Category: Economic World News

Investors in North American cannabis companies were still digesting the results of Tuesday’s U.S. midterm elections — which saw voters in three states legalize cannabis in some fashion — when the sudden resignation of U.S. Attorney General Jeff Sessions sent shares across the sector soaring late Wednesday afternoon. 

“The entire space is now rallying on the Sessions news,” noted Russell Stanley, managing director of equity research at Beacon Securities Ltd. “The industry viewed Sessions as a major obstacle to cannabis legalization and so this risk has now been removed — the industry, especially companies that derive bigger operational benefits from the U.S., are responding to that.”

In January, Sessions issued a memo on marijuana enforcement that rescinded the Obama-era policy of non-interference with marijuana-friendly state laws. That memo unleashed a bipartisan backlash, resulting in the STATES Act — a bill introduced by Democratic senator Elizabeth Warren and Republican senator Cory Gardner that pledged to prevent federal interference with states that have legalized cannabis.

“The Sessions memo actually galvanized the legalization movement and got them to circle the wagons, which completely backfired on Sessions,” Stanley added.

Shares of companies on both sides of the border charted significant gains after it was revealed Sessions was out and was being replaced by his former chief of staff, Matthew Whitaker. 

Among the biggest gainers were Vancouver-based Tilray, whose Nasdaq-listed shares soared almost 30 per cent for the day, while California-based MedMen Enterprises rose as much as seven per cent on the Canadian Securities Exchange. Other major players such as Canopy Growth Corp. and Aurora Cannabis both saw their share prices rise roughly seven per cent in the latter part of the day, while Aphria rose by almost five per cent.

The gains came after a lukewarm response from investors to Tuesday’s midterms, in which voters in Michigan had voted to legalize cannabis for both medicinal and recreational use, while those in Missouri and Utah had approved ballot measures allowing the sale of medicinal pot.

As a result of the votes, recreational cannabis will soon be legal in 10 U.S. states, while medicinal cannabis will soon be legal in 33 states plus the District of Columbia.

While Sessions’ departure was a key win for cannabis investors, a loss by another Sessions could have an even bigger impact, according to GMP Securities analyst Martin Landry.

Texas Republican Pete Sessions lost his seat in the U.S. House of Representatives to the more cannabis-friendly Democratic candidate, Colin Allred, a former NFL player, one of several wins that saw the Democrats regain control of the House.

Pete Sessions had headed the House Rules Committee and had actively blocked the House from voting on marijuana-related amendments. 

“A Democratic committee head will have a significant impact on cannabis reform, and possibly speed up the approval of the STATES Act,” Landry said.

While the Democratic win could also accelerate the chances of federal legalization in the U.S., some prefer the current pace of incremental gains. 

“I hope they won’t legalize federally anytime soon,” said Marc Lustig, CEO of Origin House (formerly CannaRoyalty).  

Origin House is a Canadian-based cannabis products and brands company that operates primarily in California, where it supplies branded cannabis products to licensed dispensaries. Companies like his are currently among the only ways investors can gain exposure to the U.S. cannabis industry.

A Democratic committee head will have a significant impact on cannabis reform, and possibly speed up the approval of the STATES Act

analyst Martin Landry

“There’s no question that when federal legalization happens in the U.S., massive conglomerates like pharmaceuticals, the tobacco and alcohol guys will all start buying up everything possible. The fact that it remains the way it is now, has given us free reign to build our chess board,” Lustig said. ”If the STATES Act bill gets passed, that’s about as perfect as it gets for us.”

It is unclear, however, whether the implementation of the STATES Act will allow American cannabis companies to begin listing on federal stock exchanges — which is the main disadvantage they have now, compared with their Canadian counterparts.

“If you’re listed on the TSX, Nasdaq, NYSE or any one of those big exchanges, you cannot touch the plant in the U.S. I am not sure the STATES Act will change that — it will just mean that the individual states have full right to determine how cannabis can be consumed and moved within its borders,” Landry said.

For licensed producers such as Aurora Cannabis, the wave of optimism toward cannabis in the U.S. is a positive development, although the real victory lies in who will be able to get a first-mover advantage on the medicinal market south of the border.

“We are poised and ready to enter the U.S. market as soon as it is legal to do so,” said Cam Battley, Aurora’s chief corporate officer. “What we will not do is put our NYSE or TSX listings at risk — but the instance it is deemed allowable, whereby we will not be violating U.S. law, we will enter.”

