Month: November 2016

Should You Invest In Marijuana?

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. – Mark Twain

Legal marijuana is undoubtedly having a moment. Since Colorado first paved the way in November of 2012 to legalize recreational cannabis, efforts to move the drug into the mainstream of society have gained real momentum. Even with the election of Donald Trump, seven states voted to legalize either recreational or medical marijuana this past month. Here at home, Justin Trudeau campaigned on the promise of legalizing marijuana “right away”, adding to the growing movement of normalising the drug.

The debate over marijuana has been all but won by the champions of recreational use, certainly from moral and scientific standards. All that is left is the actual laws that must be struck down, and as we near that day I have been bombarded with questions from my clients about whether it is a good idea to buy some of the publicly traded marijuana stocks available on the market. So is it a good idea?

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My answer to this question is typically Canadian: “It depends…”. The question that I ask investors looking for advice is what purpose would this investment serve them in their goals? Driving the excitement for investing in publically traded grow-ops are a heady brew of excitement over the possibility of legalization, reports of weed tourism and a weed economy, and the news stories about how quickly the stocks have been appreciating.  This mix of positive media have given the story of investing in the “pot business” a veneer of inevitability; that the price of the stocks will rise for some time.

In fact, according to Vice, just last week trading had to be halted on several medical marijuana companies on the TSX because their price had appreciated so quickly in a single session of trading that it tripped a “single stocks circuit breaker.” The enthusiasm for these stocks is real, but does that mean its a good time to buy?

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This is the stock chart for Canopy Growth, as of 2:30 on November 22.

First, what are the risks? The most glaring is that weed isn’t actually legal yet and continues to face significant uphill challenges to be made so. Though individual states have voted to end its prohibition, pot is still considered a Class A drug in the United States, and while Barack Obama had told his Attorney General to leave states alone that had allowed legal recreational or medicinal use of the drug, it still falls under the purview of the Department of Justice. Notably Donald Trump’s appointment to this position is by an avowed opponent to any form of marijuana legalization. How long the federal government stays out of individual state’s business is now up for debate.

The knock on effect of the appointment of someone like Jeff Sessions could be felt here too. Though Canadians might like to think that our government policies won’t be impacted by that of our neighbours, the United States will be unlikely to look fondly on their neighbours to the north legalizing a drug that they are working hard to stomp out. The impact at the border on traffic and trade may be enough to dissuade the government from moving ahead too aggressively with legalization.

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But even if we do get to the promised land of legal weed, that still doesn’t mean that the market will be good for marijuana companies. One of the arguments for legal weed is that weed is no more dangerous than cigarettes, which is true, but just look at how we have treat tobacco. Over the last 50 years we have been putting endless pressure to discourage and end the use of tobacco. You can not smoke inside, on a patio, in private clubs,  or in a car with children. Cigarettes can’t be displayed and all packages must come with both graphic and written warnings about the impact on your health. In the very near future there may be no branding on packages at all.

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Lets face it, this is subtle by government standards.

Against these challenges, medical marijuana companies are expanding rapidly. Companies banking on a future of recreational use with few regulations are borrowing money to expand their operations to meet both rising demand and expected demand. Since the companies are growing many have never turned a profit, the current surging stock price really represents a bet about the future, and not about the current financial health of the company.

Take Canopy Growth, a medical marijuana grower that became Canada’s first “unicorn” in the sector, valued in excess of $1 billion. According to a Reuters survey of analysts, the company is considered a “Buy” and the Globe and Mail has some positive views of the company, largely that it has good stock momentum and low relative debt. A surprise positive earnings report per share last week gave the company a significant boost in terms of share price. So how much has it made? Nothing. The company has a negative PE and no earnings to report on.

And so we return to the original question, is it a good idea to buy publically traded marijuana companies? It depends; depends on whether you are comfortable with risk, with companies that have yet to turn a profit and with possibility that you could see steep losses as well as happy and rapid gains. It depends on what role you expect any of these stocks to play in your investment goals. Is this money for play, or is it meant to be an integral part of a retirement plan? If you as an investor can make peace with those realities, then maybe these stocks are for you.

These are the opinions of the writer, and not necessarily reflect those of Aligned Capital Partners Inc. Aligned Capital Partners Inc. is a member of IIROC and CIPF.

