A New Mania Is Here
A new mania is here... Up 1,200% in exactly two months... The bottom line on the 'pot stock' boom... A big bullish sign for precious metals...
It's now undeniable...
The "pot stock" mania is here.
As regular Digest readers know, the legal marijuana (or "cannabis") industry has been growing rapidly over the past year or so. As a result, the shares of dozens of marijuana-related companies – most of which trade in Canada and are of questionable legitimacy at best – have quietly soared.
But the boom suddenly captured mainstream attention last month. That's when booze giant Constellation Brands (STZ) announced a $4 billion investment into top Canadian marijuana grower Canopy Growth (CGC).
Since then, the shares of many pot stocks have gone near vertical as the public has piled in. And one company in particular – Canadian producer Tilray (TLRY) – has suddenly become the posterchild of this mania.
Tilray went public two months ago today at $17 per share...
Shares initially traded as high as $34 in the following days before pulling back to less than $25. But they moved sharply higher following Constellation's announcement on August 15 and haven't looked back since...
Shares closed at a new high near $40 the next week... They passed $80 a little more than two weeks later on September 5... And yesterday – less than two weeks since then – they closed at $155.
But today, shares exploded nearly 40% higher to almost $215 after the company's CEO fueled speculation that an even bigger boom could soon begin. As financial-news network CNBC reported...
Pharmaceutical companies have to start thinking about partnering with cannabis companies as a "hedge" against the burgeoning marijuana industry, Brendan Kennedy, the CEO of medical cannabis producer Tilray, said Tuesday on CNBC.
"They have to hedge this," Kennedy told "Mad Money" host Jim Cramer in an exclusive interview. "Cannabis is a substitute for prescription painkillers, prescription opioids, and so if you're an investor in a pharmaceutical company or you're a pharmaceutical company, you have to hedge the offset from cannabis substitution."
The CEO said the same goes for alcohol producers, some of which, namely Constellation Brands, have already begun to invest heavily in marijuana companies. "I think all the alcohol companies need to enter this industry. It's a great hedge for them," Kennedy told Cramer. "Whether you're an alcohol company or an investor in an alcohol company, this is a global opportunity."
Shares traded as high as $300 this afternoon... representing a staggering return of more than 1,200% since the company's initial public offering exactly two months ago.
The following chart puts this parabolic move in perspective...
Longtime readers already know how this story ends...
Take another look at that chart.
Whether it's tech stocks in the late 1990s... housing in the mid-2000s... precious metals in the late 1970s (and again earlier this decade)... or bitcoin and other cryptocurrencies last fall, all manias end the same way.
Prices eventually reverse, often sharply, and go on to retrace 50%-80% or more of the entire rally until the last bull finally throws in the towel.
Unfortunately, we can't know in advance just how long (or how far) this mania will run in the meantime...
It could continue for several months... or reverse tomorrow. But if we had to bet, we'd guess it ends sooner rather than later.
The steepness of the rally in many pot stocks, and the suddenly extreme public bullishness toward the sector, is reminiscent of the "crypto" mania in early December. The prices of most of these assets topped within weeks.
Since then, bitcoin has fallen nearly 70%. Most other cryptos have fallen more... And many have disappeared altogether.
As we've discussed, Stansberry Research analysts have largely avoided recommending marijuana stocks for a couple of important reasons...
First, we know marijuana use is a contentious issue for many of our readers.
We often receive complaints and cancellations simply for mentioning it. And despite significant progress toward legalization in Canada and many U.S. states, the reality is marijuana use – even medically approved marijuana use – remains illegal on the federal level in this country.
Second, like cryptocurrencies, even the most promising marijuana stocks remain highly speculative and incredibly volatile today.
If you're considering buying any of these stocks, be sure to keep your position sizes small and don't risk a penny you aren't willing to lose.
Of course, just because we haven't recommended any marijuana companies to date doesn't mean we won't eventually...
While the stocks are clearly in a mania today, it's important to remember that there is a legitimate and growing industry behind it.
The majority of the American public and a number of mainstream corporations are now in support of legal cannabis. Full U.S. legalization is a matter of "when," not "if."
This burgeoning industry is likely to become a multibillion-dollar behemoth. And just as we saw in the aftermath of the dotcom bust, there will surely be opportunities to buy the "survivors" – the next Amazon (AMZN), Apple (AAPL), or Microsoft (MSFT) of the legal cannabis industry – at discount prices.
Elsewhere in the commodities market, the bullish case for precious metals continues to mount...
In recent Digests, we've noted that market sentiment toward both gold and silver – as tracked by the weekly Commitments of Traders report – had reached historic extremes that suggest a major rally is likely.
But it turns out gold and silver aren't alone. As our colleagues Ben Morris and Drew McConnell noted to their DailyWealth Trader subscribers last week, sentiment toward two other lesser-known, rarer precious metals is equally stretched. From the September 14 issue of DailyWealth Trader...
Palladium is used in jewelry and sometimes in bullion coins and bars. And it's an industrial metal. One of its main uses is in catalytic converters, which scrub pollutants out of car exhaust.
