10-Year Yield Rises; Expect A Stock Market Correction

You cannot view investing from a bubble; everything is interconnected.  You cannot look at a cannabis company, or any company, for that matter,  and say: I think this stock is going up, without looking at all of the variables involved.  Nor, can you look at a company without looking at the entire industry, or look at an industry without looking at the economy as a whole.

10-Year yields are moving higher.  How does that affect the entire economy and by extension, the cannabis industry and an individual company?

The answer to that question is simple:  If interest rates move higher, earnings multiples must move lower in an inverse relationship.

Here is a look at the 10-Year Treasury:

10-Year Treasuries rates are moving higher
10 Year Treasuries rates are moving higher.

First and foremost, I am an economist.  I look at the economy as a whole and then I look at the respective industry.  Only after I have a firm grasp of these two factors can I then look at an individual company.

There is an inverse relationship between yield and price on treasuries.  As treasuries are dumped in the market, or sold off, yield rises.  This will continue given the massive amount of stimulus being injected into the economy.

The ‘Yield’ that one would get on their respective return from an investment in stocks will decline along with the yield on interest rates.  This manifests itself via the stock market in the form of earnings multiples: Expect a decline in a company’s earnings multiple, which means price will move lower for the overall industry.

The Dow Sell-off

Although I can foresee movements lower in cannabis stocks, I don’t expect a rout in cannabis stocks.  Prices of some of the name-brand cannabis stocks will likely follow through with movements lower in the general equity market.  Part of the movement in cannabis stocks lower will be driven by the fact that they operate in the general economy, along with the entire industry.  It is sort of a guilt-by-association concept:

Look for the Dow to sell off; maybe this will be a high for some time.
Look for the Dow to sell off; maybe this will be a high for some time.

To begin with, for some of these cannabis stocks, they should not have been this high when you look at valuations, revenue growth rates, margins, cost metrics, and, ultimately profits.  Some of these companies I wonder if they are even going to make it.

Any selling in the broader market is a buying opportunity for some of the best cannabis stocks.  However, this may mean a broadly lower long-term target (As yield rises earnings multiples will decline).

The cannabis industry is a booming industry with a tremendous amount of growth potential; we are at the very beginnings of that.  For now, there should be a slight adjustment in your long-term projections on stock valuations.  But, they will still be going up over the long-term; at least the very best cannabis companies.

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I will be publishing my ‘Model Portfolio‘ over the weekend.  But, this is only available to my premium subscribers.  It is all of $40.00 for a 1-year subscription… no, that’s not a typo!  This subscription will break down my favorite cannabis stocks and when to buy them, what the price objective will be, timeframe objective, when to take profits, when to buy more, and so on.  My expectation is that these stocks, over the course of 1 – 2.5 year’s time, there will be some 100% – 250% increase in this portfolio.  Whereas other stocks have sold off over the past couple of weeks, these stocks are continuously moving higher.

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