Will we finally see Cannabis Federal Legalization? The past couple of weeks have been brutal for all stocks across the board. The economy is heading down a path of no return. Inflation is at 40-year highs and remains persistent. This is forcing the Federal Reserve to move interest rates higher a the fastest clip in decades. And, the Federal Reserve is also simultaneously removing policy liquidity in the form of reducing its balance sheet. Because of this, the broader stock market has sold off significantly. And, this has drug cannabis stocks downward along with it erasing early gains in August. In summary, September was brutal across the board.
It will get worse, far worse, for the economy and then stocks.
Will Cannabis Stocks Move Higher
But, cannabis federal legalization may actually get some kind of play during all of this turmoil. The Senate tried to push through legislation that was far too liberal for even liberals to support. Almost immediately, the Senate backed off and swept their attempt under the rug. Senators sent verbal support to other cannabis federal legalization attempts being dubbed SAFE+ – the idea that the SAFE banking agenda needs to be passed over anything else, and while they are doing that, might as well tack on a few other provisions in line with some liberal agenda.
Rumors are widespread. And, the thinking is that there is a better than 60% chance of SAFE+ happening in the lame-duck session of congress immediately following the mid-term elections on November 7th, but before the start of the new Congress on January 1st.
If that happens, there will be fireworks, for sure.
Why SAFE+ Is Important
One thing that the Feds hate with a vengeance is the idea of the $15B – $20B cannabis industry being an all-cash business. The Feds love knowing where every single penny moves. This is how they keep track of individuals. So, having an all-cash cannabis business is outside of their comfort level. Significantly.
For me, if SAFE+ happens in the lame-duck session or not is not a material difference to me. My belief is that no matter what it will occur eventually. And, I am not one to hope for any kind of moves in the market driven by outlying events to take profits in stocks. I am a long term investor and once I buy a stock, I plan on owning it for some time.
However, I also see an additional opportunity outside of norm and this is likely to drive me to make decisions to capitalize on moves with cannabis stocks. I’ll explain that later.
Up-listing & 280E
But, SAFE+ would allow for two things that are crucial for the industry. First, with SAFE+ cannabis companies would effectively be legal. This would allow for the up-listing to Nasdaq or the NYSE. This would allow for far bigger players to step in and support these stocks.
But, before the up-listing, the bigger thing is the 280E hurdle that would be removed. Cannabis companies cannot write off significant portions of their business expenses because it is disallowed by law. The effective rate of cannabis stocks is some 15% of revenue. However, normal stock pay an effective rate of approximately 3.5% – 4.5% or revenue, depending upon the respective company.
Immediately, profit margins would jump significantly.
Kyle as a Cannabis Stocks Investor
The moves in Congress have the immediate capability of drawing in a multitude of investors from around the world. Most are merely going to be chasing something, anything, that resembles the potential profit opportunity to erase any losses that these investors have seen in the past several months.
Kyle, Karen’s boyfriend, will undoubtedly want to recoup losses and rush in to any cannabis stocks he can. He’ll more than likely be rushing in to the Nasdaq-traded cannabis stocks simply because this is the only real stocks he can trade on his Robinhood account.
But, by the time Kyle hits the buy button, the short sellers who have crushed cannabis stocks to near pulverized dust will have been the ones to hit the buy button the fastest. However, even before that, offers will evaporate to near zero. This means any buy orders will be entire clips higher than the rock-bottom prices cannabis stocks are currently trading at.
But first, the economy
Regardless of any moves in cannabis stocks, the very first thing to keep in mind is that cannabis companies are playing inside an economy. And, it is not just the US economy – or, Canadian economy. All companies, regardless of being global or not, are global. There are moves and ebbs that are occurring within the financial world. There are strains inside the financial world and the feeling from professionals is that things are broken… we’ve just not heard the crack and snap of it yet.
Still, there have been significant moves in the world economies. The US dollar shot up recently to all-time highs versus some of the world’s most revered and trusted currencies. This is being driven by money that is looking to chase yield and get a better return in the US versus the rest of the world.
The Federal Reserve is removing policy accommodation and shrinking its balance sheet – the liquid nitro that is fueling demand here in the US which is pushing inflation to remain high. As the money from around the world shows up chasing higher yield, it is undoing what the Fed is doing. This is unnatural. It is like a tsunami of liquidity showing up on our shores. And, when the Fed has finally broken the back of US consumers, they will eventually have to lower interest rates. So, all of that money will then leave. This will choke the economy when it is already down on the ground.
An Economy About to Sputter To Zero
Because of this, interest rates will eventually choke out the economy in such a way that expenditures by consumers will drop significantly. Cannabis companies will see their share of declines in the coming year. This means any gains we see in any surge from investors will eventually evaporate. The reason is two-fold. First, the process of getting listed on Nasdaq or the NYSE is time-consuming and, only the biggest will do so any time soon. The second reason is that the reality of the economy will eventually unleash itself on the broader stock market and, cannabis stocks are going to contract again.
I look for continued losses in the broader market. And, I look at continued losses in cannabis stock along with these broader market sell-offs despite some of the cannabis stocks being at significantly reduced price levels.
How I Plan on Playing Cannabis Federal Legalization
Mostly, my intention is to sell out my entire cannabis stocks holdings if there is a surge. This is not because I no longer believe in cannabis stocks. It is fully because I believe that just as the short sellers are hitting the offers all day at warp speed to get out of their immediately losing positions, eventually they will get right back in and go short again.
Cannabis stocks need to go through the process of up-listing and continually building their foundations to gain scalability and profitability. It is a process, not an event. Despite the potential of this one event being a game-changer, it is but just one event. The full process needs to play out in large part over the course of the next five – ten years.
The economy is going to deteriorate significantly over the course of the next year. My expectations are that the stock market will sell off significantly even further than where we are to date. Cannabis stocks will follow suit simply because of the contraction in expenditures from consumers.
I expect I may be able to buy back my cannabis stocks holdings at a 50% reduction of price after the surge. Then, I’ll be able to own 2x the shares.
This is a process. If we get cannabis federal legalization during the lame-duck session from congress, this is a big event within the much bigger process. I fully plan on taking advantage of this.