California High on Cannabinoid Wellness

Author: David R. Kotok, Post Date: January 6, 2018

“California High on Cannabinoid Wellness” is the title to this commentary which was written a few days ago.

Now we must ask: “What about the rest of the nation?”

By yearend, 8 states will have recreational Marijuana; 29 will have medical usage. Meanwhile a reversal of established policy gives an “in your face” to the majority of the country. That is the result of the latest gesture by the US Attorney General Jeff Sessions.

CNN summarized as follows: “In a seismic shift, Attorney General Jeff Sessions will announce (he subsequently did -Ed) Thursday that he is rescinding a trio of memos from the Obama administration that adopted a policy of non-interference with marijuana-friendly state laws.” CNN goes on to say, “While many states have decriminalized or legalized marijuana use, the drug is still illegal under federal law, creating a conflict between federal and state law.”

Personal disclosure. I have personal experience with family members who have used medical marijuana derivatives to deal with pain from Chemotherapies. It works. I know cases where a derivative product has helped with seizures. It works. This change from AG Sessions is a reversal without support because of its blanket and broad nature. What it means for a confrontation between the states and the federal government remains to be seen.

Let me get to the lessons from California, the most populous state in the United States and the size of what would be the fifth largest economy in the world were it to be a standalone country. And let’s get to our original comments about the changing world of cannabis.

Todd Harrison is known for previous work (Minyanville, Ruby Peck Foundation, etc.). He is now the founding partner & chief investment officer at CB1 Capital LLC, Todd describes CB1’s effort as a cannabinoid wellness fund and an emerging disruptive healthcare enterprise. I called Todd after reading the CB1 morning note below, and he granted us permission to reproduce it and send to our readers.

The subject of California and the opening of recreational marijuana sales on Jan. 1, 2018, is huge. It is now legal to buy and sell recreational pot in California. As CB1 notes below, California is “the eighth and largest state by far to make the move.”

The morning note that Todd’s firm sent discusses many issues. Federal rules and the restriction on banking and money transfers are among them, as is the whole issue of finance and investment in the developing industry of marijuana agriculture and distribution in this rapidly expanding asset class.

At Cumberland we are watching the development of this industry closely. We haven’t seen any “marijuana bonds” in the municipal space yet. We expect they will be developed and issued by jurisdictions that want to finance state and local government activities with marijuana revenues. Why not? We have seasoned tobacco settlement bonds as a model.

We have seen the launch of the first ETF, whose symbol is MJX. The launch is too small for us to use now and not seasoned enough for Cumberland to place in managed accounts. That situation could change with time. For now a Cumberland client or trader has to buy MJX on his or her own and only for their personal account.

We’ve also watched products derived from cannabis used to treat pain, and we’ve seen the relief afforded to those who are suffering from chronic diseases. So this industry may be about “getting high” for some folks, but it is also a legitimate and now legal industry with a health component.

We have personally observed cases where juveniles have incurred criminal records and had to endure negative consequences in their lives because they were convicted on a charge involving marijuana. Those same cases would never be prosecuted today. Is there a way to cleanse those records? Would expunging those convictions allow many young adults with no other infractions more educational and employment opportunities?

And, finally, there is the antiquated federal legal structure that constitutes an impediment to marijuana-related banking and finance. It is time for a change here. We wonder at the extent of the off-the-books and cash transactions that are taking place due to the federal intransigence. We’ve watched workarounds devised in states like Colorado, where cash commercial activity thrives because of federal restrictions on conventional banking system usage.

Questions abound, but one thing is certain. With recreational marijuana now legal in California, pressures for a national evolution of this industry will intensify greatly. We expect that with those pressures will come changes in the federal system.

We thank Todd Harrison for granting permission to share the following morning note with readers.

David R. Kotok
Chairman and Chief Investment Officer
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CB1 Capital LLC Newsletter – Morning Headlines

It’s more important now than ever to update outdated policies, right the wrongs against communities of color, and continue our work to lift up the voices of the many Americans who are speaking out in favor of legalization.” -Senator Ron Wyden, D-OR

California Prepares For Recreational Marijuana Sales On Jan. 1.

On January 1, it will be legal to buy and sell recreational marijuana in California. It’s the eighth and largest state by far to make the move. It’s had to rush to get regulations in place since voters approved the measure just over a year ago. From member station KQED, Katie Orr reports.

