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On this episode of On The Tape Dan Nathan and Liz Young from SoFi preview this week’s top market headlines and get you caught up on what you might have missed over the weekend. What direction is the S&P 500 going? Ask Mike Wilson and Tom Lee, you’ll get two separate answers (8:30). Chinese stocks are rallying around a possible relaxation of ‘zero COVID’, do we really have confidence in the latest China re-opening narrative (14:00)? Tesla is reportedly cutting production in Shanghai due to low-demand, what do we make of this news from the world’s most valuable automaker (18:30)? After the break, Danny Moses chats with Brady Cobb and Emily Paxhia about advancements in cannabis legislation (27:00). How does the SAFE Banking act help marijuana distributors and dispensaries when it comes to ease of access to capital (38:00)
Live Show With The Compound: bit.ly/3VVYyPp
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Show Transcript:
Dan Nathan: [00:00:33] iConnections Ad. Welcome to a bonus edition of On the podcast. I’m Dan Nathan. I am joined with Liz Young. She’s the head strategist at SoFi. Many of you may know her as LY from SoFi. Liz, welcome to On The Tape. How are you? [00:00:48][15.2]
Liz Young: [00:00:49] I’m good. I’m good. This is we’re recording this on a Monday, but I’m one of those weirdos who loves Mondays, so. [00:00:54][5.3]
Dan Nathan: [00:00:55] How does that. How does that happen? Who loves Mondays? [00:00:57][2.3]
Liz Young: [00:00:58] I don’t know. It just so you get started again. I always. I’m well rested from the weekend. Two cups of coffee. I’m readu [00:01:05][7.3]
Dan Nathan: [00:01:06] Alright. Well, you know that if Guy Adami were here, he’d be making some sort of Monday, like, lyric, lyrical joke or something, and I mean something there. But he’s not here. It’s you and me. We’ve got a lot to cover today. I want to do a little bit of housekeeping before we get to some of the economic data Friday that jobs report, some of the stuff that we’ve seen today. Like you said, this is shortly after the open on Monday morning and we’re going to do a little bit of a look ahead. And who knows, Liz, if this one goes well, maybe we’ll start doing this a bit more in the new year on a Monday. What do you think about that? [00:01:38][32.7]
Liz Young: [00:01:38] That sounds like a little foreshadowing perhaphs. [00:01:40][1.2]
Dan Nathan: [00:01:40] All right. Well, we’ll see. We’re not going. We’re not a little tease, people. A little tease here. But I want to do a couple of things here because we have a great second part of this bonus drop today. Danny Moses is going to be joined by Brady Cobb. He is the CEO, founder of Sunburn. You guys know Brady? He’s been on the pod before. It is a cannabis brand and he is a pioneer in the space. They’re going to be joined by Emily Paxhia. And Emily is from a firm called Poseidon. They’re going to be talking all about what Congress in this lame duck session might be doing as they move towards legislation about cannabis and marijuana and THC and what the Safe Banking Act could mean. So stick around for that. Also really important, December 16th On The Tape podcast is doing a live collaboration with The Compound podcast that is downtown. Josh Brown, the reform broker, and his partner, Michael Batnick, also good friends of ours. That’s going to be December 16th at the Nasdaq. It’s going to be live. We have a limited amount of tickets. All the proceeds of the tickets are going to No Kid Hungry. That is an amazing charity, obviously trying to help childhood hunger. And so we thank our friends over at The Compound. Go check it out. We have a pin tweet @ on the tape podcast. We get all the details, buy tickets for that. All right, Liz, let’s do it. So. Fed Chair Powell on Wednesday had this highly anticipated speech. He gave it. It looked like the algos went crazy. You and I think we talked off wine after it. We’re like, okay, what just happened? Because there was nothing in that that suggested anything more dovish than I think that the CME Fed fund futures were already pricing about a December rate increase, which was very strongly going to be a 50 basis point rise after four consecutive 75 basis point rise. And we get this jobs data on Friday morning and it’s a little hotter than expected. Stocks pulled back or continued into today. What’s going on here in the last week? Is it algos gone mad or is this kind of people just kind of being a little bit herky jerky here into the end of the year, last month of the year here, herky jerky? Well, it’s been a weird it’s been a weird year for stocks because the S&P is down only 15% on the year, the Dow Jones Industrial Average that our friend Guy Adam likes to quote is down 6% on the year. It doesn’t really feel like we’ve had the year that we’ve had in the markets here. If you’re just looking at where, you know, the major U.S. indices are right now. [00:04:13][152.2]
Liz Young: [00:04:13] Yeah. Well, so, first of all, I mean, Chair Powell, this poor guy, he says, like pass the pepper at dinner and people are like, oh, my God, did you hear his tone? What does it mean? You know, I mean, hang on his every word. What I think is happening right now and this is going to sound weird because I don’t think this is a good thing. And you have a day that the market is up. Let’s call the Dow, right? The market is up hundreds of points. It’s not a good thing that we can move hundreds of points based on nothing. That’s volatility. Volatility counts on the way up, too. So when the market is that sensitive to basically no new news, that’s not a place of strength. It’s not a place of durability. And I think that we are in a spot right now where we’re just hungry for anything that confirms something that either we already thought. So the idea that it reduces uncertainty, which is exactly what happened in his speech or hungry for basically looking for data, that’s good. But the issue right now is that even good data isn’t good for the path that we’re on. And, you know, people have hated me all the way up in this rally because I keep saying I don’t trust it. And, you know, also, it’s it’s not my job to call a two month rally. I’m not trying to tell people to get in the market before a two month rally and get back out right before it’s over. I’m never going to win that game. It’s it’s been really difficult, but. I think that what happened in his speech is all he did was confirm what we already thought. Maybe before that it was speculation. Now it’s confirmed that they’re going to downshift to 50 basis points in December, but they’re still hiking and it might be 50 in December, might be another 50 in January. You know, it’s like it’s not going to stop and they’re not going to pivot any time soon. And I think now we’re actually at a point where the risk of over tightening has increased. I don’t know that they can avoid over tightening. [00:06:00][106.7]
