As of Tuesday, you'll have to cross a border to buy a clove. The U.S. Food and Drug Administration's ban on flavored cigarettes went into effect and prohibits the sale of candy and fruit-flavored cigarettes. Authorized under the Family Smoking Prevention and Tobacco Control Act, the measure is intended to reduce the number of children who take up the habit.

Under the new ban, cigarettes that include "an artificial or natural flavor (other than menthol) or an herb or spice" cannot be sold in the United States. The long, but not exhaustive list of flavors, consists of strawberry, grape, orange, clove, cinnamon, pineapple, vanilla, coconut, licorice, cocoa, chocolate, cherry and coffee.

Ahhh ... California. Home of the Beach Boys, Napa Valley, and, just recently, IOUs. Indeed, the Golden State is in dire financial straits, and looking for any way out. One suggestion? Tax the smokers. A recent poll of state voters shows 70% in favor of a $1.50-per-pack increase in the state cigarette tax.

Breaking down the numbers across party lines, 78% of Democrats, 75% of independents, and 65% of Republicans approve of such a measure. But Republican leadership remains opposed to the idea. A spokeswoman told reporters "Tax increases aren't the answer. Neither is tying programs with increasing costs to a tax source that is declining."

A Harvard report was release this week that again is setting the tobacco world on fire. Well, at least figuratively. In the report, the compound Menthol was the focus, and it was concluded that by varying the amount of it in certain brands of cigarettes, tobacco companies could recruit and keep younger smokers and those who may have had an initial bad reaction to smoking upon starting the habit.

The strategy was to "lock in lifelong adult smokers," said the researchers at the Harvard School of Public Health. After all the past shenanigans that the tobacco industry has admitted to, it's not surprising to hear that using a varying chemical level strategy to recruit smokers and get them hooked was tried. It was found that milder cigarette brand with lower menthol levels were more appealing to younger smokers. hence, these products were marketed to that age group as a result, according to the report.

One particular example cited was the strategy Philip-Morris USA used when it introduced "Marlboro Milds" back in 2000. The product instantly became a hit with younger smokers was responsible for almost 80% of the menthol product category sales for the company that year.

Wall Street has speculated for some time that Altria's (NYSE: MO) international units will be spun-off from its domestic tobacco operations. The company's board believes that this will allow overseas operations to work without the baggage of regulations and lawsuits that the firm faces in the US.

According to The Wall Street Journal, "the separate entity, for example, would be exempt from US tobacco regulations and out of reach of American litigators. Importantly, its practices would no longer be constrained by American public opinion, paving the way for broad product experimentation." Put another way, the international operations will be able to make stronger, and perhaps more dangerous tobacco products, for large markets in Europe and Asia.

China will be a major target for the new public company to be called PMI. Other large markets the company will focus on include Indonesia and Pakistan.

The Altria international operations are about four times as large as those in the US. That alone may make the case for the company to be independent.

But, at the end of the day, the name of the game is selling much stronger cigarettes to people who want them in markets where regulation is lax. A good way to make money, but bad for the lungs.

Douglas A. McIntyre is an editor at 247wallst.com.

It goes without saying that diversification is one defense against the onset of a bear market. Further, occasionally the market offers a conglomerate that possesses many of the characteristics of a diversified mutual fund or portfolio, and with the above in mind, Loews is worth a review.

Loews (NYSE: LTR) is a holding company with operations that include property / casualty insurance, hotels, offshore oil/gas drilling, natural gas pipelines, and cigarettes. Don't confuse LTR with that other company with a similar-sounding name: LTR is a conglomerate.

Analysts really like LTR's Diamond Offshore deepwater/midwater oil rig operations, which, as one might sense, are experiencing strong demand and pricing power, given the global drive for more oil. Analysts are equally impressed by LTR's natural gas pipeline business.

Congressional Democrats looking to spend an additional $35 billion on health coverage for children are drawing criticism for the method they've selected for funding the program: An increased tax on cigarettes. The program would increase the tax from 39 cents per pack all the way up to $1.

Given that smoking is more common among lower-income Americans, the tax is seen as regressive: Health coverage for children will come out of the pockets of those who can't afford it.

The Family Smoking Prevention and Tobacco Control Act, to be voted on today by the Senate Health Committee, seems on the fast track to approval. If passed into law it will place the tobacco industry under the oversight of the Food and Drug Administration. The measure, supported by health groups and some of the industry, will give the agency some broad powers in regulating the contents and sales of tobacco products.

Industry heavyweight Altria Group's (NYSE: MO) Phillip Morris favors the bill, but others such as Reynolds American's (NYSE: RAI) R.J. Reynolds oppose it, claiming the regulations would limit its ability to compete with the market leader.

Shares of Altria Group, Inc. (NYSE: MO) fell today after the cigarette maker disappointed Wall Street, missing analysts' expectations and cutting its earnings guidance for the year to $4.05 to $4.10 per share down from April's $4.20 to $4.25 level.

