(And What That Has To Do With Dogecoin)

Deep Dive #6

Hello Fellow Bubble Riders!!

Yesterday, Elon Musk, the self-proclaimed Dogefather appeared on Saturday Night Live where he was expected to mention Dogecoin ($DOGE), pumping its price further. Elon Musk @elonmuskThe Dogefather SNL May 8April 28th 202180,941 Retweets464,207 Likes

He did mention it, but not in a terribly favorable way–likely to avoid further charges from the SEC.

What he said, though, mattered little. As I expressed to my Daily Subscribers, this setup proved to be a classic example of a “buy the rumor, sell the news” trade. This is a trade where the anticipation of something vastly exceeds what reality can deliver. As a result, you want to own the stock (or coin) as long as the anticipation lasts and then sell as soon as news of reality sets in.

After the anticipated pump from the SNL skit, what exactly could happen that’s good for $DOGE? What is the next thing that could hype it? The coin is a meme coin after all, so with no buzz, why would it go higher?

The 30%+ plunge in the 12 hours after the show was foreseeable. I don’t give financial advice (I’m not a financial advisor), so my role here is to educate and entertain about broader financial ideas. In my paid subscription I only explained what a “buy the rumor, sell the news” trade is, leaving readers to draw their own conclusions about whether $DOGE fit the description.

For this Deep Dive, I want to address another item that I’ve been relaying to my paid subscribers for a bit: the cannabis trade. I think that it’s possible to make the case that this is also a buy the rumor, sell the news trade–just on a larger scale.

If that’s right, then cannabis is dead money.

I made a lot of money early on with $TLRY in this sector and sold early for reasons I explained in the linked article.

Since then, I’ve sold out of many of my positions in the industry “for buy the rumor, sell the news” reasons–though, I have a few stocks that I plan to just hold until the industry comes back, which could be 3 or 4 years. I’m going to explain why I’m doing what I’m doing for your educational and financial entertainment. Make up your own mind.

Even though I’ve discussed these points in daily and weekly updates for paid subscribers, even they will benefit from this more extended analysis. Let’s start with Industry Indicators.

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Industry Indicators

My trading strategy is a nested one. That means that before I buy anything, the strategy checks first for the health of the broader macroeconomy, then it checks for industry health, then it checks for individual stock or coin potential.

Cannabis Investing: Ways to Check Industry Health

I check industry health in two separate ways. The first is by finding a lead indicator–something that serves as a general signal for the direction of the industry. With cryptocurrencies, I just look at Bitcoin’s momentum. If its momentum is positive, then it makes sense to look at other alt-coins. But you’ll notice that $DOGE never skyrockets when $BTC isn’t at least trending upwards.

With the oil industry, it’s also really easy. You just need to check the direction of oil prices. Here’s the $USO, an oil ETF (fund), and you’ll notice that the price is above both the 50-day simple moving average (the red line) and the 160-day simple moving average (black line).

That’s a strongly positive signal, which is why my buys into oil companies have been 100% winners. As long as oil prices go up, individual oil companies are going to be getting more in revenue, which translates into price appreciation.

There is some weird stuff in individual company selection, though. Counter-intuitively, the worst companies often do the best in these kinds of environments. But that’s only if they are going to survive. My paid subscribers know that I’ve been trading in and out of $RIG quite a bit because it is terrible (= huge gains), but might not survive long enough (= dump the stock). You need to monitor things.

This is the art of the bubble after all.

Cannabis Investing is Infancy

The cannabis industry is in its infancy, so there just aren’t big funds that track the price of fine flower. It’s also not nearly as uniform a commodity as oil, so even when it does reach maturity, it’s not clear whether similar ETFs can be set up.

What I have to use as an industry indicator, then, is positive news about cannabis. Stocks like $TLRY popped just after Biden’s election giving people like me, who bet on that outcome, an enormous return for about a 90-day hold (my earliest buy actually topped 900%).

Now, if you head on over to trends.google.com and type in “marijuana legalization” you’ll get a chart that looks like this (for the United States).