Dan Nathan: [00:06:00] Well, to your point about volatility, it’s not just in the stock market. I mean, if you look at the ten year U.S. Treasury yield on Wednesday afternoon after that speech was out and during the press conference, I mean, it went from 3.8% down to 3.5%. And so then think about what the knee jerk is on that. Well, what did we see? We saw homebuilders rally. Right. And so today we have a situation where the ten year is up six or seven basis points. That’s it. It’s trading at 3.5, 8%. And homebuilder stocks, if you look at the XHB, are down 2%. You know what I mean? So think about that sort of volatility. And I guess the point that you’re making about people hating you on the way up of this rally is like, I mean, come on, people like like if you think about what’s going on here, it’s like we are not going to v bottom when we still have. To your point, the Fed tightening I took away from Fed Chair Powell on Wednesday that they are going to stick around and they are going to do that very thing that you just said that they risk doing is over tightening a little bit here. And I think guys said it last week on one of our market calls is like they got the transitory thing so wrong, they have to make sure that they get battling inflation right here. And if that means and Fed Chair Powell said that, if that means that they overdo it a little bit, then that’s fine. We still have a whole heck of a lot of uncertainty as it relates to the globe. We’re going to talk about China a little bit and then the potential for reopening. I mean, Europe, you know, is obviously in it, you know, in a, you know, inflationary environment that will likely turn very quickly to a disinflationary environment once this war ends. But it’s easily recessionary. And I wonder, Liz, if all this stuff in 2023 just balance itself out and we end up in a very stagflation area environment, which on the backside of that would mean disinflation, which just would mean lower growth for a longer period of time than maybe many expected as we are coming out of this pandemic. Remember all those calls for the Roaring Twenties? [00:07:57][117.0]
Liz Young: [00:07:59] Yeah, well, I actually think that would be the worst. I, I think that would be the worst case scenario. The fact that we’re stuck in this time of either we’re going to have stagflation, are we going to have a recession? Are we not going to have a recession? Are we going to have a soft landing? I don’t think we’re going to have a soft landing. And actually, if you look at years that you have a recession and you have a big market bottom because there’s a recession that’s basically confirmed, the upside for stocks is better after that. So it would actually be better if we just had a recession in the first half, got it over with, and then moved on with our lives. And to your point about homebuilders and the ten year of homebuilders down today, the ten year hasn’t moved back up. Those are recession signals, right? Homebuilders are a cyclical sector. The ten year is not moving back up because people are afraid of growth issues and people are afraid that the Fed’s going to over tighten. You look at just those things together and I’m going to get Guy turned up here in absentia it’s not always different. This time is not necessarily different. So it’s always different. What puts us into the crisis and it does matter what puts us in it and how we come out of it. But the things that win and lose when you’re going in, if you’re late cycle and the things that win and lose when you’re coming out, there’s a lot of similarities every single time. So you have to keep watching that and don’t discount the market signals and you have to respect the cycle. The thing that I’m going to probably talk about in my outlook for 2023, the market does not reset the cycle. A stock market rally does not give us an all clear. A beginning of a new business cycle gives us the all clear. [00:09:33][94.3]
Dan Nathan: [00:09:33] Well, that’s a really great point. We want to do a little Choose Your Fighters segment here because, you know, it’s Monday morning and we got strategists coming out, some of your peers, if you want to call them that, and some of them listen, some of them do make tactical sort of calls, you know, shorter term kind of period calls. And again, those are really hard, I think, for a lot of investors who like to take a longer term outlook as it kind of gets them turned around. Hedge funds love it. People like me love it. Right. But then, you know, you have some people who are labeled perma bears or perma bulls who never change their stance. Right. And so this morning, it’s kind of interesting. So a friend of mine, two friends of mine, you know, Mike Wilson, the head strategist over at Morgan Stanley, you know, he’s got a call. He’s basically saying the rally, this is a bear market rally. And he made an amazing tactical bullish call October 14th, basically saying that sentiments too poor stock market, basically making new lows is probably discounting a good bit of the bad news in the near term here. And so now he’s saying and he call for a 15% rally. We’ve had a 15% rally in the s&p 500, liz, and now he’s saying to go the opposite way. The quote is with both economic growth and inflation cooling next year, he’s retaining a defensive positioning in health care, utilities and consumer staples stocks. So the flip side of that. Tom Lee over at Fundstrat. He’s saying we think this rally has more support compared to the June false pivot rally to 4325. Thus we see the S&P 500 rallying above the level towards 4400 to 4500 by year end. I mean, that would be an epic rally when you think about the S&P right now at 4030, that’s another 10% or so thoughts here. Liz, who are you going with? [00:11:13][99.7]
Liz Young: [00:11:13] I’m with Mike Wilson on this one. Shocking. So. Okay. Here’s the thing with with the curve inverted the way it is. Rallies are going to run out of steam. Now, we haven’t gotten quite to 20%. If you look over history, a stock market rally with the curve inverted this deeply. And for this period of time, they’ve never gotten past 20%. Frankly they never really get above 12 or 13%. So we’re already beyond that. So is there room for it to rally 20 from that October low? Sure. So we could keep going. What frustrates me about this time of year is that people continue to say, Oh, but there’s going to be a rally. It’s a year end rally. And wherever this story came from that when you have a negative year, December is usually good. No, it’s not. There’s a lot of times when it’s not actually good, and the average return in December in negative years is pretty uninspiring. I think it’s marginally positive, but it’s uninspiring. So there’s no guarantee that anything seasonally is going to help us here. And what’s happened every time this year when we’ve had these bear rallies is we hit that sort of resistance level, whether it’s the 200 day moving average or just the downtrend that’s in place, the market fails at that point. Also, coincidentally, it usually happens when the VIX has just barely broken below 20 and we had that last week. Now it’s probably right around there, but it usually doesn’t stay below 20 very long and then the market falls again and the VIX moves back above 20. I expect that to happen again this time, but I expect it to be the last time it happens. Because what we’ve been talking about during all these bear market rallies before this is that while the economy hasn’t really shown what’s the effect of tightening yet, now it’s starting to show the effect of tightening. And as we know, the market leads the economy. So if we get one more drawdown in the midst of the beginning of kind of economic data coming in and showing that it’s actually being stressed because of tightening, then that starts to match up. And the last thing I’ll say on this is valuations, which, you know, I talk about this all the time at 17.8 times forward earnings. Something’s not right. Either the price is too high or their earnings are too low. And I don’t think the earnings are too low. [00:13:22][128.5]
