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Daily Intelligence Briefing – January 8, 2018
Last week, U.S. Attorney General Jeff Sessions rescinded a Department of Justice memorandum from the Obama-era known as the Cole Memo which effectively allowed states to legalize marijuana with little-to-no government interference. Under U.S. federal law it is illegal to cultivate, distribute or possess marijuana, however the Cole Memo instructed federal prosecutors not to prioritize prosecuting licensed businesses like dispensaries that are compliant in states that have legalized cannabis, but rather to focus on illicit enterprises that create harm, operate with criminal gangs, or sell across state lines. With this new policy change, the DOJ authorizes the arrest and prosecution of marijuana sellers regardless of whether they are compliant with their state’s laws.
The Cole Memo had opened the door for several states to legalize marijuana for medical and recreational purposes. So far, 29 states have put in place a legal medical marijuana system, and 8 states plus DC have legalized sales for recreational use. California, the world’s sixth largest economy, legalized recreational use as of January 1, 2018. In just a few years, the legal marijuana industry has become a multibillion-dollar venture that employs tens of thousands and provides a significant new source of income and tax revenues in those states. In addition, a whole new eco system of products, services, and markets has emerged around this commodity, which is gaining a foothold within established industries, such as pharma, tobacco, real estate, retail, and even tourism. America’s legal marijuana industry is expected to generate $40 billion in economic impact by 2021 –- which would be a 150% increase in economic output from the $16 billion cannabis generated in 2017, according to Arcview Market Research. Cracking down on cannabis will therefore prove unpopular, not only within the industry, but among states that have enjoyed the tax windfalls.
This setback for the U.S. legal marijuana industry is a boon for its counterpart further north since Canada intends to fully legalize marijuana by July 2018. Without the threat of U.S. competition, Canada’s cannabis industry is poised for rapid growth and could score a generous share of the estimated $55 billion global market. Not only does Canada provide the financial infrastructure to support this growth, including legal access to crop insurance, bank loans, tax write-offs, Canadian companies also have licenses to export their product. U.S. marijuana companies have none of these comforts. In fact, most U.S. banks still refuse to service cannabis-related businesses, which is a major pain point for the industry. In recent months, some banks and credit unions have become more comfortable serving marijuana businesses but the DOJ’s latest move could wipe out that progress.
The rescinding of the Cole Memo may prove to be just a temporary impediment for US cannabis. When Gallup first conducted its poll on the topic in 1969, only 12% of respondents supported legalization. These days, 64% of Americans are pro-legalization, and even a majority of Republicans now support legalizing marijuana. This means the new DOJ edict could be reversed in the future, perhaps when a new administration is in place or perhaps sooner.
A bipartisan collection of members of Congress and state officials are already pushing back. Several outraged governors have released statements condemning the DOJ decision, with some saying it will be disruptive to their local economies. Six months ago, Senator Cory Booker introduced the Marijuana Justice Act, a bill that seeks to end the federal prohibition on marijuana. Some observers believe the Attorney General’s anti-marijuana action may end up accelerating the federal legalization movement.
For now, investor would be best served avoiding U.S. marijuana stocks in favor of Canadian ones. The stock chart below seems to indicate that is already the case. US marijuana stocks plunged 25%-30% following the DOJ announcement and will likely continue to lag their Canadian counterparts until the U.S. federal government changes its position on the issue. This Seeking Alpha article includes a detailed review of Canada’s marijuana sector.