 

 

 

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

Mass Extinctions, Hedgehogs & Trump

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Donald Trump is president elect, and only Russia is happy. That, and of course millions of Americans. And Donald Trump.

There are many things I want to say about his election. One is that we had correctly read the sentiment last year and this year regarding citizen dissatisfaction and the likelihood of surprising or disappointing results in big electoral decisions. The other is to talk about the failure of “experts” and their inability to get much right, from big economies to statistical outcomes in elections.

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Instead I want to turn my attention to a recent lecture I attended at the ROM that discussed evolution and mass extinctions. In case you don’t know we may be living through a sixth mass extinction (insert Trump joke here), but aside from that the previous mass extinctions are not what we think. In fact every subsequent mass extinction has led to an increase in the bio diversity after it, and our lecturer concluded that mass extinctions help the planet cut down the time on evolutionary development, removing 50 million years of grinding it out overnight. Mass extinctions are big events but they aren’t the end of things, they are the beginning of far more.

 

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Yup, this is a graph of mass extinctions.

 

There could be something to this with Trump’s election. There are a lot of angry people out there who “cant believe this is happened” and are talking about it like it’s the end of the world. That’s obviously not the case. So what could it be the beginning of?

There is much right now to not be pleased about. While economic news for the United States is certainly better than most other countries, most people would hardly call it robust. Threats to middle class security loom large. The rust belt is a genuine and persistent problem for millions of Americans.  It also threatens to spread to more places with increasing automation. Many Americans, even if they are doing fine financially don’t feel like they can likely afford retirement. Globally the news is actually worse. Brexit wasn’t a great idea given the details of what it involved, but it wasn’t a crazy response given the total failure of the EU to manage itself or improve the economic situation for many of its members.

Other articles about Trump:

Donald Trump is my pick for Republican Nominee

Burning it all down: The Rise of Trump’s Conservatism

The Age of Breakable Things

But What if He Wins?

At some point in the last 20 years the term “technocrat” came into common usage, and refers to technical experts. Economists are technocrats. Nate Silver is a technocrat. Janet Yellen is a technocrat. The EU is a technocratic organization. It’s not a condemnation, but an acknowledgement that we have come to live in a technocratic society, one in which the levels of complexity keep rising, requiring experts with ever more refined skills to manage. 21st century complexity has seemingly killed the renaissance man, as subjects are far to varied and nuanced to be well understood. The 21st century seems to favour those of us that can know one big thing.

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But given the failure of technocrats to fix the problems they’ve made, we might ask ourselves what we’re getting wrong. The answer I think lays in the ancient Greek saying that “a fox knows many things, the hedgehog one big thing.” Technocrats are hedgehogs. They know one big thing, and they tend to assume that they are right so long as their one big thing continues to provide positive results. But the minute they are wrong they are without a clue as to what happened.

The 21st century may require more foxes, generalists that better understand the many things tugging at the world rather than the narrow and parochial focus of experts. And Trump, for all his sins (and I believe there will be many) may hurry up that need. His promise to take a sledgehammer to things like NAFTA, challenge the supremacy of persistent low interest rates and bring some realism to organizations like NATO, while terrifying, represent the mass extinction of a series of ideas that are too confident in their own self worth, too precious to be tested and too fragile to survive. Whether we come out the other side of this better off has yet to be seen but its a possibility we shouldn’t dismiss.

 

 

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

The Housing Bubble Jane Jacobs Built

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When Jane Jacobs died in 2006, her Annex home sold for a reported $3,000,000. A lofty sum, but a fitting metaphor for the career of a woman so central to how we’ve come to understand cities and urban growth.

Cities, almost everywhere, are under a crunch to meet the needs of growing populations and affordable housing. In Canada two cities stand out as being places to go when you are looking for work, Toronto and Vancouver, and notably they have both been beset with rapidly inflating housing prices. And while I have covered this topic many times (many, many, many times), recently various governments have seen fit to try and wrestle the housing monster to the ground before it explodes and does long term damage to the economy.