Dan Nathan: [00:13:22] We’ve been talking about it with you on market call and on the tape. I mean, listen, the S&P 500 earnings are still expected to be up 5% year over year in 2023. Our friend John Butters, who you know well from FactSet, he had a report out last week that saying over the last 25 or so years, most strategists overestimate S&P earnings a year ahead by about 7%. And so if you think about we’re expected to be up 5% year over year, and then you take out that kind of overestimation of 7%. I mean, we’re likely to be down year over year. You know, strategists and economists are really not forecasting that just yet. We may not see that happen until we get really into the bulk of Q4 earnings, let’s say, in late January or so. And that could be it. And I suspect, you know, the stock market will start discounting about it’s likely to kind of start doing that now at those key technical levels that you just spoke about here. The VIX, again, closed below 20 on Friday, kind of signaling a little bit of complacency here. So, again, you know, if the Fed continues to stay their course, they do 50 basis points. They suggest that they’re likely to continue to raise as quantitative tightening is going on. I mean, that and the estimate for 2023 earnings, which is still too high, that combination is a nasty cocktail for stocks after a 17% rally, in my opinion. Now, here’s the other one. Okay. So today, Chinese stocks are continuing to rally. You know, the Chinese, they’ve let some kind of air out of their zero-covid policy over the last, let’s call it a week or two, suggesting that some of the testing policies might be easier for public venues in some of the big cities, that sort of thing. Again, they’re probably just tweaking along the edges here. Expectations for China’s economy to come back online fully are really not expected to be until like, let’s say mid year 2023. And if you look at like crude oil today, Liz, it’s only up like 1%. Wouldn’t that be the barometer if people had any confidence in, you know, in China reopening and the fact that our stocks are down 1% on the heels of what’s going on in Chinese equities. It’s telling you something. [00:15:26][124.2]
Liz Young: [00:15:26] Yeah, it definitely tells you something. And I mean, the odd part about this is that China. Has been sort of out of the game for a long time, and it’s almost as if we’ve gotten used to that. So then coming back online doesn’t necessarily change the fact that the rest of the globe is suffering from a demand destruction issue. Now we’re trying to actually lower demand so China can’t make up for everything that’s happening elsewhere, certainly can’t make up for demand going down in the U.S.. So if you if you see travel slowdown in the U.S., if you see consumers not want to spend money on that gas, not want to get on planes, because as we still know, prices are at their sky high just to get from New York to L.A. or New York to San Fran. I mean, it’s it’s ridiculous what you have to pay now. China can’t make up for all of that demand. And so I don’t think that this is going to change the story materially if there’s some announcement that they completely lift restrictions. What it does change is the supply chain fears, right. It could clear some of that supply chain issue, but it doesn’t fix everything that we’re dealing with. [00:16:28][61.9]
Dan Nathan: [00:16:28] You know, it’s funny, I had a friend of mine say this to me recently, and I think people are starting to talk about it a bit more. Let’s just say China were to just do away with zero COVID, let their people travel all over the world. Let’s say that they had tens of millions of people traveling all over the world on really shitty vaccines. I mean, it’s a kind of a huge problem. And you have the same issue with India who do not have our M RNA vaccines. And so all of a sudden you could have another wave of COVID, you know, basically shutting down or at least slowing other parts of the economy or the global economy. The thought that it was kind of in the rearview mirror. So I think that’s something to kind of keep a good eye on. And I think if some point in 2023, early, if there were some sort of technology sharing or, you know, if the Chinese if the Chinese said that they were going to use the Moderna vaccine or, you know, the Pfizer vaccine, I mean, I think you’d have the S&P 500 up 5% like that on the next tick. And then on the big rally, you know what I mean? But yeah, again, you know, the Chinese are very much about showing phase President Xi is now president for life and I don’t think he feels like he needs to do that. [00:17:38][69.5]
Liz Young: [00:17:38] And just to kind of pivot the topic a little bit, I think actually what we should be watching in the next couple of weeks is not only do we have this Fed meeting coming, but we have a debt ceiling coming and who knows what happens with that? Right. If you just rewind back to what happened in 2011, U.S. debt got down. Great. If we go through some of that, again, pile that on top of China still being sort of closed, continuing supply chain issues. If there’s another spike in cases, demand issues coming in the U.S., what if the job market cracks? I mean, you can make a list of pros and cons. And if you’re being honest with yourself, there’s still a lot more in the cons column. And if you add something on top of that as some sort of debt problem in the U.S., then, you know, the market the market probably falls for the rest of December, if that’s the case. [00:18:23][44.8]
Dan Nathan: [00:18:24] Yeah, no. And I think that’s likely to happen. I think at some point in the next, let’s call it two or three months, the S&P is going to be retesting those October lows. So the story over the weekend, you know, it’s got Tesla down 5% today, is that Tesla is planning to cut production in Shanghai and their factory over there by 20%. And this is really interesting because, again, you know, we talk about like we look at a company like Apple who’s been supply constrained right by the issues that they’ve had with zero COVID and the Foxconn factories. There has not been any indication yet that there’s been a demand issue as it relates to Apple that might come. But when you think about Tesla and basically cutting that sort of production in China at a time, there’s also an article in Bloomberg over the weekend about Boyd. This is a Chinese EV high end competitor to Tesla really gunning for Tesla. You put all that together and you say to yourself this a lot of U.S. multinationals might have issues in places like China that they are depending on for future growth, especially as our governments become increasingly antagonistic with each other. There’s an easy way to fight a Cold War with, you know, kind of like from an economic standpoint. And we could see some nationalistic tendencies kind of factor their way in for demand of U.S. products. Thoughts on that, Liz? Because, again, I think that this is a story that’s likely to continue to play out in 2023. And we’ve also said that Apple is going to be the last battle fought here. When you think about the fact that they have hundreds of thousands of Chinese citizens making their phones and other products in China, you know, and they’re basically subject to just kind of ultra authoritarian behavior in those. At some point, the chickens are going to come home to roost. And ultimately it could reflect themselves in weaker Chinese demand for these products. [00:20:08][104.3]
