Look Who’s Moving Markets Now

Tuesday, 19 November 2019
Adelaide, Australia
By Bernd Struben


Yesterday we suggested that the pot stock bubble looks close to fully deflated.

Today, it looks even closer.

That follows on a fresh round of selling of some of the biggest cannabis companies on the US and Canadian exchanges.

The impetus appears to be a disapproving remark on cannabis from Obama’s former VP, Joe Biden.

Biden, as you likely know, is the Democratic frontrunner in the 2020 US presidential elections. And yesterday (overnight Aussie time) he warned that marijuana is a ‘gateway drug’, according to the Washington Post.

It’s an age-old, slippery slope argument. Almost as old as Biden himself.

The idea is that if people find they enjoy the effects of marijuana, they’ll soon be eager for something stronger.

There are some statistics to back him up. But then the data all stems from a time when cannabis was illegal. Which skews the statistics in many ways.

First, your sample group is suspect. That’s because these are people who have already demonstrated their willingness to break the law to ‘get high’. That makes them inherently more prone to taking risks. And more willing to break the law to obtain stronger illicit substances.

Second, in places where cannabis is illegal — like here in Oz — the same ‘vendor’ who sells cannabis tends to have connections to the harder drug trade as well. Which makes these black market vendors ideal gateway enablers.

That’s no longer the case in places like Canada or California. Legal pot shops sell only that…pot. If you want heroin or methamphetamines — or whatever hard drug cravings Biden believes cannabis induces — you’ll still need to hit the back alleys. Or perhaps the darknet.

There are all kinds of other flaws with the data. But then good stats are like that. You can use them to support any side of an argument you choose.

More, after a look at the markets…


Overnight, the Dow Jones Industrial Average closed up 31.33 points, or 0.11%.

The S&P 500 closed up 1.57 points, or 0.05%.

In Europe the Euro Stoxx 50 index closed down 6.69 points, or 0.18%. Meanwhile, the FTSE 100 gained 0.07% and Germany’s DAX closed down 34.74 points, or 0.26%.

In Asian markets Japan’s Nikkei 225 is down 87.58 points, or 0.37%. China’s CSI 300 is up 0.63%.

The S&P/ASX 200 is up 16.38 points, or 0.24%.

West Texas Intermediate crude oil is US$56.91 per barrel. Brent crude is US$62.44 per barrel.

Turning to gold, the yellow metal is trading for US$1,471.79 (AU$2,162.49) per troy ounce. Silver is US$17.05 (AU$25.05) per troy ounce.

And bitcoin continues to slide. One bitcoin is worth US$8,201.11. What’s the next likely move for bitcoin? You can stay atop all the latest crypto investing advice here.

The Aussie dollar is worth 68.06 US cents.

Next stop…rebound

Getting back to Biden’s market moving comment…I’d argue he has it backwards. That, on average, cannabis may well be an ‘exit drug’ rather than a gateway to harder narcotics.

That’s the blossoming hope in the US states of Colorado, Illinois and New York. To date these are the only three states who allow doctors to prescribe cannabis for any conditions they would otherwise prescribe an opioid.

It’s early days yet. The statistics aren’t in. But the hope is legal cannabis — medicinal and recreational — will stem the opioid crisis in the US. A crisis that currently claims 130 lives every day. 130 more, I might add, than cannabis.

Nonetheless, the push for legalisation is largely driven by US Democrats. And Biden’s remarks took their toll on some already bruised cannabis stocks.

The $3.1 billion Aurora Cannabis Inc [TSE:ACB] fell the hardest. It closed down 16.4%. ACB’s share price is now down 77.4% since 18 March.


But you only need to look at the performance of the ETFMG Alternative Harvest ETF [MJ:NYSEArca] to see the pain isn’t isolated to a handful of stocks.

As you can see in the chart below, the aptly named MJ ETF is trading at record lows:


chart image
Source: Bloomberg
Click to enlarge


Does this level represent a good buying opportunity? Or will trying to catch this falling knife leave your portfolio bloodied?

In yesterday’s Insider I wrote that, ‘the case for upping your exposure to the cannabis sector…or getting in for the first time…is getting stronger.’ I also suggested you look into Sam Volkering’s top two ASX listed pot stock recommendations.

I won’t rehash the reasons here today. (If you missed that you can find it in your inbox or access it on our website.) But in a nutshell, the growth outlook for the global medicinal and legal cannabis markets remains massive.

The US House or Representatives has already passed the SAFE Banking Act. If it gets through the Senate and Trump signs off on it, it will open the door for banks to legally do business with cannabis firms. And it could see a flood of money from institutional investors — currently barred from pot stocks — enter the sector.

This week the House is going even further, moving forward with the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. This would remove marijuana from the Controlled Substances Act.

While it faces an uphill battle, the MORE Act already has 55 cosponsors in Congress. And they’re pressing ahead.

From Bloomberg:

“This will be one of the most historic events in our movement,” said Congressman Earl Blumenauer (D-Ore.), the founder and co-chair of the Congressional Cannabis Caucus.’

Did you know the US has a ‘Congressional Cannabis Caucus’? Remarkable. Only a few years ago that would have been political suicide.

Speaking of which, I believe Biden’s remarks will only make it more likely that Trump offers some support for the SAFE Banking Act…if not the MORE Ac.t

If ‘Sleepy Joe’ is against it, Trump will be looking to score some political capital among its supporters.

That doesn’t guarantee the bottom is in for pot stocks. The sector, as a whole, could have further to fall.

But when the rebound comes, as Sam Volkering anticipates over at Australian Small-Cap Investigator, it could send the best placed pot stocks soaring.

Remember, that between February 2016 and October 2018, the MJ Pureplay 100 Index shot up 838%. That index tracks the returns of 100 top cannabis companies across the globe. Some of those stocks gained less than 838%…others gained more.

While small-cap stocks carry higher risk, they also offer the potential of greater gains. That’s what Sam is positioning his readers for with these two ASX-listed cannabis stocks.

You can get the details here.

What’s your exit strategy?

We finish off today with a word of caution. And a reminder of the importance of having an exit strategy.

You should never invest any money you can’t afford to lose — especially in speculative stocks. But even so, you’ll want an exit strategy to keep you from riding a losing investment all the way down.

There are all kinds of methods to choose from. I’ve covered some of them here before. Personally, I lean towards a trailing stop-loss (ideally intra-day). That moves your selling level higher as the stock price goes up, helping lock in some of your profits. Depending on your risk appetite, you could consider a trailing stop loss in the 15–20% range.

As mentioned up top, the share price of Aurora Cannabis has crashed 77.4% over the past eight months. If you bought at the peak and held on hoping for a turnaround, you’d have taken a much bigger hit than needed.

Closer to home, small business lender Prospa Group Ltd [ASX:PGL] throws up another example of why you need a good exit strategy.

A surprise earnings downgrade saw the stock tank 27.7% by yesterday’s closing bell. That puts Prospa down 44.9% since its 11 September peak.

Now I’m surprised how many people think they can recover a 44.9% loss with a 44.9% gain.

To explain the error in this thinking, we turn to our wealth preservation expert, Vern Gowdie. Here’s what he wrote in yesterday’s edition of The Gowdie Letter:

It could take decades to recoup the capital lost in the next downturn. This is an unnecessary waste of time…not to mention, capital. Better to avoid the losses in the first place.

To offset a loss of 60%, requires a gain of 150%.

To illustrate his point, Vern shared the following graph:


chart image
Source: BizNews
Click to enlarge


On that note…invest with care.

And if you haven’t read Vern Gowdie’s market crash survival guide, you can get your discounted copy here.