A New 'Front' in the Trade War
A big day for cannabis... Americans are 'cutting the cord' like never before... A new 'front' in the trade war?... China strikes back... A new chance to make triple-digit gains in Chinese stocks...
Today was an important day for the burgeoning legal cannabis industry...
This morning, the U.S. Food and Drug Administration ("FDA") kicked off its first-ever public hearing on cannabidiol ("CBD").
As regular Digest readers know, CBD is one of the two main active components found in cannabis. Tetrahydrocannabinol ("THC") is the other.
But unlike THC, CBD is not psychoactive. It's also sourced primarily from the hemp plant – a close cousin of the marijuana plant – that contains little THC. And hemp has been fully legal in the U.S. since December, when Congress passed the 2018 Farm Bill.
Given these facts – and the rapid growth in CBD-containing products in recent months – you might assume CBD has been fully legalized as well. But as our colleague Thomas Carroll explained in an update to his Cannabis Capitalist subscribers last week, that isn't exactly the case...
So why do we need an FDA meeting on hemp? The nuance here is that in 2018, the FDA approved a drug called Epidiolex. Its active ingredient is CBD. As such, CBD should be treated like any other compound approved by the FDA. This creates a dilemma.
While it's legal at the federal level to grow hemp in the U.S., it is far less clear what can be done and said about CBD. But that hasn't stopped companies from creating products and claiming benefits... And the FDA has taken note. A handful of letters have been sent by the FDA to CBD companies warning them not to make claims about CBD.
The May 31 meeting is the start of this policy process.
Thomas believes this process will be a positive catalyst for the industry in the long term...
But it could take years to fully play out, and we could see additional volatility in the near term. More from his update...
We do not believe any major announcements will come out of this meeting. In our view, this is the first of many formal meetings on the topic.
Industry associations and cannabis companies are preparing comprehensive comments. Representatives from our portfolio holdings told us they plan to be involved either directly or through industry associations. And no one suggested any kind of concern around the meeting.
That said, both mainstream and cannabis-focused news sources will likely cover the event... especially because national retailers such as CVS Health (CVS) and Walgreens Boots Alliance (WBA) have announced they will begin carrying some CBD products. Target (TGT) and Walmart (WMT) are also considering selling these products.
The news coverage comes with the chance of some "headline" risk. Given the volatility of cannabis stocks, the market may pressure some stocks indiscriminately. CBD policy remains uncertain at this time... This is a meeting that will kick off the beginning of policy creation. We can use any stock pressure to add to positions.
In other news, 'cutting the cord' is more popular than ever...
As longtime readers know, more and more consumers have been abandoning traditional cable and satellite television in favor of cheaper online-streaming services. And this trend is showing no signs of slowing.
According to a recent report from communications consultancy firm Informitiv, cable and satellite TV providers lost more than 1.1 million total subscribers in the first quarter of the year. That's an 80% year-over-year increase from the first quarter of 2018.
Traditional providers are now shedding a record 14,000 subscribers every day.
Of course, nearly 82 million consumers still pay for cable and satellite TV...
So traditional providers aren't going to disappear overnight. But this trend is unlikely to reverse anytime soon.
Online-streaming giant Netflix (NFLX) has been the biggest beneficiary of this trend to date. However, as we noted earlier this month, entertainment giant Disney (DIS) is now also positioned to be among the biggest winners in the years ahead.
Finally, the biggest news of the day centered on trade...
In what has become a familiar story lately, U.S. stocks opened sharply lower this morning following a pair of negative headlines overnight.
In a tweet last evening, President Donald Trump unexpectedly announced he was enacting a new round of tariffs. But this time, they had nothing to do with China.
"On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP," he wrote.
According to a White House statement that followed, these tariffs could be gradually raised to as high as 25% by October 1. And according to Trump, they'll remain in place until the illegal migration problem is "remedied."
We certainly aren't holding our breath on that one.
But the focus didn't remain solely on Mexico for long...
Last week, we reported that China was likely to retaliate to the U.S. "blacklisting" Chinese telecom giant Huawei. Early this morning, the country made it official. As the Wall Street Journal reported...
China escalated an already spiraling trade dispute with the U.S., saying it would create a blacklist of foreign entities that harm Chinese businesses, in apparent retaliation for Washington's clampdown on Huawei Technologies Co.
China's Commerce Ministry said Friday it would set up an "unreliable entity list" composed of foreign companies, organizations and individuals. Named to the list will be entities that violate market rules and contracts, disrupt supplies to Chinese companies for "non-commercial purposes" and otherwise damage Chinese business and national interests, said a ministry spokesman in comments posted on its website.
As our colleague John Gillin explained to Stansberry NewsWire readers this morning, this announcement may have been made with one specific company in mind...
This is a direct response to the U.S. ban on China-based telecommunications equipment giant Huawei on allegations of espionage. While the U.S. had claimed the ban was unrelated to trade negotiations, President Donald Trump undercut that argument when he recently said the ban could be used as a bargaining chip in negotiations with China.
The most significant U.S. company in China's crosshairs is Apple (AAPL). I read a report two weeks ago that concluded that Apple could lose 29% of sales if China chose the "nuclear" option and banned manufacturing and sales of its product in the country.
If China were to target Apple or any other large U.S. company, the White House would almost certainly follow through on its threat to raise tariffs on all remaining Chinese imports. And at that point, the chances of an amicable resolution would drop significantly.
Of course, if you tuned in last night, you know Steve Sjuggerud remains optimistic...
During his China emergency briefing, Steve explained why he still believes the U.S. and China will reach an agreement before the trade war goes too far.
He also shared the details on a brand-new catalyst that could send a particular group of Chinese stocks 50% to 100% higher in the months ahead. And he believes today's fears about the trade war are giving investors a fantastic opportunity to get in before it does.
Unfortunately, we're not able to offer a replay of last night's event at this time. But Steve has prepared a special presentation detailing the latest opportunity in Chinese stocks. Click here to watch it now.
New 52-week highs (as of 5/30/19): iShares iBoxx Investment Grade Corporate Bond Fund (LQD), Nuveen Municipal Value Fund (NUV), and Vanguard Inflation-Protected Securities Fund (VIPSX).
In today's mailbag, a longtime subscriber agrees with Steve's prediction about the trade war. What do you think? Let us know at feedback@stansberryresearch.com.
"Steve, I agree 100% with your opinion on China, having traveled there many times and having seen Shenzhen rise from nothing to a very modern city when I owned an import business (I'm now retired).
"Ultimately Trump will make whatever deal he can, probably vastly favoring the Chinese, and will then announce to Americans that he has made a spectacular deal with China, the best in the history of mankind. He will state that Americans are much better off because of his deal-making abilities, where in actual fact things will be only very slightly more favorable to us than they were before he was elected.
"The one thing I expect, however, is that he will hold off for awhile in making that deal, so that it will hit closer to the election, will give a shot to the stock market, and will leave his potential supporters euphoric just as they are deciding who they want to vote for.
"I have enthusiastically invested in your Chinese recommendations and look forward to some nice profits down the road." – Paid-up subscriber Jeff D.
Regards,
Justin Brill
Baltimore, Maryland
May 31, 2019