California Marijuana Start-Ups, Shut Out From Banks, Turn to Private Backing

Marijuana is becoming legal in California, and entrepreneurs are rushing in with infused artisanal chocolates, specialized farming equipment and security teams to guard large hauls. On Jan. 1, companies will be able to produce and sell marijuana in the state, making it one of eight in the United States where the recreational use of cannabis has been legalized. But finding expertise and financing won’t be easy. Cannabis use still lacks legal standing with the federal government. That means growers, processors and retailers can’t open accounts or access lines of credit from federally insured banks. They can’t write off business expenses when they file their taxes, and it’s extremely difficult to purchase crop insurance (think of the recent spate of fires in California). “It’s federally illegal, and that makes running a cannabis business more challenging than arguably any other kind of business,” said Kris Krane, co-founder of 4Front, a medical marijuana investment and management firm. Cannabis-focused accelerators and investment companies aim to change that. These enterprises have long been a presence in Silicon Valley, offering mentoring and investment in exchange for an ownership stake. Companies that provide these types of resources are critical to expanding a nascent industry around legal marijuana, said Mr. Krane, if only because they can introduce its entrepreneurs to angel investors and other private capital sources. Funders have reason to be interested. Selling cannabis in California has the potential to generate $5 billion a year, once a critical mass of businesses have proper permits, according to the Agricultural Issues Center at the University of California at Davis. Each harvested acre of cannabis could be worth millions of dollars, based on current prices in Washington, Oregon and Colorado, according to Greg James, the publisher of Marijuana Venture, a monthly business magazine. Two years ago, Ben Larson and Carter Laren co-founded Gateway, an accelerator in Oakland that has helped expand 19 cannabis-related start-ups specializing in a wide variety of business activities, including payment solutions, cannabis products aimed at seniors, agricultural technology and hemp-based plastics. When the pair started, medical marijuana had been legal for two decades, but Gateway found many companies’ business practices were still “not far departed from those of the black market,” Mr. Larson said. With legal adult use in sight, the industry is making a rapid transition to more sophisticated, transparent and mainstream business practices, he said. Gateway now offers $50,000 in exchange for 5 percent of a company’s ownership, and brings the management team of start-ups into its offices for about six months to work with experts, mentors and potential investors. Applicants present their business plans and answer questions on legal issues, trends and the competitive landscape. Mr. Larson sometimes assigns homework, asking founders to conduct customer interviews and do market research. Entrepreneurs bring a wide variety of ideas because the industry is just forming. For example, new apps, sensors and machinery help control growing conditions, save energy and reduce labor costs in greenhouses. Even “the boring areas” of the marijuana industry offer terrific opportunities, said Mr. Larson, because growers are currently spread too thin. The same company might be cloning plants, harvesting crops, selling to dispensaries and making deliveries. “There may be eight different steps in their value chain that could be specialized” and contracted out, he said. Increasing brand recognition for products and retailers is another major opportunity for start-ups. “There’s no Starbucks or Nordstrom’s yet — names that mean things to people,” Mr. Larson said. While states are collecting hundreds of millions of dollars in tax revenues from marijuana businesses, and a rising number of Americans favor legalization in some form, Attorney General Jeff Sessions’s firm opposition to it poses a risk to cannabis-related companies. He could “shut the industry down tomorrow,” said Micah Tapman, co-founder of the Canopy cannabis accelerator and venture capital fund in Colorado. Of course, there are other challenges. Evolving rules and regulations, like new packaging requirements, can add unexpected costs to processors and retailers. Companies forced to deal only in cash can run into safety and theft issues. Many small growers emerging from the black market “have no idea how to run a commercial-scale facility,” Mr. James of Marijuana Venture said. Despite the hurdles and uncertainty facing the industry, Mr. Larson of Gateway has remained optimistic. “People are gaining confidence as legalization spreads, and the growth is going to be huge,” he said.

ETF Focused On Marijuana Industry Launched 

This ETF might bring “high” returns. MJX, an ETF focused on the cannabis industry, made its debut on NYSE Arca on December 26. The fund previously planned to make its debut as the “Alternative Agroscience ETF” and claims to be “one of the first of its kind.” It intends to mirror returns from the Prime Alternative Harvest Index. According to the fund’s managers, the index “tracks companies likely to benefit from the increasing global acceptance of various uses of the cannabis plant.” The fund was earlier targeted at the real estate market in Latin America. ETF Managers Group LLC is behind MJX. “As an ETF issuer we are excited about opportunities for innovation, the chance to give investors exposure to new markets and doing our part to impact the continued evolution of the ETF industry by meeting the appetite of investors interest,” said Sam Masucci, founder and CEO of the company. MJX has 31 holdings, with more than 80% focused on the healthcare and consumer staples sector within the cannabis industry. The top three holdings in the ETF are Canadian. Its largest holding is Cronos Group, a supplier of cannabis to medical institutions. CannTrust Holdings, another company aimed at the medical cannabis industry, and Canopy Growth Corp., a cannabis producer and distributor, are the other two holdings. The MJX fund has $5.7 million in assets and an expense ratio of 0.75% and its managers plan to rebalance it on a quarterly basis. Across the pond, the Horizon Marijuana Life Sciences Index ETF also tracks businesses within the marijuana industry.

Pot Stocks Soar as California Gets Ready to Get High (video) 

Marijuana companies are higher than ever as California rolls toward recreational legalization. The BI Canada Cannabis Competitive Peers index is having its best day ever as Californians prepare to light up, or eat up, marijuana products starting Jan. 1 at 12 a.m. Among those reaching intraday records are Canopy Growth Corp., Cronos Group Inc., and producer Aphria Inc. Some marijuana companies are creating multinational franchises on the heels of legalization, said RBC analyst Nik Modi this month. Green House Brands North America has a joint venture in Canada with Canopy Growth and Organa Brands, which sought to invest in and acquire cannabis brands in the U.S. There is overlap among the alcohol, tobacco and cannabis industries AdvisorShares Investments Managing Director and Chief Operating Officer Dan Ahrens said in a Bloomberg TV interview, with mergers and acquisitions or “at least” joint ventures likely. The three work well together, he said, noting his AdvisorShares Vice ETF includes an allocation of about 20 percent cannabis-related stocks. The industry is in its “infancy” and “just getting started,” Ahrens said. Canada’s also legalizing recreational pot next year. Ahrens isn’t alone in that sentiment. Bloomberg Intelligence analyst Kenneth Shea, in his 2018 outlook, highlighted key trends for the cannabis group, which included more and larger mergers and acquisitions and a rising number of states legalizing medical or recreational use. Earlier this year, in fact, Constellation Brands purchased a 9.9 percent stake in Canopy Growth that could catapult the marijuana producer into a league of its own, according to GMP analyst Martin Landry. Of the 34-member Canada Cannabis Competitive Peers (BINACCCP) index, 32 are trading up today, while 60 of the 69-member BI Global Cannabis Competitive Peers index are also in positive territory.

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