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Today’s Featured Topic Senate’s STATES Act Could Mark a Turning Point for American Cannabis Canopy Growth Corp, a publicly listed medical marijuana company, announced a blockbuster $3.8 billion investment by alcohol giant Constellation Brands Inc, a move that will expand Constellation’s stake in Canopy to 38%, and allow the company to finance its international growth plans, including expansion into the US. Partnership with Constellation, producer of popular brands like Corona, Modelo, and Svedka, now provides Canopy with some very lucrative marijuana overlap in the alcoholic beverage market. And they’re not the first. Craft brewer Lagunitas, which is owned entirely by Dutch beer giant Heineken, has already launched Hi-Fi Hops, a calorie-free sparkling water that swaps out alcohol for high-inducing Tetrahydrocannabinol (THC). However, Canopy and other publicly traded marijuana-based firms including Tilray and Cronos, are currently stuck operating only north of the border, in Canada. Amid the crackdown from US Attorney General Jeff Sessions, executives from both brands have stated that they will not expand operations in the United States until there is a solid legal framework allowing the sale of their products. MRP has previously highlighted the booming Canadian Cannabis market, due to full scale legalization and also noted that the US would continue to lag their northern neighbor. However, we may finally be reaching a turning point. The STATES Act, introduced by Senators Elizabeth Warren and Cory Gardner, ensure that “each State has the right to determine for itself the best approach to marijuana within its borders”. This would be significant because many companies will not operate in the US while cannabis is prohibited at the federal level, and some US states, including California and Colorado, have already legalized or decriminalized cannabis. Canopy CEO, Bruce Linton, has said his company prepared to “move ahead” and enter the U.S. market if new legislation forces the federal government to respect state laws on marijuana. In other regulatory news, California brought in around $74.2 million in marijuana industry tax revenue during the second quarter, up 22% from the first three months of the year, in what the government said was a “growing” trend toward compliance with regulations. This is significant because it shows that a large amount of market share can, indeed, be captured from the black market and put to good use. Federal law continues to make finding US banks who will cooperate with the marijuana industry a major issue for the industry. An amendment to the STATES legislation does, however, cover the Treasury Department, so if the language is enacted it would appear to shield financial institutions that work with marijuana businesses from being sanctioned by federal banking regulators for that activity. But, because the Justice Department’s enforcement efforts would remain unimpeded, those banks would still potentially be at risk of asset forfeiture or criminal sanctions related to marijuana profits that remain federally criminalized. Some major financial institutions are beginning to dip their toes. Goldman Sachs and Bank of America Merrill Lynch were the banks who financed Constellation’s monster investment in Canopy. To date, mid-tier banks such as Canaccord Genuity and Cowen & Co have been providing both research support and advising services to Canadian and some U.S. players. Severn Company, for instance, an FDIC-insured holding company, is one of the leading depository institutions aggressively partnering with the cannabis industry. For Severn, it has been a lucrative venture. As of the second quarter of this year, the bank reports deposits of $27.8 million and has loan balances of $15.3 million. It also reports that medical cannabis customer accounts were primarily responsible for its $566,000 increase in deposit service charges in the first half of the year. As of March 2018, there were 411 depository institutions serving marijuana businesses. Cannabis companies have also turned to startups like Hypur, aimed at serving highly regulated and cash-intensive businesses. While Hypur doesn’t touch any of the money involved in marijuana-related transactions, it can originate those transactions through the financial institutions it partners with to provide marijuana-related businesses with an electronic payments system that it calls Hypur Commerce. Hypur currently works with three credit unions and six banks, and expects that will grow to seven credit unions and 10 banks over the next four months. The regtech startup also contracts directly with financial institutions that have access to Hypur’s full suite of compliance, monitoring, document management and site-audit tools. Anticipation remains high in the U.S. market – legal cannabis is expected to Grow To $30 Billion in the U.S. by 2025, according to New Frontier Data. Creating a friendly legal environment will undoubtedly help realize this forecast. Investors can gain exposure to the cannabis industry via the ETFMG Alternative Harvest ETF (MJ). We’ve also summarized the following articles related to this topic in the Services section of today’s report.
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Chart: 1 Year: Cannabis ETF (MJ) vs Aurora Cannabis (ACBFF) vs Aphira (APHQF) vs S&P 500 (SPY) 1 Month: Cannabis ETF (MJ) vs Tilray (TLRY) vs Capogyu Growth Corp (CGC) |
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Other Disruptive Change
Labor, Education & Demographics
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Joe Mac’s Market Viewpoint |
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The U.S. capital markets had a challenging time in the first half of 2018. While the brouhaha about trade wars has been cited by experts as the cause of this year’s rise in volatility, MRP believes otherwise. Extended valuations, investor sentiment, portfolio leverage, an ageing bull market, inflation, and a Fed tightening cycle are all headwinds. In short, several large forces are at play and they will continue to pressure both equity and bond prices in the second half of this year. Joe Mac’s Market Viewpoint: U.S. Markets at Midyear →
Other Viewpoint Reports Joe Mac’s Market Viewpoint: CAPEX Booms! → Joe Mac’s Market Viewpoint: The Inflation Complication → |
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Current MRP Themes |
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Major Data Points |
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US Consumer Sentiment Lowest in Near a Year The University of Michigan’s consumer sentiment for the US fell to 95.3 in August of 2018 from 97.9 in July, below market expectations of 98. It is the lowest reading since September last year amid weaker assessments of buying conditions, mainly due to less favorable perceptions of market prices, preliminary estimates showed. TE |
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Natural gas Prices Surge Natural gas increased by 2% to 2.9721 USD/MMBtu. TE |
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Coffee Hits Near 12-year Low The price of arabica coffee decreased to a near 12-year low of 100.9 USd/Lbs on Friday as supply in Brazil and Colombia increased due to favorable weather conditions. TE |
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Other Disruptive Change |
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