U.S. steel and aluminum tariffs aren’t having “the dire impacts” predicted for the Canadian auto sector, an analyst said, suggesting that losses, if any, are minimal and are being overblown.

Cormark Securities analyst David Tyerman, who covers the two largest manufacturers of autoparts in Canada  — Magna International and Linamar Corp. — said the sector’s largest companies haven’t seen a significant impact to their bottom lines since U.S. President Donald Trump imposed tariffs of 25 per cent and 10 per cent on steel and aluminum respectively on May 31.

The real danger, Tyerman said, was that Trump would make good on his threat to impose auto tariffs of 25 per cent on the sector. The threat led to uncertainty, but the USMCA trade deal that the U.S. and Canada signed in September eliminated that risk.

“It just doesn’t make that much of a difference,” Tyerman said. “It would be good if they weren’t there. It might bring the price (of the commodities) down a little bit, but the reality is it doesn’t gigantically change the equation of the overall economy.”

The main reason, Tyerman said, is because companies such as  Linamar and Magna receive rebates that cover as much as 100 per cent of the tariff charges from the federal government if they import steel and aluminum from the U.S. and export it back out.

In its second-quarter earnings report, released after Trump imposed the tariffs, Magna estimated that the company would lose US$60 million per year because of the tariffs. “It might sound like a lot to you and me,” Tyerman said, “but it’s not to Magna, who makes US$34 billion in sales a year.”

Due to the uncertainty over the tariffs and the lack of a trade deal at the time between Canada, the U.S. and Mexico, Magna lowered its outlook to between US$2.3 billion and US$2.5 billion, down from a range of US$2.4 billion to US$2.6 billion.

Linamar CEO Linda Hasenfratz has been outspoken on the tariffs, going as far as to warn on Tuesday that the tariffs may result in a recession.

“This is taking a toll,” Hasenfratz said at a conference in Montreal. “We may be past the point of no return of being able to stop the ramifications.”

But on Wednesday, Hasenfratz clarified during a third-quarter earnings call that while the impact of the tariffs on the Guelph, Ont. company is “not zero, it’s certainly not close to material for us.” Hasenfratz said there was no impact to Linamar’s U.S. facilities and any impact to its Canadian facilities is reimbursed by the government.

Her concern, she said during the call, was centred around what the tariffs could do to American companies such as Ford Motor Co.

It would be good if they weren’t there. It might bring the price (of the commodities) down a little bit, but the reality is it doesn’t gigantically change the equation of the overall economy

Cormark analyst David Tyerman

Smaller companies in the field such as the Markham, Ont.-based Exco Technologies Ltd. are also reporting minimal effects. The company reported “a modest drag on profitability” due to the tariffs, in a third-quarter earnings report in August. The company’s net income grew nearly three per cent compared with the third quarter of 2017. 

As well, both large-cap and small-cap companies are likely to benefit from the price of aluminum plunging since Trump announced the tariffs. Its U.K.-based LME benchmark puts aluminum at US$1,950 per metric tonne — more than $350 cheaper than it was on June 1.

The price of hot rolled coil steel, the U.S. benchmark, has declined nearly US$100 to US$817 per metric tonne since the tariffs were implemented. The price is still quite high for automakers, however, in comparison to the US$609 per metric tonne at which they could purchase it on Nov. 7, 2017. Hazenfratz said that higher commodities costs in the company’s industrial segment have already lead to price increases for customers.

While these companies haven’t seen significant losses, Veritas Investments analyst Dan Fong said that any additional costs — however small — will eventually fall to consumers — the customers going into dealerships to buy cars, Fong said.

“If you think about the second-order effect on what these tariffs will do to the cost of a car if you have to pass the whole thing on to the consumer … depending on the car, the increase in cost will be (between $500 and $1,000),” he said.

Trade issues that played a minor role among voters in the U.S. midterm elections are poised to become one of the first points of conflict between U.S. President Donald Trump’s administration and a newly elected House of Representatives, analysts say.

Among the early items likely to be caught in the crossfire: the United States-Mexico-Canada agreement (USMCA), which still needs to be ratified by the three countries before it takes effect.