Here are three previously published DIBs reports related to this subject:
- LEGALIZATION OF CANNABIS AND ITS IMPLICATIONS
- TOBACCO – INDUSTRY PUSHES FOR MONOPOLY OF CANNABIS DISTRIBUTION
- LEGAL MARIJUANA BOOM REVIVES STATE-CHARTERED BANKS AND CONGRESSIONAL ACTION
AND HERE are some recent articles on the Cannabis industry (the stories are summarized in the SERVICES Section):
- Cannabis – U.S. pot enforcement policy a lift for Canadian cannabis industry
- Cannabis – Canadian cannabis producers set their sights on global domination
- Cannabis – Legal Weed Startups Aren’t Sweating a Crackdown Just Yet
- Cannabis – Defiant Vermont legislators vote to legalize marijuana just hours after Sessions sets stage for a crackdown
- Cannabis – California Defiant in Face of Federal Move to Get Tough on Marijuana
- Cannabis – Trump administration’s crackdown on pot sales could push banks out of cannabis industry
- Cannabis – How a Maryland bank is quietly solving the marijuana industry’s cash problem
- Cannabis – Legal marijuana industry could generate $40 billion in economic impact by 2021
CHART: Comparing Canada Marijuana Stocks (WEED.TO, ACBFF) to U.S. Marijuana Stocks (CNBX, CNAB)
OTHER STORIES HIGHLIGHTED IN TODAY’S DIBS:
- Banks – America’s bank profits take a hit from tax reform
- Construction & Real Estate
- Housing – By all measures, a construction boom is shaping up for 2018
- Media – Amazon Plans Bid for Premier League Streaming Rights
- Manufacturing and Logistics:
- 3DP – Volumetric 3D Printing Injects Speed into Additive Manufacturing
- AI – Google and Intel Beware: China Is Gunning for Dominance in AI Chips
- AI – Beijing to build $2 billion AI research park
- Autos – US Auto Sales Slump in First Since 2009, But Party Isn’t Over
- Autos – UK Car Sales Drop In 2017 For First Time In 6 Years
- LNG – Cold weather, higher exports result in record natural gas demand
- Oil – Trump Administration Proposes Massive Expansion of Oil Drilling
- Energy & Environment:
- Batteries – Whizzes’ lithium-iron-oxide battery ‘octuples’ capacity on the cheap
- Pharmacies – CVS expects $1.2B increase in annual net income from tax bill
- CHART: U.S. job growth in 2017 was the lowest in 7 years
JOE MAC’S MARKET VIEWPOINT
- Joe Mac’s Market Viewpoint: The Coming Value Rotation
- Joe Mac’s Market Viewpoint: Beyond the BOND BUBBLE
- Joe Mac’s Market Viewpoint: A Review of MRP’s Latest Change-Driven Investment Themes
- Joe Mac’s Market Viewpoint: The Gathering Storm
- Joe Mac’s Market Viewpoint: Contrarian Crude Call
CURRENT MRP THEMES
Electric Utilities (L)
TIPS (L) / Short-Dated UST (S)
Industrials & Materials (L)
U.S. Financials & Regional Banks (L)
Emerging Markets (L)
Oil & U.S. Energy (L)
U.S. Homebuilders & Construction (L)
France (L), India (L)
U.S. Healthcare Providers & Pharma (S)
Gold & Gold Miners (L)
Robotics & Automation (L)
Video Gaming (L)
Value over Growth (L)
About the DIBs: MRP focuses on identifying transformational change in the global economy and offering an investment thesis whenever an opportunity arises that has not yet been recognized by the market. The DIBs are MRP’s compilation of articles and data from multiple sources on subjects reflecting disruptive change that have potential investment implications for an industry or group of securities. We share these with our clients who may already have or may be considering exposure in the industries affected. The subjects change daily and constitute an excellent update on featured topics.
- United States, Employment Situation – Nonfarm Payrolls, MoM, DEC: 148,000 from prior 228,000
- United States, Baker-Hughes Rig Count, WoW, wk1/5: 924 from prior 929
- United States, Factory Orders, MoM, NOV: 1.3% from prior -0.1%
- Denmark, Unemployment Rate, MoM, NOV: 4.3% from prior 4.3%
- Norway, Loan Growth, YoY, NOV: 5.8% from prior 5.7%
- Hungary, PPI, YoY, NOV: 4.5% from prior 4.5%
- Taiwan, Inflation Rate, YoY, DEC: 1.21% from prior 0.35%
Banks – America’s bank profits take a hit from tax reform
When Donald Trump won America’s presidential election 14 months ago, banks’ share prices leapt. One reason for that was the prospect of lower corporate taxes, which would both benefit banks directly and (investors hoped) ginger up the economy. Yet several banks expect the act to make deep dents in fourth-quarter profits. On December 28th Goldman Sachs said it was braced for a $5bn hit. A week before, Bank of America (BofA) announced a $3bn write-down.