Liz Young: [00:20:08] Yeah, well, I think I mean, spoiler alert, we’re not the only country thinking about on shoring and trying to wrap our arms around our own production and keep it all here because it seems to be much more difficult to do it elsewhere. I think that probably continues for a while. If we go back to the Tesla story, I honestly think the bigger question is how much longer is it going to take for that EV theme to actually take off and. I’d almost compare it to cannabis in the sense that especially in the United States. So, you know, California had released mandates that it’s I don’t know exactly what the law is. At some point they can only sell electric vehicles or whatever it is. You can only buy electric vehicles. But that’s just one state. It’s going to be spotty. It’s not going to happen all at the same time. There’s not going to be this force of every American that has to buy an electric vehicle. And a lot of people are still going to choose to do it the other way. And this is anecdotal, but as we know, I’m from Wisconsin. There’s a lot of pickup trucks in Wisconsin. There’s a lot of like heavy hauling vehicles. Those aren’t going to stop being bought. So the demand that I think we all expected there to be for electric vehicles maybe last year or the year before. It just hasn’t come to be in that sense. And I would even ask you, didn’t you used to have an EV? [00:21:19][71.2]
Dan Nathan: [00:21:20] I had a Ford Mustang Mach-E and I really love the car. I mean, the biggest issue is a just the battery range, the range anxiety, but also the build out of the charging network. And I’ve said this on many occasions. I mean, to me, the killer app for Tesla is really the early lead that they have in their supercharging stations. But, you know, when you go from let’s say what they’ve been doing is a half a million cars to a million cars, let’s say the 2 million cars all of a sudden. I mean, for them to keep up with the demand and the charging stations, it’s going to be really, really hard. Now, all that said, on the flip side, you have Detroit, you have the European automakers, you have Japan, you have the Koreans. All of a sudden, if they get together and with some of these subsidies, with this IRA, this this bill that just passed in the Senate, if they really get together and say we’re going to have the world versus Tesla, that that could really accelerate things dramatically for some of these other automakers. And to your point about pickup trucks, that Ford F-150 lightning, they can’t make them fast enough right now. So again, the competition is coming. Tesla’s market share is expected to drop from above 20% of the EV marketplace to, I think, mid-teens or so in the next few years. And that places them at low single digits of global market share for autos. So again, the story is not as clean as many people think, you know, and if you also think about 99% of the auto companies that have ever been formed on this planet over the last, let’s say, 125 years have gone bankrupt here. So the idea that Tesla. Well, that’s just a fact. Okay. So the fact that Tesla still has 90% of the global market cap as it relates to autos, not just EVs like total autos, there’s still something amiss there. So again, when you start seeing demand weakness in China, that’s not a great sign, in my opinion, for, let’s say, Tesla specifically, but also extrapolating out a little bit to U.S. multinationals and some of the nationalistic fervor we might feel against some of our products, specifically in places like China. I think that’s something that’s coming to a theater near you in 2023. All right, Liz, you and I, we covered a lot of ground. You know, we did it without our friends, Guy and Danny. There’s going to be other mixtures on the Mondays when Liz gets in here. Maybe I won’t be here. Maybe it’ll be Liz and Danny. Maybe. [00:23:35][135.1]
Liz Young: [00:23:37] Oh I don’t know. I don’t know if I’d recommend that. I mean, it just it goes off the rails fast. [00:23:40][3.2]
Dan Nathan: [00:23:41] So. So is there anything, Liz, out there right now? Again, we said we have a continuation in equities being weak from Friday. After that jobs data, we have rates bouncing a little bit. The ten year yield bounced off that three and a half percent, which is maybe just a psychologically important level here. You know, the dollar which had been weakening, it’s up a little bit. Is there anything on your radar that you think that listeners should kind of be focused on this week? [00:24:04][22.9]
Liz Young: [00:24:04] Well, it’s not necessarily this week, but what I would say to people is this everybody is hungry for a stock market melt up or some kind of rally and really excited to say that it’s a new bull market because now we crossed over the 200 day because we’re done feeling negative. Right? The market doesn’t care about your feelings and it’s not going to start caring about your feelings. The economy doesn’t care about your feelings either. And, you know, I hate I hate to sound that kind of negative about it, but it’s true what I think we need to happen and this is where I sit back and say, okay, what’s my thesis buster? What we need to happen is something like the wage price spiral, that fear to go away. And news flash, the jobs data that came out on Friday made it worse. It didn’t make it go away. Wage prices continued to rise both month over month, year over year, above expectations. So some of that needs to slow down. And when you’re in an economy where services inflation is still sticky, still much higher than goods inflation and you’ve got wages rising like that, that spiral continues to be a risk, if not a bigger risk every time we get new data. [00:25:07][62.4]
Dan Nathan: [00:25:08] Yeah, no, I agree with that. So let’s keep watching that data here. Okay. And lastly, guys, just stick around. When we come back, Danny Moses is joined by Emily Paxhia. She’s the co-founder managing partner of Poseidon Investment Management and Brady Cobb. He’s the founder and CEO of Sunburn Cannabis. So check it out. iConnections Ad. FactSet Ad. [00:25:26][18.2]
Danny Moses: [00:26:44] Welcome back to On the tape. I am joined by Brady Cobb, founder of Sunburn Cannabis, as well as Emily Paxhia, founder of Poseidon Investment Management. These two people, as you know, we had them on the podcast several months ago, have been veterans in the industry managing money or managing operations in some form or fashion since 2013/14. They’ve seen a lot go by. They’ve seen a lot that has and has not happened. One of the things we want to talk about, obviously, right out of the gate is what’s going on in Washington, D.C. We’ve had some bills actually that have already passed on the medical research side that we can talk about and also what may be coming here today or in the following weeks here. And so without further delay, I want to welcome you both back to the podcast. Brady, I want to start with you here. Obviously, things are fluid in D.C. I know you’ve worked extremely hard. I mean, this has been a lifelong passion from the personal business side for you. Bring us up to speed here as we sit here Monday, late morning and what’s been developing in D.C.. [00:27:43][59.5]
