Background
First things first, a little background: Marijuana is currently classified as a Schedule I drug, which is the same category as LSD and heroin. In 2022, Biden launched the process to review how marijuana is scheduled under federal law. On 29 Aug 2023, this led to a recommendation by the Department of Health and Human Services (HHS) that the DEA should move marijuana from its current status in Schedule 1 to Schedule 3 of the Controlled Substances Act. Schedule III drugs include “drugs with a moderate to low potential for physical and psychological dependence” such as ketamine, testosterone and Tylenol with codeine.
The DEA will have the final authority to make any changes to marijuana’s scheduling, and it will go through a rulemaking process that includes a period for the public to provide comments before any scheduling action is finalized. This could take place in the next few months.
The fully unredacted letter of the HHS to the DEA was released on 12th Jan 2024. There were a few interesting details in it, but one of them struck with me: The FDA basically recognized conclusive evidence for the use of cannabis in the treatment of pain. As per Politico:
That’s a big change because marijuana’s position in Schedule I indicated that the federal government believes there is no indication of medical use for marijuana — and this review unequivocally counters that.
The important point here is that you have the HHS and the FDA now giving positive feedback to the DEA … in an election year.
IMPORTANT CAVEAT: These processes usually take A LOT OF TIME. So I wouldn’t be surprised if the timetable slips. As mentioned above, a part of the rescheduling process is that the topic is opened to public consultation. Can you imagine how many questions they will receive on this?!
What does this mean?
The easy narrative is that rescheduling could help the up-listing of cannabis stocks to major exchanges and allow institutions to invest more easily in cannabis stocks.
But the part I didn’t appreciate is that these companies are subject to “280E tax restrictions”, which prohibits them from deducting many normal business expenses on their federal tax returns i.e. they pay tax on GROSS profit.
Lets put it simply: the effective tax rate of these companies can be >80% ! (Compare that to the US corporate tax rate of 21% or other companies in the US that sell social media drugs, like META which pays 5%)
Rescheduling would mean that Section 280E no longer applies. If we use some simple math, we can readily conclude that by removing the 280E restriction, the net income of these companies goes up by 2-3x!
Technicals
MSOS 0.00%↑ is an etf that holds shares in the largest US based operators of cannabis growers & dispensaries. It has only been around since 2020, so I’m sticking with the daily chart.
I like this ridiculous long base that it’s forming and that it’s trading above the 200dma. It fits my narrative so I’ll go with it.
Incentives Incentives Incentives
I saw a poll that 9 out of 10 Americans say marijuana should be legal for medical or recreational use.
This is an Election year. In the last election of 2020, rescheduling Marijuana was a key pillar of Biden’s platform. When 90% of a country supports rescheduling AND you promised it AND it’s possible to get it done, well … there’s a higher likelihood that it will get done.
Biden & the officials he appointed to lead the DEA, FDA, & HHS, are all motivated to get this through the finish line before year-end because of the boost it could give Biden going into Election Day. The actual date when/if this may occur is a huge question— and I don’t have the answer. But there’s 8 months left to Election date.
Incidentally, another weird factoid I learned during my research: there’s >400k jobs in the legal cannabis industry, surpassing dentists and pilots combined. That’s a lot of votes!
Summary
I haven’t gotten into the “weeds” of the situation yet (get it? get it?) in terms of single names, so I think the path of least resistance is the MSOS 0.00%↑ ETF.
Again it’s worth reminding: THIS WILL TAKE TIME! I wouldn’t be surprised if this trade spikes up & down a few times in 2024, so be mentally prepared for it. There’s definitely the risk that the timetable spills over beyond the election date, in which case the new administration may have a different view on rescheduling and may leave you bag holding, so beware.