“I think USMCA will get through Congress but it will be very difficult,” said Gary Hufbauer, a senior fellow at the Washington-based Peterson Institute for International Economics. “The Democrats will want to change it and, given their majority, which looks to be pretty strong, they can still lose a few votes and hold up the ratification process. It’s not going to be easy.”

Following a tumultuous few weeks of campaigning, Republicans strengthened their hold on the Senate by adding three seats while the Democrats won a majority in the House of Representatives, gaining seats from coast to coast — and enough power to challenge many of Trump’s policy moves.

Yet the “blue wave” that many Democrats had hoped for failed to make a significant impact in some areas, notably in farm country, where agricultural producers have borne the brunt of Trump’s controversial “America First” trade policies.

U.S. tariffs on steel and aluminum imports from countries such as Canada and Mexico have prompted retaliatory tariffs on a range of American agricultural products. And the escalating U.S. trade war with China has resulted in retaliatory tariffs from Beijing that have sunk the price of soybeans, pork and other products, weighing on farmers’ bottom lines. Recent data from the U.S. Department of Agriculture’s Economic Research Service suggests 2018 net farm income will be US$9.8 billion, or 13 per cent, lower than the year before.

“I think trade was one of the issues farmers cared about but it wasn’t the top one,” said Dan Ujczo, an Ohio-based trade lawyer with Dickinson Wright, who has been closely tracking the midterms and political support for USMCA. “And in general in this election, there might have been an undercurrent of trade concern with voters but I just don’t think it changed the direction of the tides at all. It wasn’t a deciding factor.”

The outcome of the election has cast a cloud of uncertainty over the passage of Trump’s largest trade deal to date. With so many Republican-held seats having changed hands, gauging how much support exists for the USMCA has become difficult, Ujczo said. For instance, Congressional seats in Texas, Minnesota, New York, New Jersey and Virginia that were all previously occupied by Republicans believed to be solidly supportive of the deal, have now flipped to Democrats whose positions are unknown.

“These are freshmen members of Congress and while most look to be middle-of-the-road candidates, who knows what the Democrats will decide and where the party will land on trade,” he said. “All of a sudden we could start losing votes.”

Though the Democrats could simply look the other way and pass the deal unaltered, Hufbauer said it is more likely that they will insist on stronger labour and environmental provisions. Those would likely be handled in side letters to the agreement so that a new round of exhaustive negotiations can be avoided.

These are freshmen members of Congress and while most look to be middle-of-the-road candidates, who knows what the Democrats will decide and where the party will land on trade

Dan Ujczo, trade lobbyist

“I think Trump really faces an uphill battle getting anything ratified and I think he’ll be lifting a really heavy weight getting USMCA through,” Hufbauer said. “Everyone will be looking to 2020 elections so they’ll be looking for plausible reasons to make it difficult to ratify anything.”

Satisfying both sides would force the White House into “a delicate dance,” in which accommodating the Democrats could risk the support of the Republicans, said international trade lawyer Mark Warner. Though ultimately, if the Democrats look as if they will block the deal, Trump can always raise the familiar spectre of a U.S. exit from the North American Free Trade Agreement.

“That’s always been his threat and I think he’ll go back to that threat,” Warner said, who predicts the USMCA will ultimately be ratified by early summer, before presidential campaigns in the United States and federal leadership campaigns in Canada kick off. “There will probably be some hiccups getting it passed … but the parties have a mutual interest in putting this to bed.”

In the meantime, the lack of a rebuke on trade by voters in the midterms, particularly in farm country, will likely see Trump carry on with his forceful approach, Hufbauer said.

“I was moderately surprised because they’ve suffered economically, no doubt about it,” Hufbauer said. “It leads me to believe Trump still has a very free hand on pursuing this aggressive free trade policy because on balance he didn’t lose many votes on it.

“I’ve come to the conclusion that the only thing that will count on trade when it comes to an election is consumer backlash, financial market backlash or general economic malaise. We don’t have any of that right now.”

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In May 2017, a college student based in the US invested $5,000 in Ethereum (ETH), when the digital asset was worth around $50.

Within merely months, the price of ETH skyrocketed from $50 to $1,281 at its peak, as the cryptocurrency market achieved a valuation of $800 billion.

With a base return of 25-fold, having made over $125,000 in ETH, the individual invested in a few digital assets and initial coin offering (ICO) projects, and, by the end of December, the portfolio of the investor reached $880,000.