Earnings per share were $1.05, down from $1.29 last year and under the $1.13 of First Call estimates. Revenues grew almost 10% year-over-year to $18.8 billion, the company said. Bloomberg News notes that the U.S. business is declining at a faster rate than analysts expected.

Simultaneously, the company is acquiring a 30% stake in a Mexican tobacco business from Grupo Carso. CFO Dinyar S. Devitre noted that the international businesses are ready to be split up, although no timing has been given. And who said smoking is a dead-end business? Altria shares are actually up since the company completed its Kraft Foods (NYSE: KFT) spin-off, and shareholders still have the likely spin-off of Phillip Morris International coming down the pipe.

Many investors would have thought the company's future was in the ashtray, but the company has defied the skeptics, even though everyone knows that its products kill. Actually, shares are up considerably over the last 10-years and it has paid significant dividends. Even the states don't want the company to entirely disappear because cigarettes are responsible for generating huge amounts of tax revenue.

Investors may not all be tobacco fans, but they probably all will say "Keep Smoking!, thanks for the money."

Jon Ogg is a partner at 24/7 Wall St.; he does not own securities in the companies he covers.

MAJOR PAPERS:

• The Wall Street Journal's (subscription required) "Heard on the Street" column focused on Credit Suisse Group's (NYSE: CS) new CEO, Brady Dougan, saying the company chose him to hold a steady course, avoiding periods of high revenues followed by crashes.
  
• Barron's Online's (subscription required) "Weekday Trader" column wrote that Elizabeth Arden Inc (NASDAQ: RDEN) trades at a discount to its industry and the broader market, and looks enticing at current levels.

OTHER PAPERS:

• BusinessWeek's "Inside Wall Street" column reported that AMR Corporation (NYSE: AMR), the parent of American Airlines, is a buyout target of a group that includes the Goldman Sachs Group Inc (NYSE: GS).
• The New York Times reported that Congress has reintroduced legislation to allow the federal government to further regulate the tobacco industry by cracking down on marketing aimed at young people.
• The New York Times also reported that Microsoft Corporation's (NASDAQ: MSFT) CEO Steve Ballmer said Wall Street analysts are being too optimistic about sales of Windows Vista.
• According to the Red Herring, Google Inc (NASDAQ: GOOG) has acquired Adscape for $23 million.

According to a Dow Jones report yesterday, the decisions to three pending Star Scientific, Inc. (NASDAQ: STSI) summary-judgment motions in the company's patent-infringement lawsuit against Reynolds American Inc's (NYSE: RAI) R.J. Reynolds Tobacco Co. will be available on tomorrow.

The patent-infringement suit has been ongoing since 2001, when Star Scientific filed against Reynolds, alleging that Reynolds had violated the company's process to reduce the level of nitrosamines - a carcinogenic toxin - in tobacco.

Star Scientific's stock rose from $3.39 to $4.40 yesterday on the news the decisions had been reached, and could rise again significantly should those decisions go its way. Additionally, if Reynolds is ordered to pay a significant enough sum, the tobacco giant may decide to simply buy out Star Scientific rather than pay a hefty patent-infringement fine.

Tonight investment strategist Jim Cramer discussed the tobacco industry in a positive light on his television program, "Mad Money." He thinks this is a pretty good buy list: Altria (MO), Reynolds (RAI), Vector (VGR), UST (UST), and Carolina Group (CG).

Cramer also discussed the oil industry and the impact of a proposed law in California. He said he thinks in California that Proposition 87 will pass. It would make oil companies in that state fund alternative sources of energy. He thinks that measure will hurt oil companies and thinks Chevron (CVX) has the most exposure. He thinks if that happens it would be best to buy Chevron after the election and after they cut numbers.

Cramer also interviewed the CEO of Rite Aid (RAD), and ended up saying that RAD is a stock for those who can tolerate high speculation.

Almost everyone was happy about Altria Group Inc.'s (NYSE:MO) earnings and the fact that it is finally planning to spin out its food operations, Kraft, to shareholders. That is not what will drive the tobacco companies fortunes in the future, however. It is the pending liability suit over "light" cigarettes. The suit could represent a $200 billion risk to the tobacco companies, despite temporarily dodging a bullet as they appealed a ruling that plaintiffs could have class-action status.

Tobacco suits have been a big problem in the past, but Altria has won the suits brought against it that claimed to have induced people to smoke while lying about the health risks. The new law suits take a different line of attack. They claim that "light" cigarettes were marketed on the premise that they posed fewer health risks to the smoker and that this marketing ploy was not entirely true.

Moody's, the credit rating agency, which has to take the legal environment into account in its ratings of the world's largest tobacco firm, has actually upgraded Altria recently.

Investors can only hope that Moody's is right. The $200 billion at stake is a lot of money.

Douglas McIntyre is a partner at 24/7 Wall St.