here's a real classic ... short video of the wonderfully hilarious, and sometimes sexy, Benson & Hedges advertisements, people constantly getting their long '100s' cigarettes crushed by accident because they weren't used to the extra-king-size, like when ogling a girl in a mini-skirt.

The music here became a big hit, performed by 'The Brass Ring', the song called 'The Dis-Advantages of You' (1967) - great audio on this clip here, too.

We over-50 people will all recognise the tune instantly tho we may not have known the name ... Quite a nostalgia trip ... and in fact makes me want to light one up with the other rebellious Belgians in the cafés here. I might just do that right now ...

'Relax and enjoy ...'


Mon, 06/06/2011 - 14:40 | 1343966 chunkylover42
chunkylover42's picture


Why would a tax-exempt bond such as the Michigan one you cited be in a pension fund?  DB plans are already tax-exempt entities so they don't benefit from the bond's T/E status and they would collect a shit yield (1.32% at issue) in the process.

The muni market is a retail market, so th4e bond is probably in some poor sap's Citigroup brokerage account because his idiot broker had to unload some inventory.

Mon, 06/06/2011 - 15:16 | 1344112 Bruce Krasting
Bruce Krasting's picture

Look at the description again. The Price is 1.32 the Yield is 8.87%.

I think the paper is in pension funds because of the high yield. This rate is above the 8% hurdle rate for most DBs. There is also the duration. This (on paper) adds to the average life of the total portfolio. So it fits, the tax exempt feature is a throw away, in my opinion.



Mon, 06/06/2011 - 14:30 | 1343930 SmittyinLA
SmittyinLA's picture

50 years from now a soylent green taco with a side of Soma salsa will cost you $5 billion.

Mon, 06/06/2011 - 14:13 | 1343865 b_thunder
b_thunder's picture

1. the bond issuers rightly figured out that they won't be around when $4.4B comes due. for now they get their promotion or move on to the private sector

2. the bond buyers - well, the actual physicel human beings that signed on the dotted line - they get their bonus and move on to other firms

3. if we do have annnual double-digit inflation over next 5-10 years, this bond will be the best thing ever for the issuers.


Mon, 06/06/2011 - 14:04 | 1343829 earnyermoney
earnyermoney's picture

True irony if the Pension fund holding this is none other than GM's UAW.

Mon, 06/06/2011 - 13:48 | 1343777 Broomer
Broomer's picture

Now the question is, will 4.4 billion be enough to make even with 50 years of inflation?

Mon, 06/06/2011 - 14:32 | 1343773 SwingForce
SwingForce's picture

Wow, this one's a beauty- this is the opaque-ness MWhitney talks about. Michigan is screwed. BTW- What's the current bid on those zeros?

Mon, 06/06/2011 - 13:43 | 1343744 AR15AU
AR15AU's picture

Back in 2008 the State of Michigan borrowed $58 million. They spent this money the very next day. This is a zero coupon bond so Michigan doesn’t have to pay a penny until the maturity. The maturity was FIFTY YEARS!!!! The principal due at maturity? An unbelievable $4.4 BILLION. 

Slavery: alive and well in Michigan...

Mon, 06/06/2011 - 13:37 | 1343731 DoChenRollingBearing
DoChenRollingBearing's picture

I see fewer and fewer investment options that are any good.  I guess buying gold looks to me to be best.

THANKS Bruce for the interesting post on a topic I knew very little about.

And look at how, once again, how the state .govs have been thinking short term only.  Kick that can!

Mon, 06/06/2011 - 13:48 | 1343765 trav7777
trav7777's picture

this paper shit was never really an "investment."

Gold isn't either, but at least it holds value.  WTF in paper is any good anymore?  I guess the defensive plays still pay meager dividends.

When this shit all blows, up people will get those high yields they want

Mon, 06/06/2011 - 13:32 | 1343721 wombats
wombats's picture

Thanks for this article.  I never realized that this was going on.  I think you're definitely right about this being a great example of kicking the can down the road.

Mon, 06/06/2011 - 13:31 | 1343717 piceridu
piceridu's picture

BK, I'll say it again. We are lucky to have you post on this site. I for one would have never seen or heard of this without you taking the time to post. Thanks as always...another homerun.

Mon, 06/06/2011 - 13:33 | 1343715 nevadan
nevadan's picture

I hear Ted Bundy finally quit smoking.

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