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2018-10-17 09:54 by Karl Denninger
in Market Musings , 116 references
[Comments enabled]  

The opposition of the alcohol industry to weed legalization is obvious.....

“I realized that I get zero enjoyment out of drinking and it costs me more money than weed does,” said Jena, who asked to omit her last name because marijuana is not legal where she lives.

Oh.....

Well now.... that, by the way, puts a whole lot of color on the weed industry too though.

You see, booze, while a significant (and profitable) business isn't that large.  The total booze (all types) in the US was about $25 billion last year, half of which (roughly) is wine.

Now consider that if there's a substitution effect and the cost goes down to the consumer for the cannabis products then the gross sales are going to be materially smaller than they are for the booze industry.

There are still people preening around saying that the total addressable market is in the couple-hundred billion area -- Tilray's CEO being one of them.  IMO he's using too much of his own product.

I know, I know, the stuff's legal in Canada basically now.  Fine.  The US will follow, and soon -- it's utterly silly to cater to Jeff "I'm a dickhead" Sessions at this point, but it's part and parcel of his bull**** and that Trump doesn't really care about the issue - especially not the very real and known medicinal characteristics for kids suffering from epilepsy.

Nonetheless the worm will turn -- just don't get caught under the weed stocks when the floor falls out of their valuations -- because it will.

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2018-10-11 07:48 by Karl Denninger
in Market Musings , 292 references
[Comments enabled]  

In early 2007, more than a year before it all went to Hell, I started writing The Market Ticker with a series of articles that exposed outrageous behavior by banks -- including Washington Mutual, which later failed.  These firms featured paying dividends out of money they didn't have, essentially "capturing" additional debt (for which they'd be liable in one form or another) to sustain the payouts.

This was a very solid indicator that the market had essentially backed itself into a corner from which it could not escape.  Stock prices were supported by these "payouts", in that it's very hard for the price to collapse when you have such a yielding instrument.

But when you are paying out more than you are making in operating cash flow the act is a fraud because you cannot sustain that payout, and to claim otherwise is a lie.  Continued into the indefinite future it must cause the failure of your firm; this is a mathematical fact and yet I challenge you to find that disclosure in 10K and 10Q reports.

The SEC and other regulatory agencies have never once, to my knowledge, jailed or otherwise brought criminal charges against any firm for doing this, yet it is exactly identical, in factual terms, to promising that you can jump over the Empire State Building.  You can't, and these firms cannot either, into the indefinite future.  It's impossible.

Buybacks are an inherent fraud upon the public for two reasons: First, they claim to be issuing options and restricted stock to executives at current valuations which, of course, means that there is only value to the executive in them if the company prospers in excess of the current performance.  This is a lie when there is a buyback because when you shrink the denominator the price of the remaining shares rises ratably irrespective of performance.  That's fraud.  Second, they quite-arguably constitute illegal insider trading in every instance because the executives who benefit from same mathematically are the ones voting on the buyback and who have inside information on both the intent to do so and the outcome while obtaining the shares subject to same.

Today we have both dividends being paid out in excess of operating cash flow and buybacks being paid in excess of operating cash flow.  Both are being funded with debt accumulation exactly as was the case in 2007.

There are many who argue that this is "not a big deal" and that debt levels are "reasonable."  Oh really?  They said that in 2007 too, and look what happened.

Today we have an even more-perverse problem due to the EU (specifically, German) rate curve.  Draghi's policies have effectively capped the long end of the US rate curve, which is quite serious indeed -- if "curve inversion" matters.  Who knows if it still does, of course, but it looks like we're going to find out.

What you need to keep in mind in a debt-fueled bubble like this, however, is that valuations do not matter until someone pokes the wrong place with something sharp.  In other words there is exactly no boundary on price -- at all -- but in addition there is no value behind any price.

That's why, when reality returns you get a crash rather than a small dip or "correction"; the forward projections have all been frauds driven by the claim and belief that one can do uneconomic things forever and simply accumulate debt into the indefinite forward future without consequence.

This is the "Illinois head-in-sand" syndrome, where you can pile up a couple hundred billion in forward pension obligations against a ~$40 billion budget -- an impossible-to-fulfill obligation yet the market has not yet called "bullcrap!" on that and collapsed the economy or state government, despite the mathematical impossibility of meeting those obligations.

Then there's the fact that Trump has shot his wad, along with Treasury in compounding the business frauds with monetary shenanigans.  Of course nobody is calling smiley on that, but they all should be.  But heh, it's all good when you run 6%+ monetary expansion during a boom!  Why that's not blowing bubbles! 

smiley

smiley

smiley

Likewise the rest of the so-called "market" is doing the same thing, but just remember how it ended in 2008.  Last time around this was concentrated in housing; a large piece of the economy to be sure, but really not that significant when one looks at it in terms of percentage of the whole.  The key was that the '08 disaster was a larger bubble, in percentage terms, than the 1999/2000 tech bubble -- it had to be, in order to "re-inflate" it.

This time around it's damn near everywhere, from firms like GM to Tesla to your favorite tech firm like Netflix.  It's much larger, and as a result when the fatal stab comes the outcome will be far worse, just as it was in '08 .vs. 2000.

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2018-10-11 07:00 by Karl Denninger
in Market Musings , 108 references
[Comments enabled]  

.... you should consider investing in this as well.

You're going to need it, IMO.

These stocks are ridiculously overpriced and they will crash.  When they do you're going to want one big fat bong-riff, right here and now, to make up for the loss of value in your portfolio.

Don't get me wrong -- the legal cannabis market for both CBD (doesn't get you high) and THC (does) based products is real.  It's going to expand like a big fat bong riff in your lungs but price is always the issue with any investment.

Simply put the market isn't that big and shifting it from illegal marijuana sales to legal cannabis sales channels can't possibly result in enough revenue and thus profits to justify these valuations.

No way, no how, no matter what you do.

I'd like the idea of buying some PUTs on these companies except that their implieds are quite unfavorable and thus the POTential gains are not what I'd like.... after all these firms are not likely zeros -- just way, way overpriced.

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