These one-off hits have two main causes. First, many banks carry “deferred tax assets” (DTAs) on their balance-sheets, largely past losses—a legacy, for many, of the financial crisis—carried forward to set against future taxes. The higher the tax rate, the more these assets are worth. So the new law, by cutting the federal corporate-tax rate from 35% to 21%, slashes their value.
Second, cash repatriated from abroad will be taxed at 15.5%—below the main rate, giving banks an incentive to bring it home. This accounts for around two-thirds of Goldman’s $5bn; JPMorgan Chase has said repatriation could cost up to $2bn. Foreign banks face a further niggle: the law taxes payments from American entities to foreign affiliates—a measure called the base erosion and anti-abuse tax, or BEAT. Economist
Housing – By all measures, a construction boom is shaping up for 2018
All signs and numbers point to a huge year for the construction industry. Even in December, with much of the nation frozen, the construction industry added 30,000 jobs, according to the Bureau of Labor Statistics. For all of 2017, construction added 210,000 jobs, a 35 percent increase over 2016.
Construction spending is also soaring, rising more than expected in November to a record $1.257 trillion, according to the Commerce Department. That was up 2.4 percent annually. Spending increased across all sectors of real estate, commercial and residential, with particular strength in private construction projects. Construction firms are clearly looking to hire more workers. Three-quarters of them said they plan to increase payrolls in 2018, according to a new survey from the Associated General Contractors of America. The biggest concern for the industry is the severe shortage of labor. CNBC
Cannabis – U.S. pot enforcement policy a lift for Canadian cannabis industry
A move by the U.S. attorney general to quash an Obama-era policy that allowed legalized pot to flourish south of the border dealt a blow to marijuana stocks Thursday, but observers and industry players say the crackdown is a boon for the Canadian cannabis industry. On Thursday, Jeff Sessions rescinded the 2013 Obama administration guidance that suggested the federal government would not intervene in U.S. states where the drug is legal, which has opened the door for several states to legalize pot for medical and recreational purposes.
Echelon Wealth Partners analyst Russell Stanley said if marijuana continues to be illegal at the federal level, it will benefit Canada as this will suppress the rise of any large U.S. cannabis companies to challenge Canadian marijuana producers as they expand globally.
The TMX Group, which operates the Toronto Stock Exchange and the TSX venture, warned in October that cross-border marijuana companies with activities that violate U.S. federal law could undergo a delisting review. TMX issued a staff notice saying that U.S. federal law takes precedence over state laws. However, the alternative Canadian Securities Exchange took a more lax approach, requiring that marijuana companies disclose to investors risks associated with its U.S. activities — an approach that the Canadian Securities Administrators supported in its own guidance in October. CTVN
Cannabis – Canadian cannabis producers set their sights on global domination
Medical marijuana consumers in Prague rang in 2018 with a new Canadian import, Tilray Milled Cannabis, a high THC marijuana product grown on Vancouver Island. The Czech Republic is just the latest nation to sell Canadian weed, joining Germany, Australia, New Zealand and a growing list of other nations which are turning to Canada as a safe and legal source for medical grade cannabis. In recent months, more than a dozen countries have legalized medical marijuana. New laws are pending in at least a dozen more as national regulators and even the World Health Organization recognize legitimate medical uses for a drug which had long been banned under international treaties.
The moves have sparked an unprecedented demand for legally grown, high quality marijuana, as well as the oil which is extracted from it. Seven Canadian producers have been granted licences to export the crop. By the end of March they will have sent 528 kilograms of dried cannabis flower and 911 litres of oil overseas. That may well be just an initial trickle, as the floodgates open on an international medical cannabis market.