First, a BC law was passed on foreign buyers. Totalling 15%, early signs are that it has worked in Vancouver and Victoria. Sort of. In late October several news outlets published the startling result that “Home Sales Plunge 38.8%”, which is helpfully misleading. The gross number of home sales on a year over year result (that is October 2015 vs October 2016) was 61.2% of what it had been in the previous year. 3646 homes were sold in October 2015, and 2233 were sold in October 2016. A corresponding decline in price for the same two periods was non-existent. Prices were actually up year over year, by 24.8%, though the average price had dropped by 0.8% from September.

The next set of laws has come from the federal government, which is trying to improve the financial health of those seeking mortgages by setting higher thresholds for banks and CMHC insurance qualifications. More recently imposed than the BC foreign buyers tax, we’ve yet to see what kind of impact these new rules will have, but I’m willing to posit a guess.

Like the BC law, the new national rules will do more to curtail the supply of property than it will reduce price and limit demand. The reason for this is that governments are attempting to tackle the part of the housing problem they feel most comfortable in, taxing and regulation. And while we know fundamentally very little about how many foreign buyers there are and what impact they are having on the Canadian market (among other obtuse aspects of Canadian realty, you can read about these issues here.), regulation and taxation are well understood tools that most politicians feel comfortable using even when the problem may still not be well understood.

What governments are loath to do though is tackle the part of the problem they could have the greatest impact on, which is supply. Governments, municipal and provincial, have a big say in what can get built and at what speed. But cities like Toronto frequently challenge their own growth, trying to straddle the boundary between their future needs while obsessively preserving some idea of a perfect version of itself.

 

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Proposed highway construction for Toronto

 

The efforts the city and province have made, to try and “densify” urban corridors while leaving the neighbourhoods of detached homes in between them untouched, is probably failing in some measure. First because the neighbourhoods themselves aren’t super excited about 20 story buildings going up within the line of sight of their homes. Second because many people don’t see themselves raising families in condos, leading to an abundance of 500 – 700 sq-ft spaces that only serve first time buyers, but not growing families.

The resistance that neighbourhoods put up to growth can be almost comical. From petitions to “Stop Density Creep” to city councilors objecting to condos not being “in keeping with the community” in our most urbanly dense sectors, citizens and their representatives can be almost hysterically opposed to any changes that might affect them.

tumblr_mtxtnjdxzb1s9jvclo1_1280And so we come back to Jane Jacobs. There is unlikely anyone more influential on how we think of cities than Jane Jacobs. She’s responsible for many great ideas about livable spaces, about how sidewalks and cities need people to thrive, the benefits of cities for bringing different people from different socio-economic backgrounds together and the importance of making cities for people, and not cars. When she lived in New York she fought against the likes of Robert Moses, and the push for more highways (frequently built at the expense of poorer neighbourhoods). When she brought her family to Toronto to avoid the Vietnam war (her kids were of drafting age) she moved into the Annex and fought against plans for the Spading Expressway (now Allan Rd) and campaigned so that its southern portion was never built.

But Jacob’s legacy has born some strange fruit. Though Jacob’s herself did seem to support growth of cities and solid development, the movement she helped birth and guide has become paranoid, myopic and NIMBY-istic. Here in Toronto we both benefit from her insight, and are hobbled by it as well. We have learned to love cities as places for people, but have grown suspicious of the development needed to accommodate our growth.

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Against those challenges, stricter regulations for new home buyers and a tax on foreigners seems to do very little to solve the one problem we do have, not enough supply. While tightening the lending restrictions is important to stemming the growing debt burden saddled on Canadians, the goal should still be to restore a healthy real estate market to our major cities, both a certain way to avert a massive housing bubble implosion and a way of making homes more affordable. That seems to be a challenge our elected officials aren’t up to yet.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc

But What if He Wins?

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You may not respect him, but have you ever seen someone with more luck than Donald Trump? I put it to you that you haven’t and I would wager that neither has Hillary Clinton. Three debates and a decade old video of Donald Trump lewdly discussing how he likes to grope women seemed to have moved him from a better than outside chance of winning to a massive and decisive loss. His obituary had practically been written and pundits were getting comfortable that they were never going to have to say “President Trump” with a straight face.

snifflegrabapussThe reopening of the email investigation by the FBI has breathed second life into Trump’s campaign, reinvigorated a dejected base and rekindled the seemingly pathological hate many have for Hillary. Trump’s candidacy is still a long shot, but not as long a shot as it should be.

