For the better part of August, the U.S. cannabis journey remained the same: anemic volume ($15-$20M notional per session) and sentiment, for those who still cared or were still interested at all in U.S cannabis, was on life support.
The week before last, not one but two U.S cannabis-focused funds unwound positions, adding additional pressure as the buyers continued to strike.
All-time lows registered several times as technical levels breached and the ever-present shorts pressed against the latest break at MSOS (NYSE: MSOS) $5.
After another long and frustrating summer, most market market participants took the last week of August off to relax and reboot before September.
While some still clung to hope that SAFE would perhaps see progress when congress returned from break, most adopted a wait-and-see attitude after so many false starts and empty promises.
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By the time Wednesday, August 30th arrived, there was a dead calm in the markets for most of the session. It had been 931 long days since the sector top; even the most fervent bulls, bloodied and beaten as they were, never saw it coming.
After all, the MSOS U.S. cannabis ETF (which isn’t the U.S cannabis sector but rather a reflection thereof, had lost 91% the prior 2 1/2 years in almost a straight line.
If we can’t count on D.C to come through when they should, why would we expect anything different while they’re on their scheduled recess?
And then it happened:
- BN 12:11 *HHS RECOMMENDS MOVING MARIJUANA TO SCHEDULE III DESIGNATION
- BN 12:11 *HHS MAKES RECOMMENDATION IN LETTER TO DEA
- BN 12:11*HHS CALLS FOR MOVING MARIJUANA TO LOWER-RISK US DRUG CATEGORY
- BN 13:40 *DEA CONFIRMS IT WILL REVIEW CLASSIFICATION OF MARIJUANA
The takeaway for investors is this: if and once the DOJ ratifies this decision, section 280E of the IRS tax code would be removed, U.S plant-touching companies would be allowed to deduct normal operating expenses and as such, they would no longer be subject to a 70%+ effective tax rate.
This comes, naturally, after these companies have optimized the sprinkles out of their operations and are as lean and mean as they could possibly be. Some of them are even making money despite all these fucked-up regulations and tax codes, which tells us a lot about what stellar operators they are.
We shared several notes on what exactly this will mean and encourage all cannabis investors to take a few minutes because August 30th is the day our world changed.
The Feds Move on Cannabis (Aug 30, 2023)
It is estimated that leading U.S plant-touching cannabis companies (Tier1 MSOs) pay $40-$50M per quarter in 280E tax so yeah, today was a massive development.
According to Vangst and their most recent jobs report, cannabis moving from schedule I to III would immediately create over 100,000 new jobs in the industry.
we’ve been looking for a Schedule III/ Garland Memo/SAFE Banking tri-fecta this fall + heard the HHS recco + Garland Memo would be released around the same time. Memo’s aren’t laws we know, but DOJ clarification certainly wouldn’t hurt, especially if there is specific language aimed at the banks.
The Morning After (Aug 31, 2023)
I was on the phone with Jonathan Sandelman, the Chairman of AYR Wellness, talking about how this journey has been longer than any of us thought it would be, as well as the specter of federal reform.
Our discussion eventually turned to the recent chatter that the HHS was going to recommend moving cannabis to a schedule III.
“When we get that red headline,” I said, repeating a statement that has cost me a lot more money than it’s made, “If you’re not already on the cap table, have fun chasing.”
[note: as I was tell him that, the headlines leaked across Bloomberg in all-caps.]
If it was leaked, it would be the most bullish set-up possible given the holiday-thinned ranks into the last few days of August. There was zero warning for the abundance of bears caught short, pressing the most recent technical failure. No head’s up for any interested longs, most of whom were in wait-and-see mode heading into September.
“We believe that rescheduling to Schedule III will mark the most significant federal cannabis reform in modern history," said Ed Conklin of the U.S. Cannabis Council.
“This is the best-case scenario for advancing U.S. cannabis reform for the U.S. MSOs,” said Andrew Semple at Echelon. “Current price targets don’t assume any federal cannabis reform and there’s ample room for further price appreciation.”
The Year-End Cannabis Wish List (September 4, 2023)
The back-of-the-envelope analyst math suggests a 2-3X turn for U.S cannabis plant-touching securities and that’s before any short squeezes or animal spirits, the latter of which have been scattered on dawn's highway bleeding, ghosts crowding their young fragile eggshell minds.
Word on the street for the last two years was that a cabal of Canadian hedge funds had been algorithmically pressing these stocks lower as banks and custodians systematically restricted investors from accessing any U.S. cannabis plant-touching securities.
The only thing better than a one-off positive would be a steady drumbeat of good news and evolving conditions, which could look like this:
- HHS recommends cannabis move to a Schedule III (8/30/23);
- SAFE Banking moves through Senate Finance Committee (September);
- SAFE Banking moves through the full Senate (October);
- Garland Memo. (Sept/ Oct);
- PREPARE Act in Senate (regulatory …