Last month, we showed you that speculators had flipped their bets on palladium... After its price soared from early 2016 to this past January, palladium fell and started a new downtrend. During the decline, speculators turned from extremely bullish to extremely bearish. At the time, we explained that the big drop in prices and the reversal in sentiment meant palladium could be ready to rally.
As they explained, that's exactly what happened...
Unlike gold and silver, palladium prices have moved sharply higher. Yet, sentiment suggests even higher prices remain likely...
As you can see in the chart below, since that update, palladium prices have soared more than 8% in a near vertical ascent. The metal closed trading yesterday at $982 per ounce. And speculators are just starting to reduce their bearish positions...
Last week, speculators' bullish positions totaled just 6,200 contracts. That's only 1,300 contracts higher than last month, which was near its lowest level in a decade.
This tells us that palladium likely still has plenty of fuel left in the tank for a bigger rally. But it's still dangerous to buy into a vertical move. The safe bet – and what we'll be looking for in DWT – is to wait for palladium prices to pull back and form a "higher low" before placing any bets.
Meanwhile, platinum – a widely used industrial metal similar to palladium – has suffered the worst declines of all four major precious metals...
Unlike even gold or silver, it recently made a new low below both its late 2016 bottom and its 2008 financial crisis bottom. Yet here, too, sentiment is painting an incredibly bullish picture. In fact, as Ben and Drew noted, speculators have never been this bearish before...
Platinum prices are down about 21% from their January 24 high. And they're down nearly 58% from their August 2011 highs. Yesterday, the metal closed trading at $803 per ounce.
In the 10-year chart below, you can see this weak price action and speculators' positions in platinum futures. Right now, their bearish positions are the largest they've ever been...
Again, platinum recently fell to a new 10-year low. But here, too, Ben and Drew believe there's reason for bullishness...
Platinum recently dipped below its 2008 and 2016 lows. These were key "support" levels. So we wouldn't have been surprised to see it flush lower after breaking down.
Instead, platinum traded sideways... even though speculators have never bet more aggressively on lower prices.
When an asset holds steady or rises in the face of bearish news or events, we say the asset is "acting well." And it's a good sign that higher prices are coming.
As always, these extremes don't guarantee precious metals prices will rebound immediately. But they are incredibly bullish signs. We believe significantly higher prices are likely in the months ahead.
New 52-week highs (as of 9/18/18): Automatic Data Processing (ADP), American Express (AXP), Berkshire Hathaway (BRK-B), Blackstone (BX), Ingersoll Rand (IR), iShares U.S. Aerospace and Defense Fund (ITA), Match Group (MTCH), Nutrien (NTR), Roku (ROKU), T-Mobile (TMUS), and Viper Energy Partners (VNOM).
In the mailbag: Praise from a happy Stansberry Alliance member... and two readers weigh in on the "trade war" with China. As always, send your questions, comments, and concerns to feedback@stansberryresearch.com.
"My Alliance subscription. I love it. I just wanted you to know. I was 'enticed' reluctantly to sign up for this two years ago. It is very hard for me to even overpay for a cup of coffee sometimes, so this was not a small financial decision. But I feel very lucky to be able to get insight and guidance from all of the different analysts, newsletters, data, SB terminal beta, and Las Vegas conference. Thanks again." – Paid-up Stansberry Alliance member Jeff S.
"You act as though the trade war with China is now in the sixth or seventh inning. In fact, the trade war has just started! When you start seeing tariffs of 50-100% percent, then you will know it is in full swing. Also, the Trump Administration has, so far, made no mention of the numerous individuals who have been charged with espionage on behalf of China against the United States or American companies. That is a silver bullet which can be used at any time. Not to mention the facts that China is a human rights monstrosity, or it has used the threat of force to extends its territory recently (South China Seas)." – Paid-up subscriber Arthur R.
Brill comment: We're not sure what you're referencing. We've made no claims about how long this fight could drag on. But we certainly hope you're wrong... If your predictions come to pass, a bear market in stocks would be the least of our worries.
"With 1.4 billion severely overpopulated mouths to feed through a communist system that doesn't work and a $30 trillion mountain of debt in a false economy based on borrowing and spending, do you really think President Xi Jinping is going to risk a civil meltdown if the trade war that China started with the USA decades ago backfires on him?" – Paid-up subscriber James D.
Brill comment: We think Steve Sjuggerud might disagree with your assessment of the Chinese economy. Our point was simply that we don't know what he will do. But here are the facts... Earlier this year, Xi's government officially removed term limits for the presidency – in effect, making him China's ruler for life – after his years-long "anticorruption" campaign had removed his rivals and enemies from the Chinese government. As a result, Xi is arguably the most powerful man in China since Mao Zedong, and holding on to that power is likely his primary concern.
So, what does he see as the greater threat to that power: civil unrest, or appearing weak to those who would challenge him? Again, we don't know... But we'll likely find out soon.
Regards,
Justin Brill
Baltimore, Maryland
September 19, 2018