Has the Market Rationally Priced the Prospects for Federal Legalization?
Cannabis stocks closed down nearly 9% this week, according to the Alternative Harvest ETF. The market clearly viewed the Schumer/Booker proposal as little more than political posturing having virtually no chance of being passed. But one might wonder, why such a violent reaction? After all, did anyone seriously expect that true federal legalization was at hand?
Many cannabis proponents would prefer an approach that simply deschedules cannabis (thereby promoting financial access) and removes IRS 280e, and leaves most of the rest up to the states. This position was eloquently expressed by Kyle Kazen CEO of Glass House Brands: “Let’s get the hell out of the way and let the states do it… the federal government has only done harm here…”
Perhaps most significant in driving market reaction is the apparent intransigence of the proposal’s authors. Cory Booker (D_NJ) said he “will lay myself down” to block the passage of less comprehensive reform bills (such as SAFE Act, or MORE Act). Booker’s stance seems to indefinitely delay these more moderate measures while consensus on social equity, states rights, and sentencing reform is achieved.
Finally, the proposal at least tangentially raises the specter of interstate commerce, and states with newly established adult use frameworks will fight hard to prevent these tax revenues from moving to lower cost/better agricultural locations.
The market has been rationally pricing the dwindling likelihood of federal legalization. The graph shows the prices of a basket of four groups of cannabis stocks indexed to 4/2/21: Small Canadian (Blue), Large Canadian (Orange), Small US, (Grey), and Large US (Orange).
Large Canadians are the worst performing group as would be expected since they stand the most to gain by US federal legalization.
Large US is best performing group, and this makes sense because this group is performing quite well under the status quo.
Small US companies are the second-worst performers as they would gain significantly from easier capital access.
Small Canadian companies were the second-best performers. Unlike their larger brethren, their business models do not depend on access to the US market.