Brady Cobb: [00:27:44] Yeah, thanks for having me back, Danny, and always great to be joined by Emily again. I feel like we are the two gluttons for punishment on this industry. We’ve been around long enough. As Danny mentioned, we are. This is without question, the best shot on goal that we’ve had as a as an industry for the first major piece of reform legislation to go through. I’ve been on the podcast a bunch. I’ve always talked about incrementalism. DC very much works in an incrementalism mindset that little wins march you along and then it to change the law and kind of a growing industry or a nascent market like this. This would be the biggest win thus far and it’s kind of was bookended on the front end. Just last week we saw President Biden sign into law the research bill that passed, which will authorize and increase tremendously the accessibility for universities and other institutions to conduct full research into the medical use of cannabis. Now, taken in a vacuum, that would seem like, okay, that’s kind of cool. But if you follow the breadcrumbs a little bit in this run up that we’ve had over the last it 3 to 4 months. President Biden ordered a reschedule or rescheduling review by the Department of Health and Human Services, which sent delegates to the FDA and the DEA to review cannabis scheduling under the Controlled Substances Act. Cannabis is currently listed on Schedule one, which means it has no medically acceptable uses. I believe what the language of the Controlled Substances Act states. That’s a that’s that is the burden that is the trigger to remain on schedule one. And the hold back in being able to overcome that is you have been able to conduct research because there’s only really one university in the country up until now, the University of Mississippi that was available for true research. Everything else has been done in Israel or overseas. So President Biden orders to reschedule. Then just now, one of the first things that passes in the lame duck out of the House and the Senate with overwhelming bipartisan support, was the cannabis research bill. You might ask yourself, why? What’s the timing? In my humble opinion, that is to set up to make sure that over the next 10 to 12 months the FDA can conduct and validate a lot of this research have been conducted internationally, bring it on into the US, have it peer reviewed to show the medical use necessary to recommend a rescheduling to schedule three, which is what my intel is telling. Now we sit here and stare at Safe Banking Act, which, you know, if you follow me on Twitter or listen to the podcast before, I’ve been pushing Safe Banking Act, I feel like for an eternity this is not dog years, this is dog years times four. And to now tell you that we are literally on the best possible shot on goal. Even Danny and his good friend over at BTIG, Isaac is even most recently been saying he’s 70 70% I believe. 75. I’ve lost multiple dinners to him. I owe him like nine dinners right now. Isaac, if you’re listening out there, I’ve been wrong on the timing, but here we sit with safe banking teed up to go into the NDAA. I’ve been told that it will be included in the actual text of the bill or we expect it to be included in the actual text of the bill. Not offered as an amendment, which is huge. That’s a key distinction. If it’s generally in the conference report of the bill, it’s very hard to come out amendments live or die on an up and down vote. If it’s in the bill, you have a much better shot. And then I want to pivot to Emily, and I expect this to move relatively quickly sometime in the next call it two weeks. But I’d love to have Emily talk to us a little bit on the investment side. How how she feels safe will be somewhat of a game changer. [00:31:07][203.4]
Danny Moses: [00:31:08] Yeah. So, Emily, before I handed over to you, I just, you know, you obviously actively manage money in the space you’ve been involved in private and public companies, you know, for the last seven, eight years. So you’ve seen and you can see what safe banking would potentially mean to all these companies, just access the hurdles that they have to jump over and the hoops they have to run through just from not having something like this pave the way. So maybe take a step back and, you know, talk about your experiences in dealing with the kind of fits and starts in DC and then more importantly, what it actually means to these companies would be great. [00:31:39][31.3]
Emily Paxhia: [00:31:40] Yeah, you know, as I’m watching as this come up, I keep saying and by the way, thank you for having me on. I think a fun little factoid is that my Spotify wrapped the all this this podcast on the tape was one of my top five so right to be back. Yeah so anyway happy to be here as we’re coming up on the eve of potentially something happening. And I agree with Brady that this is our best shot on goal. I can’t help but think back to January 4th, 2018, when Jeff Sessions rescinded the Cole memo, and since that time for almost five years without any banking kind of guidance around this industry and thinking about what that has meant, because it’s really kept capital at the sidelines and has created a real access issue for these companies and the cost of capital being so extraordinarily high. And I think one of the things that a lot of people don’t realize is it’s not just about having a bank account. It’s also having access to ordinary resources that that businesses have, like a line of credit or a small business loan that shouldn’t be so gratuitous. And further to that, it has a trickle down effect because this has been a massive signal to service providers, to the industry that this is not being accepted at the federal level. So our insurance costs, we have about 1 to 2 real underwriters of this industry. It’s incredibly expensive to insure these businesses and it goes on from there. And so I think it’s really important to realize that not only is there the structural significance of this, but there’s the signaling. And I think it will help to improve custody around the industry and bring people into the industry, bring capital that has been sitting on the sidelines waiting for this signal. Now, from an investor standpoint, I can’t help but think about Peter Lynch and he talks about one of his favorite investments. Best investments ever was Taco Bell. And one of the reasons for that is that he knew the business. He knew the business had something to offer, and he continued to invest in it even as the stock was punished. I feel like that’s a very serious analog to how we’ve been investing in cannabis. We know there’s this structural limitation around capital flowing into the industry and for us it’s just been an opportunity to know these businesses understand the sector and lean in and invest along the way. [00:33:47][126.9]
Danny Moses: [00:33:47] Let me just say that I think one of the things that people are looking at, they always try to find a negative and a positive, right? It’s always like, oh, yeah, but yeah, but so one of the thing that keeps coming up is, oh, you don’t get up listing for it as far as the people that are out there understand that the U.S. multistate operators, the MSOs trade literally on the pink sheets in the U.S. and on the CAC in Canada. Right. Which is a junior exchange up in Canada. And so people are like, oh, well, let me be very clear. The exchanges don’t need regulatory court approval. They need cover. And believe me, any chance to make money. I’ve worked in Wall Street for years. The exchanges will find a way. The same goes with the banks, give them safe harbor to start coming in and they will lend. It may be a slow in coming, but it will be there. And to your point, Emily, most importantly, I think it allows investors, potential individuals that are nervous either about sending money to a cannabis investments or even using their debit card in a dispensary or things like that. I really think it’s going to change the whole complexion. And I know, Brady, you want to you want to talk to that, too. But I just people like this is not a baby step. This is a massive step. And I guarantee you that everything kind of falls in line after that. [00:34:50][63.0]