As Canada moves towards legal recreational weed in July, the number of licensed growers has swelled to 84, production is skyrocketing, and research into new growing techniques and improved strains is increasing exponentially. This has placed Canada in a unique role as other nations scramble to find safe and legal supplies of medical cannabis. Germany and several other European countries, including Greece, Italy, Poland and the Czech Republic, have passed new medical cannabis laws. Several others are following. A report published in November places the value of the European cannabis market at $84 billion Cdn a year. CBC
Cannabis – Legal Weed Startups Aren’t Sweating a Crackdown Just Yet
94 percent of Americans support medical marijuana legalization, the 64 percent say it should be legal nationwide. While Attorney General Jeff Sessions has rolled back the Obama-era Cole memo, which essentially instructed federal prosecutors to deprioritize marijuana crimes in states where it’s legal, the entrepreneurs and investors fueling the legal marijuana boom of the past few years remain, well, pretty chill about the whole thing.
While it pierces the protective shield around legal marijuana companies in states like Colorado, Washington, and as of earlier this week, California, it does not specifically instruct federal attorneys to go after legal weed. Randy Maslow, cofounder of iAnthus Capital Management, which invests in the cannabis industry. Maslow takes that as a positive sign. Before the Cole memo, he says, federal attorneys mostly left the enforcement of these crimes up to the states. Given the way state governments have come around to marijuana legalization, with 29 states legalizing it in some form or another, Maslow predicts it’s unlikely that repealing the Cole memo would suddenly turn law enforcement against the industry, or spur US attorneys to buck the will of their own state governments. Especially when legalized marijuana has brought jobs, tax revenue, and in Colorado, one study found, even a decline in opioid deaths.
If Sessions had wanted to, he could have issued explicit guidance directing federal attorneys to go after legal marijuana businesses. It wouldn’t be the first such directive. But he issued no such directive, which entrepreneurs in the space view as a promising sign. Wired
Cannabis – Defiant Vermont legislators vote to legalize marijuana just hours after Sessions sets stage for a crackdown
The Vermont House of Representatives voted 83 to 61 Thursday in favor of a bill that would fully legalize the possession of up to an ounce of marijuana and allow individuals to grow up to six marijuana plants at home. The bill is expected to win approval in the Senate, which passed a nearly identical version last year. The state’s Republican governor, Phil Scott, has already said he is “comfortable” with the legislation and has signaled he’d sign it.
Vermont’s bill differs from marijuana legalization measures passed in other states in that it doesn’t set up a commercial market: Buying and selling pot would remain prohibited. With no large-scale marijuana growing and selling operations, Vermont would not offer much in the way of targets for zealous federal prosecutors.
The public, meanwhile, appears eager to see an expansion of legal marijuana nationwide. Nearly two thirds of American adults say marijuana should be legal. Michigan voters are likely to see a marijuana legalization measure on the ballot this November, and New Jersey’s new Democratic governor has pledged to legalize marijuana in that state. WaPo
Cannabis – California Defiant in Face of Federal Move to Get Tough on Marijuana
The sale of recreational cannabis became legal in California on New Year’s Day. Just four days later, the Trump administration acted in effect to undermine that state law by allowing federal prosecutors to be more aggressive in prosecuting marijuana cases.
Leading voices in California’s marijuana industry said Thursday that while the announcement by Mr. Sessions might have punctured some of the excitement surrounding legalization, it did not change their plans to take part in what is the world’s largest legal market for recreational pot. Lawyers who specialize in cannabis said they were skeptical that federal prosecutors would be more aggressive in California for several reasons, including a perceived reluctance of jurors in the state to convict marijuana cases, especially small-scale ones, that do not involve other crimes. Lawyers also point out that the Trump administration has not yet appointed its own federal prosecutors in California.
Additionally, lawyers said the Justice Department is constrained by the Rohrabacher-Farr amendment, which has been attached to congressional budget bills in recent years, and prohibits the Justice Department from spending money on the implementation of state medical cannabis laws. But the uncertainty is nonetheless substantial. The Sessions announcement may give further pause to large companies that have been reluctant to invest in the marijuana business because of fear of retaliation by federal authorities. NYT
Cannabis – Trump administration’s crackdown on pot sales could push banks out of cannabis industry
Most banks and credit unions won’t accept deposits from marijuana businesses, but the few that do have been relying on federal guidelines that state how they can accept deposits from those companies. Although those guidelines remain in effect for now, many expect they will have to change because they were underpinned by one of the policies just rescinded — a 2013 document known as the Cole memo.
