WASHINGTON. Monday morning find the US stock market trading flat to slightly negative on the day. Today’s malaise is likely due to negative action in the banking sector as Q2 earnings season reporting begins. Citicorp (trading symbol: C), the first major bank to report, showed good numbers, propping other bank stocks up. But then investors changed their minds, and down those bank stocks went. Trading elsewhere remains anemic, and we’ve looked on as the marijuana patch stagnates. Again. Boring.
Bargain hunting vs. earnings season
In truth, we were prepared for a bit of bargain hunting Monday morning. That’s because during many (though not all) Mondays over the last few years, stocks have had a tendency to end up in the red. Influenced by anything from weekend headline risk panic to buyers’ remorse, stocks have a tendency to sell off. when a new week of trading begins. That means Mondays generally emerge as a great day for bargain hunting. That is, if the general trend of the market remains up, not down.
What ails the banks today? Likely the Federal Reserve’s hinted suggestion that a July interest rate cut may lurk around the corner. This forces interest rates down a bit. For consumers, this tends to be a “YAY!” On the other hand, for banks and those that invest in them for their generally stable dividends, such a move is a big “BOO!” Which, on Wall Street, can only mean “SELL, SELL, SELL!” As fans of Jim Cramer’s soundboard already know.
Making things worse, it’s Q2 2019 earnings season this week and for the rest of July. Sellers always line up for this, typically fearing the worst. The incoming earnings season is no exception, as today’s stagnant, nervous market seems to predict today.
Treasuries and bank stocks make traders and investors nervous. Because: Fed
Friday’s closing numbers hinted at this according to Innovative Income Investor’s Tim McPherson.
“The 10 year treasury traded in a range of 2.01% to 2.12% before closing the week near the high of 2.11%. The 10 year treasury had been trading under 2% the week before, but strong employment numbers that week put an end to the fall in rates-for now. Core consumer inflation numbers came in a bit hot last week at +.3%, which helped to hold interest rates up from the prior week as well.”
Given the negative spin on the Citicorp report and banks in general, most other stocks, including tech stocks, also seem paralyzed thus far today, though things can always change. We’ll have to wait through the rest of the week to see how this earnings season actually shapes up.
Marijuana patch stagnates. So do cannabis stocks, marijuana ETF
Notably negative, continuing a summer-long trend, are stocks – mostly Canadian issues – that allow investors to roll the dice in the still developing commercial marijuana patch. We’ve discussed these mercurial stocks in this column before. (Here, here and here.)
Back then, these stocks were fairly hot. And they got even hotter for a brief period of time, when our friendly neighbors up north decided to legalize cannabis for recreational use. (The Canadian government had already okay medical marijuana, which is what led to the IPOs of many existing North American cannabis companies to begin with. Mr. Market himself even boasted a brand spanking new ETF – symbol MJ – devoted solely to the marijuana patch. Plus a few other companies that provided support.
To the surprise of many eager marijuana investors, however, the Canadian marijuana breakthrough legislation – plus the passage of (illegal) legalization statutes by some US states in Election 2018 – failed to goose marijuana patch stocks very much. In fact, after an initial run of excitement last fall, those stocks, too, became casualties of Wall Street’s vicious 2018 Q4 swan dive.
By mid-March, 2019, the marijuana patch issues had recovered some lost ground. Ditto MJ. But now, the whole enterprise, at least stock-wise, has resumed its decline, retracing half of its collective upward move from its late-December bottom.
Is the marijuana patch in a no-growth mode?
Briefing.com, a service available through some brokerages (and thus no link here), summarized some of the reasons why cannabis stocks just can’t seem to get any traction these days. This news release provides further support for our own observations.
“The Cannabis ETF (MJ -4%) is trading at six-month low as investor hype around cannabis stocks has faded.
“In a somewhat predictable sell-the-news reaction, the MJ ETF peaked when recreational cannabis went into effect last Fall after staging a massive run leading up to the highly anticipated event.
“Since then, the onus has been on companies to deliver. Most of them have begun reporting enviably strong sales growth, but the euphoric valuations had priced in a generous amount of future success.
“Last week, Canopy Growth (CGC) Founder Bruce Linton was ousted from his role as co-CEO. He did a great job scaling the largest cannabis company in the world, but Constellation Brands (STZ) sought a more sound operational manger for the next phase of growth at its multi-billion dollar cannabis investment.
“This week, CannTrust (CTST) announced that it was non-compliant with certain regulations in Canada, resulting in millions of grams of inventory being put on hold. The stock has nearly been cut in half.
More on the current state of marijuana stocks. Should investors toke up?
“The cannabis market is still nascent and the THC and CBD markets have tremendous long-term potential, but unforeseen events are par for the course in the world of business. In hindsight, cannabis stocks were priced for perfection, so it was just a matter of time before sentiment cooled off.
“Cannabis stocks have pulled back from their aggressive valuations as expectations have been set at a more reasonable level.
“Headwinds in the form of regulations and capacity constraints appear to be abating as the industry starts to mature. The growth outlook remains very promising.
“Despite the recent sell off, the leading (largest) cannabis companies Canopy Growth (CGC), Tilray (TLRY) and Aurora (ACB) still trade at ~20x forward revenue estimates. With the backing of Altria (MO), Cronos (CRON) is even more expensive relative to sales estimates while Aphria (APHA) trades at a discount.”
Chapter the Last: Nothing more to write
Not much else to comment on today. We’ve incrementally increased our holdings in select sector ETFs to balance our portfolios. But otherwise, our tendency is to sit and wait. The entire market looks more than a bit toppy, and has looked that way since some time last month. We’d hate to fill up our investing plates for Mr. Market’s common (but not inevitable) late summer swoon, which tends to set in after Independence Day. When it does.
More as it happens.
— Headline image: A new version of the Canadian flag (?) celebrates passage of that country’s new Cannabis Act.
(This and similar images illustrate flags currently for sale online and elsewhere, design copyright unknown)