The question that has lurked in people’s minds since Trump actually won the nomination for the Republican nominee is “what if he wins?” Normally it would mean very little, much of America’s budget is spoken for, in the form of military, social security and domestic payments as well as interest on debts. But Trump’s promises have people scared. Beyond the impractical (build the wall) and unlikely (make Mexico pay for the wall) Trump has promised to change the economic landscape in a big way. He wants to tear up trade deals and have a trade war with China. To Wall Street and other hubs of investing this sounds insane, and people who understand these agreements know that trade deals can not simply be torn up without serious repercussions. These promises make investors heads reel with fears of economic collapse.

But asking “what happens if he wins” is really several questions stacked on top of one another. The first question is “What happens tomorrow?”, the next is “how likely is Trump to follow through on his agenda?” and lastly “What should investors do?”

The Day After Tomorrow

Predictions about the market impact of a Donald Trump win range from apocalyptic to the more mundane, but a sudden sell off wouldn’t be surprising. In fact given the time frame between the election win, the time it takes to assemble a new government and the ability to pass legislation, its unlikely the much would happen policy wise initially, and a sudden sell off would be met with growing confidence in the market as investors and market makers bought cheaply sold companies and economists saw economic health remain steady. That might amount to a phony war while real changes remain over the horizon, but the events following BREXIT might provide a useful guide: an immediate sell-off followed by a market bounce, but with a large amount of uncertainty looming.

Git’er Done!

How likely is Trump to follow through on “the greatest wall you’ve ever seen”? Probably not that likely. A lot of Trump’s plans rest on other people helping push his agenda, and while he holds the bully pulpit that role is only effective so long as he’s popular.

In Toronto, Rob Ford’s election stunned a lot of city councilors and led to some hasty changes of allegiance, but as time wore on and Ford was seemingly more unreliable, his opponents were emboldened. Trump may not even get the same grace period and early support, having won a highly contested election in which all the guardrails came off the political system, lots of people will feel better about challenging his success than making him great. But given the uncertainty of power and how craven many politicians seem to be, its likely some of his ideas will find their way into action. While he’s unlikely to actually end trade agreements, spending increases on defence and border control and new tariffs on countries like Mexico won’t be surprising.

What Should You Do?

To start with? Nothing. America’s economy looks strong and competitive. Job growth has been fairly consistent and GDP continues to rise. The standard approach for politicians is to denounce your opponents accomplishments and them claim them as your own after a certain time. I can only assume that the temptation will be for whatever president/congress to declare victory and say that not every aspect of a Trump’s agenda is needed. Whether that satiates his followers has yet to be seen, and if Trump finds political appetite in pushing his agenda, that may ultimately lead to a more insulated, poorer nation; one less appealing to invest in.

The most likely scenario?

Trump loses.

Trump loses and nothing goes back to normal.

Trump’s most damaging language may yet be his view that the election is “rigged.” Initially meant as a shorthand for media bias, it has morphed to be an accusation of actual vote rigging, and is coming dangerously close to demanding voter intimidation to “preserve democracy”. The outcome of this election may leave us much of where we were before, with Republicans comfortably in opposition to a democratic president who they feel no need to work with.

Politicians are public servants, but ones frequently given to bouts of moral cowardice. This is a result of being elected and needing to satisfy an ever more diverse group of people to hold on to power. The easiest way of holding on to power is to grab whatever tent pole groups the largest number of people together. In 2009 that tent pole was the tea party, which opened the door for a number of savvy politicians to take seats away from older and more principled people, even as the language became more extreme. For at least several decades it has also been quite popular to say that one “isn’t a politician”, a line so tired that it practically begs to be called out on live television.

These trends only exist because they resonate with enough of the public to facilitate getting elected. If Trump fails he will have still demonstrated how much more effective one can be ignoring the (now very few) niceties of politics. If you thought we had seen the last of people literally talking about penis size and advocating war crimes in an election cycle, think again. A number of junior and potential politicians will see this as a path to higher office and getting media attention, two things in short supply for any ambitious politician.

In the end, I expect more of the gridlock that has defined the past eight years, and for some reason I don’t think that will bother Wall Street one bit.

by The Walker Report of Walker Wealth Management and Aligned Capital Partners Inc