In 2014, in accordance with that memo, the federal Financial Crimes Enforcement Network, or FinCEN, a Treasury Department bureau, issued guidelines for banks that want to serve cannabis businesses. The guidelines directed banks to file special reports on their marijuana clients and to be on the lookout for the potential serious illegal activities spelled out in the Cole memo. With it now rescinded, the guidelines may be scrapped or at least amended, said Julie Hill, a law professor at the University of Alabama who follows cannabis banking law.
Neil Zick, chief executive of Twin City Bank, a Longview, Wash., institution that accepts deposits from cannabis businesses, said he worries the Federal Deposit Insurance Corp. will see cannabis businesses as riskier clients now that the Cole memo has been rescinded. That, in turn, could allow the FDIC to put so many conditions and requirements on the bank’s cannabis dealings that it would no longer be worth the bank’s while.
Only about 400 banks and credit unions — out of more than 10,000 institutions in the country — openly work with cannabis businesses, according to FinCEN, and many cannabis businesses have accounts but don’t disclose their true business to their bank. LAT
Cannabis – How a Maryland bank is quietly solving the marijuana industry’s cash problem
Most banks refuse to open accounts for cannabis-related businesses even in states where pot is legal, citing federal laws that outlaw the drug and consider it on par with cocaine and heroin. In Maryland, however, at least one community bank is working with the state’s newly launched medical marijuana industry, offering growers and stores a way to avoid the security concerns and extra costs of a cash-only approach.
Two marijuana dispensaries and two growers told The Washington Post they have opened business accounts with Severn Savings Bank, an Annapolis-based community bank owned by the publicly-traded Severn Bancorp. Three other businesses involved in the industry say they know of additional cannabis companies also banking with Severn. Account holders have to pay hefty fees to Severn and can’t write checks or seek loans from the bank, because doing so might trigger scrutiny from federal regulators that could prove problematic. The businesses say they go to extraordinary lengths to prove that they aren’t violating any of Maryland’s strict medical pot regulations. Sahar Ayinehsazian, who specializes in cannabis banking issues at the marijuana-focused law firm Vicente Sederberg, says she’s never heard of a community bank losing its FDIC insurance for working with cannabis businesses.
There are also out-of-state technology companies that can help pot businesses formalize their operations. CanPay offers a mobile app that lets customers make debit payments. A California-based start-up called Green Bits offers a tablet-based inventory management system that dispensary managers can use to track cash purchases. WaPo
Cannabis – Legal marijuana industry could generate $40 billion in economic impact by 2021
A new report released by Arcview Market Research on Tuesday says the legal marijuana industry is expected to generate nearly $40 billion in economic impact by 2021. That would be roughly a 150% increase in economic output from the $16 billion cannabis generated in 2017. The report provides estimates on cannabis’s total economic contribution, direct and indirect jobs created and tax receipts from each of the 35 states that are expected to have medical and, or recreational marijuana by 2021. For example, legalization of adult-use, or recreational marijuana sales in California, which began on Tuesday, is estimated to create nearly 146,000 cannabis-related jobs in the state in four years. MW
Media – Amazon Plans Bid for Premier League Streaming Rights
Amazon.com Inc. plans to bid for the rights to stream Premier League matches in the upcoming auction in the U.K., according to a source familiar with the matter, part of a broader strategy to bring more sports content to its global customers. The digital giant sees such sporting events as American football, tennis and soccer matches as a way to get more people to subscribe to Prime memberships, which include video streaming and convert occasional customers into more loyal shoppers.
Its interest comes as no surprise to media analyst Richard Broughton, of Ampere Analysis, who said Amazon is “very likely” to bid for one of the smaller packages in the upcoming auction for Premier League live rights for broadcast in the U.K. Broughton said he has been told that the digital giant is interested in adding to its sports footprint by making a tilt at the Premier League, Europe’s most prized live sports broadcast asset. The soccer league also has a growing audience in the U.S. B
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