I’ll be right up front.
What I have to say today is going to go against the grain.
You may not think so, but I guarantee there are a bunch of “get rich quick” artists out there who will.
Perhaps they’re right. I can’t deny those kinds of allegations.
That really doesn’t matter to me, though.
It’s making profitable recommendations that concerns me.
And, for me to do that, we have to speak frankly.
That way, you’ll be better armed and better equipped to build the kind of Total Wealth that will last a lifetime, not just a matter of weeks or until the next “hot” money trade comes along.
Get this right… truly grasp what I’m saying about what’s taking place… and you’ll be laughing all the way to the bank while others are crying in their beer, or, as the case may be, consumed by the munchies when their hard-earned money goes up in smoke.
Here’s the situation…
Pot stocks are all over the media right now.
Oh… excuse me… cannabis stocks. That’s what they’re apparently called these days.
I find the fact that we have to use euphemisms to somehow make ’em more palatable to be very telling in and of itself, but that’s a story for another time.
Canada made recreational marijuana legal on Wednesday, Oct. 17.
That means any consenting adult who wants to have a little “magic lettuce” or “maui wowi” can now buy some from Newfoundland to the Yukon and everywhere in between.
Predictably, investors are falling all over themselves to get in on the action.
Deloitte estimates that the total value of legalized Canadian cannabis will top $22.6 billion when you include growers, testing, security, tourism and – yes – exports.
Most of which will go directly into Wall Street’s pockets, dashing the hopes of millions of investors who fancy making a quick buck.
I’d love to tell you we’ve never seen anything like it before, but that’d be flat out wrong. I wouldn’t be doing my job.
We have seen this before.
Twice in the last five years, in fact.
First with gold. Then with cryptocurrencies.
Now with pot stocks.
I get it. Many investors are simply looking to make a quick buck, so they’re piling into even the most questionable of questionable stocks.
We’ve seen this playbook so many times it’s painful to write about.
Each new “rush” promises huge wealth but ends in tears for 99% of the folks who jump on board. Tulips in 1637, California’s Gold Rush in 1849, Charles Ponzi in the 1920s, cryptocurrencies in 2017.
So you want to do it right.
Or not at all.
Take cryptocurrencies and Bitcoin, in particular.
According to howmuch.net, just 4.11% of the addresses owned 96.53% of all Bitcoin as of September 2017. Many people are surprised to learn that’s actually worse than the concentration in derivatives that led to the Global Financial Crisis in 2008, when just five banks accounted for an estimated 95.9% of worldwide exposure.
Which is, of course, exactly what led to the massive run up in 2017, when Bitcoin topped out at $19,343.04 per coin. According to University of Texas professor John Griffin, an expert on market manipulation, and graduate student Amin Shams, at least half of the rise of Bitcoin in 2017 was due to price manipulation.
Today, as I write, a single Bitcoin is worth $6,429.82, which means it’s lost a staggering 66.76% of value it arguably never had in the first place. By comparison, even the tech-laden Nasdaq only dropped 14.4% from the start of 2008 to the end of 2009.
It’s no wonder that many of the same “players” have moved on to pot stocks. The so-called “green rush” is simply tailor made for fleecing the “get rich quick” crowd.
The level of concentration would make a greedy interest rates swaps trader drool!
According to the Financial Post, a single Cayman Islands-registered hedge fund called MMCap International Inc. purchased more than half of all Canadian pot-related securities offered during the first half of this year.
What’s more, MMCap has used every trick in the book – warrants, ownership changes, layered entities – to recycle capital through Canada’s cannabis industry ahead of last Wednesday’s legalization. The hedge fund is even reportedly using deals to close short positions and borrowing shares from company insiders during private placements – a tactic that is completely against the law in the United States… but legal in Canada.
In plain English, this means the hedge funds – and MMCap, specifically – are using every dirty trick in the book to limit their losses by shifting the risks onto clueless individual investors. Conversions, warrants, loans… they’re all there.
You could look at the documents associated with each public cannabis-related offering, but it probably wouldn’t do you much good. The same five or six private equity funds are taking down an estimated 50% to 90% of every deal – as opposed to 100% only a few years ago – and their names aren’t anywhere in the public documents because there’s been so much shuffling.
Put another way, these same hedge funds are using some of the most sophisticated financial engineering in the world to drive up prices by creating the impression that the sky is the limit when, in reality, they’re already planning to collapse the market.
Once again, millions of investors will be left holding the bag… or the bong, as the case may be.
Thankfully, all is not lost.
The Right Way and the Wrong Way to Play Pot Stocks
Like the Gold Rush you and I have discussed so many times, the real play here is via the companies selling cannabis-related “picks and shovels.”
That’s why, for example, I’ve recommended companies like ScottsMiracle-Gro Co. (NYSE: SMG), which is rapidly becoming the biggest pot-related hydroponic and fertilizer supplier. Or shares of Constellation Brands Inc. (NYSE: STZ), which took a 38% share in Canopy Growth Corp. (NYSE: CGC) in August, and which has the resources to see this through. Both have very seasoned CEOs at the helm.
They’re the true investments if you have a longer-term perspective and want to make real money down the line, meaning the kind that doesn’t evaporate when the smoke clears.
— Keith Fitz-Gerald
Source: Money Morning