Brady Cobb: [00:34:51] I think the single biggest thing you’ve got to look at is what happens if you go back and study the charts and more importantly, study the volume, especially the volume on both the U.S. names, the ones that trade in the U.S. right now, which are the Canadian companies, Tilray and Canopy. Those are the two I study. And then you also look at the MSOs ETF and some of the larger U.S. MSOs like Curaleaf and GTI, and just study the volume spikes that they have every single time that there’s a potential federal moment, every every false start on safe banking. Even when President Biden ordered the reschedule, which was going to take 12 months, you know, MSOs was halted, I think twice intraday for volatility. Spikes is very much the phrase I’ve used as a coiled spring. And just as you know, we’ve raised for sunburn cannabis with, you know, beside and as a as a having them probably as being someone that supported us, ultimately, we raised probably one of the larger equity raises in cannabis and we actually raised that money from April through August of this year, which was absolutely, if you could mark the most miserable time to do it, that would be it probably in the last 36 months. And we still were able to do it largely because we took an approach of this is coming. And more importantly, we looked down the field and our pitch was largely centered on building a brand because that’s ultimately what’s going to flow into the space as alcohol, tobacco and CPG come into the sector. Make no mistake about it, safe banking is happening because the alcohol lobby has said it’s okay for it to happen. They are incredibly powerful and they have signaled that it is okay for finally come across the wall. This is happening because they’re ready to make their moves. You saw Canopy announce they’re divesting Canadian retail. Then a week later Biden makes the reschedule. Then two weeks later they announced Canopy USA. That is not a coincidence. I believe in coincidences. I’ve just never seen one. Emily, I love your take on that. [00:36:41][110.4]
Emily Paxhia: [00:36:41] I couldn’t agree more. And I think that your point about the volume and the activity in the public markets is and is an exact symptom of having these limitations around the industry. I’m on the Capital Markets Group at this group called Attach, and we actually have submitted a letter to the exchanges written by a number of lawyers who really do outline the case for looking at up listing without any change actually at the federal level. And I think that stay safe could be that thing that kind of opens the door to that conversation to really take that legal argument very seriously. And I think it would have a tremendous impact. You know, the other day, Morgan and I were my business partner and brother and I were walking through the airport and Morgan’s like, do you do you know, cannabis like PSTN just landed in these small cap value style box on Morningstar. I’m like, we’re a value sector, yet we are a growth sector. And this is a tremendously exciting for me as an investor who loves fundamentals, who loves digging in on the businesses. This is a dream scenario where this is setting up right now, and I’m just really excited for the ability for more capital to be able to access and invest into this industry. Because when you look at the comparison or the backdrop of what’s gone on in, for example, in crypto or even in tech, our industry has been focused on metrics such as EBITA on a path to free cash flow. Because we have no other option, we have to be able to sustain ourselves through our own businesses. And it’s a really opposite scenario to what we’ve been seeing that has been the darlings of, you know, invested capital for the past ten years and in cannabis is really setting up to be an interesting condition for investors to be looking at, especially if we are going into a tricky climate in 2023 on a macro level. [00:38:17][95.8]
Danny Moses: [00:38:17] Level, just to echo Brady’s point about, you know, some of these stocks that move and the volumes and so forth. So the only way that institutional investors currently can really express any investment in cannabis has been through the Canadian names that trade on the U.S. exchanges, Tilray, Canopy, you know, etc.. The other way obviously has been through Poseidon or through, you know, making some of these some of these investments in the private market or trading the MSOs, which encapsulates like all these pink sheet names in the U.S. names. What’s interesting to me and where I see comparisons when you think about the dot com bubble, the Internet was emerging, obviously was here to stay. The macro was very strong. But you had a lot of companies that battled their way through and some that didn’t make it right. You had the Pets.com and then you had Amazon, right? They made it through. We were going to see, I believe, you know, emerge a handful of winners that are able to weather the storm. Yes, they’ve had to issue tons of capital over the last period of time because they couldn’t access traditional investment management arms. But most importantly, Emily, I think to the point you just made, when you think about it, people that aren’t in cannabis, right, the ability to access debt at a reasonable level. And it’s not just there’s three or four people that are providing, you know, debt out there and lending to these companies. This is going to open up, you know, an entire group of people, not just for Poseidon, but for other investors that can come in and lower the cost of capital, which has an immediate impact on your present value of your equity. So it’s going to be very, very fortuitous, I think, and it’ll all kind of come together over a period of time. But we all know that there’s a lot of companies out there that can recap themselves. They can start to lower their cost of financing, lower their cost of equity. And that, I think, is going to be huge with the status of the economy in the U.S. right now. Obviously thinking that we’re going to go into recession, state and local governments are looking for any source of revenue that they can get. And on the tax side and in Illinois, Massachusetts, correct me if I’m wrong, we are now generating more tax revenue than the alcohol industry in those two states and probably growing. And so this is right sector, right time. Micro and macro. What Brady, if you want to comment on that. [00:40:17][120.0]
