6
Month Market Review
The
Tobacco Settlement Talks
The Money of Shhhmokes
By Tom Gardner
([email protected])
If you've heard about as much on the tobacco wars as you can stand, you might
want to sell your television set and radio, cancel all newspaper and magazine
subscriptions, and close down your computer's access to the network. The
fat lady isn't singing yet.
Even though it's one of the six biggest news stories for the first half of
1997, the battle over regulation of the tobacco industry is scheduled for
fifteen rounds -- and the pre-fight introductions aren't concluded yet.
This past Friday, 40 state attorneys general announced a proposed settlement
with the tobacco industry on everything from billboard advertisements and
Internet banners to nicotine levels and the status of class action lawsuits.
The announcement was initially praised, but hours after the release of the
77-page document, it was challenged from all sides. Most recently it has
drawn sharp criticism from former Food and Drug Administration (FDA) Chief
David Kessler and former Surgeon General C. Everett Koop. Heck, even Minnesota
Attorney General Hubert Humphrey III, one of the 40 negotiators, said at
a news conference Friday evening: "The agreement as I understand it is woefully
inadequate."
So... why all the complaint?
The settlement proposal gives the tobacco industry 25 years to pay off $368
billion in various reparations directly to the states. Humphrey called that
amount "paltry" compared to the health damages and considering that it is
payable over two and a half decades. Adjusted for a 4% inflation rate, the
real value is around $150 billion.
So, two key initial problems are that the cash is payable over 25 years and
that the money may be more attractive to state governments than a deal that
is most protective of public health.
Problems a level deeper revolve around the proposal's clear restriction of
the powers of the FDA to regulate tobacco. This restriction might subvert
Philadelphia Judge William Osteen's opening the way for the FDA to regulate
tobacco this past April. The deal negotiated by lead attorney general, Michael
Moore of Mississippi, requires the FDA to prove that nicotine is addictive
and to guarantee that any reduction of nicotine levels will not create
underground markets for the drug.
The FDA would prefer not to have to re-fight the five-year battle it recently
won in April. Given that, it's no wonder that former FDA Chief David Kessler
powdered up over the weekend and stumped on every televised stage he could.
Kessler isn't about to let the attorneys general -- perhaps eager to swell
state coffers -- casually deal away the authority of the FDA to regulate
tobacco products that have been linked to more than 270,000 deaths per year
in the U.S. For statisticians, per year that's nearly six times more than
all the Americans that died fighting in Vietnam. It is equivalent to three
jumbo jet crashes each day in America, with two hundred victims per flight.
Using these numbers, Kessler and the FDA have plodded ahead piecemeal for
years to claim the right to regulate tobacco products. This latest proposal
from the states represents a fairly dramatic step backward from the FDA's
present position of authority.
What lies ahead?
Clearly, this will be an enduring struggle. The line dance is really only
just getting underway. Congress hasn't even twinkle-toed across the floor.
And with so many interested parties, it'll often be difficult to determine
who's dancing with whom, when, and whether the steps and smiles are of any
consequence.
Are the attorneys general most motivated to press for public health, public
attention, or public monies? Which tobacco companies are working together
on which issues, and why? Will the tobacco industry artificially prolong
this debate, buying some time to gear up for increasing its efforts abroad?
And will the federal government attempt to regulate the industry's international
activity? And yes, Soros' question: Should the government legalize and regulate
drug sales in America, given its position on nicotine and tobacco?
What about investors?
For investors, the question of whether it's okay to invest in "Flip Mo" just
boggles the mind. In a
recent
feature in Fooldom, we considered the ethical implications of investing
in a company like Philip Morris. It's not an easy no, and it's not a simple
yes.
Philip Morris not only sells Marlboro, Merit, and Virginia Slims cigarettes,
but also Miller, Molson, Lowenbrau, Foster's, Red Dog and Milwaukee's Best
beers, and also Kraft Foods, Oscar Mayer, Post Raisin Bran, Kool-Aid, Jello,
Maxwell House coffee, Altoids, and a slew of other edibles. It is a massive,
fiscally well-managed conglomerate with over $69 billion in annual sales
and profit margins that run in the vicinity of 8%.
The quantitative investor looking at the numbers and believing that a modified
version of Michael Moore's proposal will go through probably should be buying
here. But is there an ethical component to investing -- and to consumer buying?
In England, the general consensus is that if you are morally opposed to the
business as an investment, you should be morally opposed to it as a consumer.
What about in America?
Is it better to avoid companies whose practices you don't support? Or is
it better to invest in them and exercise your voice at the next shareholders'
meeting? Or is it better just not to think about ethical issues when investing
your money? Certainly, to each his own. And a fair defense can be made for
all three positions -- with the most challengable third argument being supported
by investors who posit that if the business is "okay" for American society,
cleared by the judicial system, and subject to market forces, then it is
"okay" for investors.
As was to be expected, the majority of the participants in our message folders
-- a collection of eloquent Fools from EPA employees to university professors
to money managers -- voted for either of the first two considerations. If
you are opposed to the tobacco business, either avoid investing in it or
dive in and make your beliefs known to the company at every reasonable
opportunity. For me, the best answers lie 'twixt those two.
Concluding thoughts
Certainly the issues surrounding cigarette sales and illegal drugs will take
centerstage in America over the next decade, as will the activities of our
companies abroad. If you're like me, you are prepared to change your mind
on specific matters numerous times during this debate.
Though it's one of our top six stories for 1997, this wick was only just
lit. The real discussion lies ahead.
-Tom Gardner, Fool |