In Focus: Gambling, Weed, and Money
July 2013, the city of Detroit files for bankruptcy shocking markets and citizens inside and outside of the city. The city that was home to America's auto industry and Motown was unable to service it's $18 to $20 billion of debt and was also looking at a $162 million cash flow shortage.
Bankruptcy was nothing new in 2013, people were used to hearing a company name followed by "files bankruptcy" or a famous person's name followed by "files for bankruptcy." But many of us had never heard of a city, especially one as well known as Detroit filing for bankruptcy. Detroit would be the largest municipality to file for bankruptcy, surpassing Alabama's Jefferson County filing in 2011.
As the information on Detroit's bankruptcy filing was translated from court documents to layman's terms we found out that during its heyday Detroit's politicians made big bets on the American auto industry being strong forever, which left the Detroit administration in 2013 with little room to maneuver financially when Detroit was decades past its heyday and in the middle of really hard times.
Detroit's debt load at the time of the filing was between $18 and $20 billion. The city borrowed against its future to support its past by issuing municipal debt.
Just about every major project in your town, the schools being built, the highways and bridges being built, the roads, etc, are being funded by debt. Your city sells bonds/debt to investors in order to raise money to finance the building of schools, roads, bridges, and government buildings.
For Detroit, where 1.8 million people called home in 1950, expanding the infrastructure to facilitate a growing local economy made sense. But by 2013 the number of residents dropped to 700,000, and the city was struggling to collect property taxes from the residents that were there.
Who Will Be The Next Detroit?
In 2020 COVID-19 could have the same effect on some local governments as the dying American auto industry had on Detroit.
“There’s an enormous loss of revenue going on, and we don’t know how long it will last.” That is how Richard Ravitc explained the impact that COVID-19 is having on municipalities to Barron's. Ravict is famous for guiding New York through several economic crises including the Great Recession in 2009, and even he admitted that this time it's worst because of the uncertainty that comes with the pandemic.
Moody's and Standard & Poor's, the two agencies that hand out credit ratings have already given the negative outlook classification to several states, which include Alaska, Illinois, Nevada, New Jersey, and New York for Moody's and Alaska, Illinois, Nevada, New Jersey, Hawaii, Michigan, Minnesota, New Mexico, and Oklahoma for Standard & Poor’s.
Some cities like Honolulu, Las Vegas, San Francisco, and New York have also received the dreaded negative outlook from Moody's since the start of the pandemic. Las Vegas and Honolulu's reliance on tourism was a factor for their negative outlook. San Francisco's wealthy leaving the city, which is a major hit to the tax base, was the cause for their negative outlook, and NYC is expected to see less tourism and is also dealing with it's wealthy fleeing the city.
If state officials are properly reading the room and thinking about the future of their state, counties, and cities, then they should be looking into the sin industries to generate revenue. Sports gambling and marijuana could help municipalities offset losses caused by the COVID-19 pandemic, and sure up their financial futures post COVID-19.
Gambling, Weed, and Money
For equity investors companies like DraftKings (DKNG) and Penn National (PENN) could be big winners if states relax their laws on sports gambling. In the marijuana industry Trulieve (TCNNF), Green Thumb Industries (GTBIF), and Curaleaf (CURLF) could also benefit from more states passing favorable marijuana legislation.
Of the states given a negative outlook by Moody's and Standard and Poor's Alaska, Illinois, Nevada, Michigan have fully legalized marijuana and Minnesota, New Jersey, New Mexico, New York, and Oklahoma allow for medicinal use according to disa.com.
A state like Kentucky, which ranks in the bottom five in state creditworthiness due to large and poorly funded pensions according to the Barron's article only allows for the use of CBD Oil. The full legalization of marijuana could help the state navigate any troubled waters caused by the coronavirus and then address it's underfunded pension issues.
When it comes to online sports betting, Illinois, Michigan, Nevada, and New Jersey are the only states from the Moody's and S&P lists that have legalized online sports betting.
Don't Be a Sniper, Use the Gatling
For investors who can see things lining up the way that I do, with states growing more needy of capital to stay solvent, I would recommend to not be a sniper, but instead employ the approach of a Gatling gun and take a shot at everything.
The Motley Fool recently made a very good argument for investing in Penn National over DraftKings. I agreed with the article and understand why they would go with Penn, but I think it's best to take the Warren Buffett approach and buy them all, or in this case both companies. If laws towards online gambling loosen as I expect they will, both companies will win in the long run.
With limited sports in play due to the pandemic, investing in a sports betting company may not seem like the right move at the time, but that's what separates the good investors who make money hand over fist from the struggling investors who are constantly chasing the markets. If you think the world will get the pandemic under control some time in the future and that sports will be back in full swing some time in the future, then building a position when things aren't so rosy is the way to go.
The marijuana companies listed earlier were companies operating in or around the marijuana industry that have operating income according to New Cannabis Ventures. While there are a lot of companies to choose from in the marijuana industry, I think it's best to stick close to the companies that have operating income.
Municipalities would be doing everything they can to financially navigate the fallout caused by the coronavirus. Along with budget cuts that many states have already employed, they should also be looking to take an offensive approach that will bring in more tax revenue. Legalized sports gambling and fully legalized marijuana are low hanging fruit, and should be taken advantage of. Not being the next major city to file bankruptcy should be a priority, up there with beating the coronavirus and getting back to normal.
Did you know the Federal government collected $258 million in alcohol taxes, nearly 9% of it's tax revenue in the first year following the repeal of prohibition?