Brady Cobb: [00:40:18] Yeah. I mean, the setup is tremendous and it doesn’t you know, as the setup is tremendous as it is, you can’t ignore how absolutely miserable it’s been to get here. But, you know, anything anything worth you know, if it was easy, everybody would do it. And as you look at the setup within the broader macro having issues, you know, just like alcohol, cannabis is a vice industry that largely does better in a period of downturn during the COVID 19 downturns. You know, largely that was also helped by the fact that people were stuck at home and having to homeschool their children. So cannabis was a pretty nice option after a long day of being a teacher and thinking you were going to die of COVID, but same time it was an economic contraction and cannabis did it? Absolutely. It ripped our business here in Florida, our one plant business. It was some of the best that we had as far as in that entire back end of of kind of middle to the end of 2020. Cannabis is a non correlated asset. It’s something that it’s an alternative. We’ve had a plumbing problem thus far. Make no mistake about it. Safe banking fixes that plumbing problem. It requires updated FinCEN guidance on AML, and maybe it has to be issued relatively quickly by the plain language of the statute. But I think the other really interesting thing to take out of this, Danny and Emily, is look at and I’d be very excited to see the ultimate, but my own internal vote counting the bipartisan support that’s going to be behind a bill from both the Republicans and the Democrats. More importantly, the knock has been that the Republicans are just not there on cannabis. 53% of a publicans that were recently polled support full legalization. I think when you see that vote count that’s going to come out of safe banking, it’s going to reflect that. And that is a big issue. And that is an incredibly quick flip over. Call it four years ago when you wouldn’t have seen anywhere near that. To your point, Emily, I remember where I was, what I was doing on January 4th. I remember it. I know I could tell exactly where I was sitting to go from that moment to where we are today is a huge change in the wind in DC and it’s now something that is being a Republican issue that I’ve got to be honest, Democrats kind of fumbled. They could have been the ones controlling the narrative on this one if they’d acted sooner. They’ve given this issue to the Republicans, and you’re going to see it be a big issue in DC moving forward. [00:42:25][127.9]
Emily Paxhia: [00:42:26] Yeah. And I want to I want to double click on your point about what we saw during COVID, because there was a pattern of increased purchasing of cannabis during that time. And yes, we can attribute that actually on the headset data, which I know we all watch. We actually watched when the distributions would go out from the government, the checks would hit and you’d see a spike in the sales across those days, which was was great. It’s great to see that people are allocating share of wallet to cannabis as a as a category. But I also remember when I was doing consumer work during the the downturn, the great, you know, the Great Recession before the COVID, because that we all know that was a pretty distorted period of time in 2020, going back to the prior Great Recession. One of the things that I remembered tracking was the alcohol purchasing patterns during that time. And to your point, they definitely peaked. And in fact, there’s a little bit of trading up that goes on because people are treating themselves a little bit for staying home. And I can’t help but also watch as we’re heading into a potential difficult time on an economic standpoint. People are still stressed at the core. You know, I’m I’m thinking about how the younger generations, like the younger millennial generation and also Gen Z, are tending to trade in alcohol for cannabis. And so this is going to be a really interesting experience to watch how people who are spending time at home, spending time going over to their friend’s home to make dinner at home, maybe not going out so much. And we all know one of the biggest limitations in cannabis currently is that there are not a lot of designated spaces where you can consume it. Like, Yeah, you can bring a joint to a concert and that’s all great and grand. But the difference is you can go to a bar and purchase alcohol and we all know the margins on that are pretty impressive. But I think that when you think about people staying home more during a time like this, where is cannabis going to enter the conversation for those younger generations that now have their own spend their own share of wallet that they’re allocating to their preferences? And so this is going to be a really interesting consumer bevel experience to watch. [00:44:20][113.7]
Danny Moses: [00:44:20] So Emily I’ll ask you this question first and then I’ll turn it over to Brady. But so you’re sitting there with an ETF. You’re sitting there obviously with a lot of private companies that are invested in how will this change to, let’s say, safe passage tomorrow, safe banking passes tomorrow, you guys all meet? What do you do over the next kind of weeks and months in terms of how to deploy that strategy as a result of all of this change. [00:44:41][21.2]
Emily Paxhia: [00:44:42] Poseidon has always been focused on quality. We we are not the get in quick, get out quick. I mean, obviously you’ve been around for nine years. So we’ve been I would say we’ve been setting the table for this moment so that when the rocket ship really does take off, we’re positioned the way we want to be positioned. And if you look at the ETF, you can see the weightings of our positions. It’s very reflective of how we view the quality of these companies. And we do feel like it’s a great opportunity because it has the the leverage component too. And yeah, it’s been painful through this entire difficult time. But, you know, as we say, you always want to be in the market with the resource or the tool that you can to capture the upside. So I would say we’ve been setting the table the whole time for when this does take off. And part of that has been just leaning in, continuing to have painful conversations with people. I mean, it’s been difficult to raise capital in cannabis adjacent to when you’ve seen like these rocket ship stories of of what is now the boom bust of the crypto world and being stacked up next to it and being such different industries. But really the emerging industry is that people have been paying attention to has been painful. But now I think the rubber’s hitting the road and it’s going to be a really interesting set up, not just for us to continue to lean in and allocate on the positions that we we think represent quality, but also to attract capital into our strategies, just having the tenure in this market and really leading the way. [00:46:03][80.5]
Danny Moses: [00:46:03] So, Brady, same question to you. I know different. You’re running a private company here. I’m well aware of what it is. Sunburn cannabis. How will it change you think the way you think about, you know, the business moving forward, whether it’s balance sheet related and so forth. [00:46:16][12.6]