The early spike in search volume was right around the election–signaling real interest in the topic. The next one concerned a few state legalization measures, including New York.

So, the trend is down and that’s not good news. What should you do?

The Mechanics of A Political Trade

As a rule, you need to keep politics out of your investment decisions. In this case, you will need to look at politics, but not for the purposes of whether you agree with a policy, but whether it’ll actually pass.

The problem is that Joe Biden’s agenda shifted in his first 100 days. He’s currently looking at pushing through an infrastructure bill, which will pour $174 billion into the electric vehicle market (= good for $TSLA), and a family plan, which will help with university education and child care.

Given Joe Manchin’s opposition to both–he’s a senator from West Virginia, so that he’s just barely a Democrat–means that those will struggle to pass in a form even resembling their proposals.

There will be, as a result, absolutely no time for a bill that includes federal legalization of marijuana.

Cannabis Investing Depends Upon Legalization

State legalization will continue, but it has significant drawbacks.

• Cannabis is not actually legal in the United States. The only thing that’s holding the DEA from jailing lots of people is their discretionary forbearance.
• Banks cannot, as a result, be involved in cannabis. They must have FDIC backing to operate and so are subject to Federal law.
• Cannabis corporations cannot deduct regular operating expenses either, since they are not federally recognized legal entities. The 208e tax code has made it such that American cannabis firms pay more than 380% effective tax rates. Even though $GRAMF, for example, is the largest operator in California, and California has a larger market than all of Canada, it can only turn a modest profit right now.
• Finally, the ‘F’ in all American cannabis firms indicates that they are traded on over-the-counter exchanges–the pink sheets. They can’t get listed on the New York Stock Exchange, for example, and so can’t be traded in a lot of people’s retirement accounts and are restricted for a lot of investment firms.
• That lack of exchange access means that they trade at a relative discount to their Canadian firms, like $TLRY, even though they are often much better companies.

Concluding Thoughts

There you have it. The entire cannabis industry is acting like $DOGE. It was hyped up on anticipation of action, but then the reality of getting federal legalization passed set in.

While individual states are continuing to legalize, and while the MORE Act might help to correct historical injustices, what the industry needs is federal legalization for the list of reasons reviewed (at least). 

Reality has set in and it’s worse than whatever high expectations people had. That sounds a lot like a “buy the rumor, sell the news” trade to me.

I’m still holding onto some favorite trades, as those firms will make it through the cannabis downturn. I have only one losing cannabis stock, $GRAMF, and everything else is a winner by wide margins. I might sell the stock so that I can count the loss against my massive earnings this year, and rebuy it almost immediately since I like it long term.

I’d reconsider that long-term hold if the basic economic cycle deteriorates though since everything loses in that kind of environment. Incidentally, that’s the indicator that weekly and daily subscribers get the output from so that they can plan their own trades.

How long will the cannabis winter last? It’s hard to say. There will continue to be a lot of state-based good news and some of it might actually spike prices quite a bit.

But federal legalization will depend on the outcome of the 2022 election–which is widely expected to go to Republicans. At that point, cannabis will have to wait for the 2024 election in hopes that at that point Biden can win again … and just maybe get around legalization in 2025.

In the meantime, I stick my money in leveraged trades, for the reasons I explained in my article on Black Swans.

That’s it for this week! Happy Trading!!

Notes & Disclosures

General financial disclaimer: This post is provided for entertainment purposes only. I am not giving you financial advice and I am not a financial advisor. You should expect no financial returns one way or another based on my statements. These points hold equally for any statements that could be attributed to The Art of The Bubble or any related business entities. If you decide to buy or invest in anything, then your returns and potential losses are your own. No statements about taxation are taxable advice and you are encouraged to consult your own tax and financial advising professionals. You are also encouraged to do your own due diligence before investing in anything.

Specific disclaimer: At the time of writing, I own a variety of cryptocurrencies, including Bitcoin and Ethereum. In general, I trade these, so by the time you read this, I may not still own them.