“I gambled in more than a few bad ICOs to start 2018, had some money in coins that absolutely plummeted with no chance of recovering, etc. Today my portfolio sits at $125k, a far cry from my $880k. My estimated tax liability for 2017 is about $400,000,” the student said.

At the crypto market’s peak, the student recorded a net profit of $875,000 with an investment of $5,000.

Tax Liability

In the US, cryptocurrency investors are required to declare taxes using the tax form 1099-K and major cryptocurrency exchanges like Coinbase have tax filing systems in place to automate the process for its investors.

In March, subsequent to spending over a million dollars in January in a conflict with the Internal Revenue System (IRS), the revenue service of the United States federal government, Coinbase released new tax tools to help users to establish a complete view of trading activity, calculate gains and losses, and file taxes.

“Gains on digital currency sales and exchanges are taxable in the US. For reference, here are the IRS guidelines for reporting digital asset gains. We understand taxes for digital currency can be complicated, so we updated our tax tools to make reporting easier,” the Coinbase team said at the time.

In early 2018, Coinbase reported the 1099-K of the individual, which calculated all of the gains the individual made throughout the calendar year. While the student did not withdraw any funds to a bank account during that time, cryptocurrency-to-cryptocurrency trades were listed on the report.

“These were crypto-to-crypto trades (i.e. Bitcoin for Ethereum, Ethereum for Litecoin). These are considered taxable events from what I understand. At no point did I ever cash out to fiat and transfer any USD into my bank accounts from these tradings.”

The issue with tax reports in the US is that if the reports are not filed with the IRS, failure to file and failure to pay penalties can be imposed. Hence, taxes on the returns have to be recognized, and the trader has to pay the taxes accordingly.

The student disclosed that a consultation with a tax attorney had been scheduled to resolve the issue.

“I’ve scheduled a consultation with a tax attorney that specializes in cryptocurrency and alternative investments. I appreciate it all very much, these last few months have been mentally trying.”

Tax Clarification

As an asset class at an early stage, taxation policies surrounding cryptocurrencies still remain ambiguous in many regions and complex even in large markets like the US.

While companies like Coinbase attempt to simplify the process for investors, unexpected situations could complicate the process of taxing returns for investors in the cryptocurrency market.

Featured Image from Shutterstock. Charts from TradingView.

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Nearly 11 months into a bear market that has seen the bitcoin price take a two-thirds haircut from its all-time high, the flagship cryptocurrency could be on the verge of a year-end rally.

Mati Greenspan, senior market analyst at eToro, has been watching for a bitcoin breakout for some time now, and he said in market commentary made available to CCN that there are early indications that cryptocurrencies will see a “Santa Claus rally” heading into the new year.

“In traditional markets, it’s very common to see a stock rally leading up to the end of the year due to the increased activity in the private sector during the holidays,” he wrote. “It may be too early to say this, after all we’ve only seen very moderate crypto gains this week, but it is very possible that we might see a Santa Claus rally in the crypto markets.”

Notably, Greenspan identified the looming Bitcoin Cash hard fork as the catalyst for this rally, noting that the BCH price had exploded in advance of the Nov. 15 fork, which seems likely to split the network into multiple competing versions.

“The gains are being led by Bitcoin Cash ahead of the hard fork next week. It’s kind of funny to see that after all this sideways movement, a possible break out could come from a disagreement in the BCH community of all places,” he said.

“In any case, the fire doesn’t usually care where the spark came from. Upward momentum has a way of snowballing in financial markets no matter what the drivers of that momentum may have originally been.”

Greenspan tempered his bullish outlook with the qualification that he believes bitcoin needs a strong breakout above its 200-day moving average (DMA), which is currently sitting at $7,068, to truly put the bear trend in its rearview mirror.

However, he isn’t the only analyst pounding the table on bitcoin’s technical indicators. Earlier this week, Bloomberg reported that bitcoin’s directional movement index (DMI) had entered a bullish phase and that its price trends had broken out of their VERA band upper limit. Moreover, the moving average convergence divergence (MACD) gauge for the Bloomberg Galaxy Crypto Index — which features a heavy BTC weighting — recently entered positive territory for the first time in a month.

Featured Image from Shutterstock. Charts from TradingView.

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