Brady Cobb: [00:46:16] Talking balance sheet first, you know, safe passage, we’re going to have an opportunity to actually have our debt priced properly at some point and call it the next, you know, 4 to 6 months. So as you have right now, there’s kind of a group of 3 to 4 private lenders that service the cannabis industry. And it’s not cheap. It’s bad credit card rates. If you are just let’s just be real honest about what it is. Even when you look at some of the bigger public companies, I’m a small I’m a private company. And once they operate or some of the bigger public MSOs are still at 16 to 18% interest rates, all in with with with O.D and everything else. So there’s almost an instantaneous reprice there as, as institutional capital looks to really flow into the space cost of insurance, as Emily mentioned, goes down. I mean, just because we sell cannabis, we pay a markedly different rate for both banking fees and insurance fees than if I was selling alcohol. There’s no legal there’s no rational justification for it. It’s simply that just is what it is because of our Schedule one classification. So while safe does not fix that Schedule one classification by providing a safe harbor for banks and institutions to enter the space, they all want to service the space. It’s always been my thesis. Boris Jordan and I have disagreed on this and I’ve got a tremendous amount of respect for Boris, but he’s been of the notion that we need specific language to allow for up listings. I’ve been on record since as early as call it 16, 17, saying, no, you don’t, because age rating agencies and exchanges want to make money and they don’t want to see all the money flowing to Canada. No disrespect to my Canadian buddies, and at the end of the day, if there’s an opportunity with safe harbor for them to do a risk based listing where they can just disclose away all the potential issues they’re going to be on U.S. exchanges, we do not need that language, and I think that’s what we’re ultimately going to see play out. So then you have the opportunity to potentially look at a U.S. listing from an operational standpoint like Emily, we’ve been setting the table for this moment my entire career in cannabis and navigating and focusing on the premium end of the market and brand building was for this moment, I’ve been working DC since, you know, late 14 on this issue, lobbying it’s inch by inch meeting by meeting, member by member. I’ve been crawling through the industry myself to find the moment where I can have my own private company in a state like Florida with a vertical market to go build a brand. So like Emily, I’ve been I’ve set this table for a long time for when this moment happens and brands will truly matter. So for us, it’s not going to change much what we do, except for it’s time to hit the gas pedal. You know, safe is going to be followed by something else, which we know will be the reschedule. And then our big our bigger friends are coming over the wall. And I think the first acquisitions, the first companies that are going to lean heavy in are going to be both alcohol companies and more importantly and specifically the alcohol distributors. And I say that because, again, I’m a big breadcrumb following person. If you listen to the last hearing we had in the house a couple of weeks ago, which Nancy makes it an absolutely tremendous job leading when you listen to that hearing, I want to go back and count how many times you heard this phrase, if we regulated it like alcohol, we could legalize tomorrow. Those types of statements are not said in legislative hearings unless they’re choreographed. So at the end of the day, that was that was a sign, not a signal of what’s to come in my humble opinion. [00:49:20][183.4]
Danny Moses: [00:49:20] Yeah, I just want to say one thing, Emily, then I want to turn it back to you, is that there’s a lot of money in private equity, right? Traditional private equity that’s sitting out there. And believe me, some of their GPs are personally invested in the cannabis space and many of them the ability to come out and deploy. So I think we’re actually going to see LBOs start to occur in the space. We have a lot of I won’t name them small kind of orphan MSOs that are sitting out their market caps ranging from 50 to 150 million. I think that’s going to be a huge opportunity. I think we may see that. Let me just echo what I said at the beginning of this interview, which is I worked on Wall Street for, you know, 25 years. And I am telling you, people that are out there, in the words of Gordon Gekko, the good part of Gordon Gekko, greed is good. Greed works. Make no mistake, these banks and the exchanges are going to want to find a way in because it’s a moneymaking industry for them and it’s fertile ground. And they will Emily you’ll start to get inbounds and your ETF, PSTN will start to get a boom coming in and things will happen. But want to get your thoughts on what I just mentioned about traditional private equity, kind of looking at the space. [00:50:21][61.2]
Emily Paxhia: [00:50:22] It’s so interesting because you actually read my mind. I was about to start bringing up those other sources of capital and private equity is essential to where we are in this cycle of our industry. Because I think some of the MSOs, yes, there’s the lower tier MSOs not saying necessarily buy quality, but really by market cap. But they do have some quality assets, but they are running out of cash and the balance sheet point is critical. It’s something we’ve been watching for quite a while and where these companies are in their CapEx project timelines. But I think that private equity getting into the sector is it’s essential on many levels because we do need to go through a cycle of divesting, of assets, rebuilding some new organizations. And I think it could inject a fresh look at what the MSO landscape looks like instead of just seeing the same names with the same assets and rethinking. Maybe even there’s like a regional play that some of these private equity groups take. The West Coast has gone through The Hurt Locker in terms of what has gone on here because of the competition of the illicit market. And all of these things would help because then we could capitalize businesses to be able to go after and really kind of build into this next generation of what cannabis business looks like. So I think it’s incredibly critical. The other thing I was going to mention, because I agree with Brady about the revenue centers around the exchanges is the private equity activity that I think will actually be happening in the broader markets. Because when I look at the constituents of the exchanges, I see companies that probably do need to go private and probably maybe even need to combine with some of the other companies there to build stronger businesses. But that’s going to mean a loss of listing fees for those for the exchanges. And I think that they’re going and the same thing is true with the SPACs. I mean, I think we’re about to see a bunch of these things continue to drop off and a calling of that. So where they’re going to be looking for revenue sources and I can’t think of a better source than an industry that looks like it’s set up to continue and have longevity at this level. [00:52:13][111.5]
Danny Moses: [00:52:14] That’s great. So we had you guys on a few months ago. We’re waiting here with bated breath on what might happen here in D.C. over the next couple of days, hopefully at the worst, a couple of weeks. And we were going to have you guys back on. But just for people out there, just understand that Brady and Emily have been doing this a long time. There is no more seasoned veterans. They’re still young, but there’s no more seasoned veterans in the industry. These are people you want to listen to and talk to. And so very excited to see what happens here. And we’re going to have you guys back on hopefully within the next few weeks to talk about what happened and what it really means now that it became law. So thank you guys both for coming on. I really appreciate you guys coming on the tape. [00:52:50][36.1]
Emily Paxhia: [00:52:50] Thank you. [00:52:50][0.3]
Brady Cobb: [00:52:51] Thank you for having us. [00:52:52][0.7]
Guy Adami: [00:52:56] CME Ad. [00:52:56][0.3]
Dan Nathan: [00:53:20] On the tape is a risk reversal media production. This podcast is for informational purposes only. All opinions expressed by me, Dan, Nathan, Guy, Danny, Danny Moses and any other participants are solely our opinions and should not be relied upon for specific investment decisions. [00:53:20][0.0]
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