I heard an interesting take earlier this week on institutional investors within the legal US MSO sector.
One of the current sell-side tropes is that institutions had to divest of holdings due to concerns from risk management, the potential for legal exposure, and possible enforcement by the feds <umm, yeah>. The extension is that this ‘forced selling’ of MSO holdings walked institutions out of the room, and have contributed to the price slide that began in late February.
As TheCannalysts pointed out in our 50th podcast – sell-side has put forward excuses, peddling them as ‘reasons’ (there’s a BIG difference between the two). Some of those tropes? SAFE will actually help the blacks and latinos, what are you waiting for?; institutional blockades (per above); it’s all been manipulation by the ‘scummers!’. And so on. God it gets tiring.
And those 6 or so excuses aren’t aging well Hey – how much do you hear about ‘DCF’ anymore? Now the new tune is ‘intergenerational wealth’.
The worst I’ve seen in the past week was this from a sell side muppet who said <paraphrased>: “I feel for our new friends who came in at the high in February….but stay the course…..I believe these (MSOs) can double from these prices”. Seriously. Really.
That is what passes for ‘analysis’ from a commercial outfit that doesn’t disclose the breadth and depth of relations with companies paying for enhanced exposure on their specific platform. Anyhow. Regarding institutional interactions in legal cannabis right now……
The take I heard is that algorithms (algos) are a’plenty right now, laying missionary position on the MSO and their prices, doing the in-the-trenches buying and selling that leads to the intra-day volatility we are witnessing. I can’t say for sure, I’m not in touch with any desks. And if I was, they wouldn’t tell me what they’re doing anyway.
What I can tell you is when I was in the I-banks, a ‘typical’ trade desk had a core operational budget of ~=$250k/yr – which a quant and a coder were hired with, and includes data feeds and discretionary spends – and that the trader/desk was assigned book limits set by a specific VaR. A desk is referred to in the industry as a ‘flight’. The level of VaR granted is contingent upon region traded, whether spot or term tenors are transacted, core exposures, how complex deals needed to be, and previous track records. The desks always had annual PnL target set at a multiple of VaR. Standard industry practice. A trader’s 100% performance bonus target was typically 4x salary for the minions, multiples of that for the heavy hitters. Straightforward.
I believe that there are trade desks everywhere right now whacking MSO moles – and the only thing I need to support that contention is in one word: volatility (vol). Vol attracts trade like a light attracts moths. And where there’s relatively unsophisticated liquidity wandering around, it’ll quickly resemble an MMA fight between Francis Ngannou and a Girl Guide.
I think to believing algos are not present in MSO equities is to be the equivalent of falling off of a turnip truck that sell-side is driving. More succinctly: horribly naive.
The bottom of it is that the presence of algos themselves nullifies the idea that institutionals aren’t here. Their presence would positively confirm it. Which leaves us to the exposed logic of sell side claiming ‘scummers’ are manipulating the market.
Say sell side, do tell: if there is manipulation in the market (but no institutions) – who’s doing the manipulating? A cabal of retail buyers who’ve pooled their money? Or the equivalent: Who other than an institution would have the capital depth to pull off a short position on a block trade? I’d love to hear the answer….
The conviction of JT Burnett on charges of extortion and fraud have likely been weighing hard on Trulieve’s ($TRUL) shares, as a shadow has been cast on the licensing process in Florida. Yep. Scandal! And we’ve seen allegations thrown and litigation launched across a dozen states thus far.
Today sees a relative escalation of those in Nevada, where FBI agents are reported to have been examining pay-to-play schemes in the Silver State. Nevada’s licensing process has been a shemozzle thus far – which has also enhanced/distorted earnings of some companies via artificially created moats in the State.
I think the main takeaway here is to bust another of those sell-side tropes: that verticality is going to remain intact post-legalization.
As if the feds are going to specifically exempt the cannabis sector from engaging in anti-competitive practices – to the exclusion of virtually every other industry out there. To openly defy the Constitution – because…..well. Ask your closest sell-side voodoo practitioner why cannabis would be regarded as ‘special’ within the American commercial landscape, and why it’ll be exempted from the law of the land.
I’ll bet a flat of Pabst Blue Ribbon that the reply won’t be terribly convincing unless you’re one of the faithful.
I genuinely believe we’ll see a pop in MSO prices when the regulatory issues become clearer, and a wider audience of investors comes in. That’s not rocket science. As to how long it’ll be lived is another question. The parallels Blue and I see between Canada and the US cannabis sectors are plentiful. There are vast distinctions, and we’ve worked hard to point these out.
At the bottom though, a gold rush only lasts as long as the field is seen to produce. I believe Canada’s experience will be illuminating on the US sector, just like Colorado and Washington and Oregon have already laid out.
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative.