published Sep 19, 2018, 3:41:12 PM, by Robert Burgess
(Bloomberg Opinion) —

More than a few commentators are talking about how the rally in marijuana stocks has officially become a bubble. Just take a look at Canadian cannabis company Tilray Inc., whose shares about doubled on Wednesday to $300 each before a series of trading halts late in the day sent the stock back down to around $200. Time will tell whether this is a bubble, but all the ingredients are in place.

Three factors typically drive stock prices: fundamentals, trading patterns and human behavior. As the strategists at Richardson GMP pointed out this week in a research note, fundamentals tend to be the driving force of long-term results, while trading patterns, or as some might say technical analysis, can help identify turning points. But both of those can be trumped by human behavior, driving prices far beyond rational explanation. So, consider whether this is rational: Tilray and fellow cannabis companies have a combined stock market value of more than $35 billion. Then consider that Market Research/BDS Analytics forecasts legal cannabis spending globally is only expected to hit $32 billion by 2022, according to Bloomberg News’s Joe Weisenthal.

Speculators flock where there is the potential to get rich, not where valuations make sense, according to the Richardson GMP strategists. They note that Warren Buffett put it rather succinctly when he said: “People start being interested in something because it’s going up, not because they understand it or anything else.” In other words, they want in because they see others who are dumber than they are getting rich, and want to get in on the action.”It’s the fear of missing out that drives us toward the action; however, much like mosquitoes getting zapped flying to close to the light, flying too close can be a fatal mistake for investors,” the Richardson GMP strategists wrote in their research note. That sounds an awful like the cryptocurrency craze that flamed out spectacularly earlier this year.

COCAINE COMEBACKWhat is it with narcotics these days? Everyone knows about the big rally in marijuana stocks, but here’s something else to consider: Colombia’s cocaine production has never been higher, surpassing levels seen before U.S. President Bill Clinton launched the Plan Colombia counter-narcotics program, reports Bloomberg News’s Oscar Medina. The amount of land planted with coca shrubs rose 17 percent to 171,000 hectares last year, enough raw material to produce 1,379 tons of cocaine, the United Nations Office on Drugs and Crime said Wednesday. That’s more than triple the output five years ago. Coca output now surpasses the previous record of 163,000 hectares in 2000, the year Plan Colombia started. The U.S. has given Colombia more than $10 billion in aid over that period, more than to any other country outside the Middle East and Asia. A 38 percent slump in world coffee prices since the start of 2017 has led some farmers to switch to coca. Virtually all of the world’s cocaine comes from Colombia, Peru and Bolivia, with Colombia producing more than half the total, according to Medina. No wonder Colombia’s peso has held up better than the broader market for emerging markets, dropping only about 1 percent this year.

LOAN BONANZAIt’s become a tough time for fixed-income assets. The Bloomberg Barclays U.S. Aggregate Bond Index has dropped about 1 percent over the past month, bringing its decline for the year to 1.77 percent. That may not seem like much until you consider that the gauge is on track for its worst year since 1994, when it dropped 2.91 percent. But what’s surprising is that the riskiest parts of the bond market are acting as a haven. Loans made to companies with below investment-grade credit ratings, have generated an average return of 3.69 percent this year, according to the S&P/LSTA Leveraged Loan Index. No less than Goldman Sachs Group Inc. says this type of debt still offers value. Declining net leverage, increased coverage ratios and investors pushing back on deals where they believe borrowers are seeking overly lax terms are signs that the market for riskier loans isn’t overheating, Goldman Sachs analyst Amanda Lynam wrote in a report on Wednesday. “The risks in the leveraged loan market, broadly, are manageable and not close to an inflection point,” Lynam wrote in the report. The firm notes that the percentage of loans with weak interest coverage ratios is at a record low of 3.5 percent. Unlike many other types of fixed-income assets, loan rates rise and fall with benchmark rates, making them attractive during times when the Federal Reserve is raising borrowing cost, like now.

BUCKLE UPThe S&P 500 eked out another gain on Wednesday, its seventh in the last eight trading days. But, alas, all good things must come to an end, and that end may come next week. Arbor Research & Trading scientist Ben Breitholtz points out that since 1990, seasonal quirks in economic and inflation data releases into the end of September have tended to produce the worst week of the year for the S&P 500 Index. The 39th week — which in 2018 comes next week, ending Sept. 28 — has historically been the worst, with losses 71 percent of the times by a median of minus 1.25 percent, Breitholtz wrote in a research note. This is also the time of year when economic data tends to disappoint. Breitholtz finds that such data has routinely soured from weeks 36 through 40 of the year, with momentum slowing 70 percent of the time during week 40. Last week’s consumer and producer price index reports showed that inflation may be losing momentum, which it has done many years from weeks 34 through 38, according to the data scientist. There is an upside, at least for bond investors: The end of September has tended to produce some of the strongest weeks of the year for U.S. 10-year Treasuries. That would be good news for investors dealing with a selloff that has pushed 10-year yields to as high as 3.09 percent on Wednesday from last month’s intraday low of 2.81 percent on Aug. 22.

WHAT TARIFFS?U.S. tariffs on Chinese goods were supposed to weigh on China’s economy, forcing it to negotiate better trade deals with America. That may still happen, but there’s one indicator that shows China’s economy may even be doing better. Copper demand in China, the top global consumer of the metal, is soaring. The premium paid for the metal at the Chinese port of Yangshan has risen to the highest level in almost three years as importers lock in supplies, according to Bloomberg News’s Ranjeetha Pakiam. The fee has soared almost 50 percent since the end of July as the London Metal Exchange price declined less than 3 percent. Inventories in warehouses tracked by the Shanghai Futures Exchange have more than halved in about six months, signaling tightening supplies. At the same time, production has been rising as smelters expand capacity, and imports of refined copper and concentrates are up strongly on a year earlier, feeding sustained demand from fabricators of pipes and wires for air conditioning and power supplies. Does that sound like an economy that’s under pressure?

TEA LEAVESMeasures of U.S. consumer confidence are the highest in about two decades. Any why shouldn’t it be? The unemployment rate is below 4 percent, the stock market is at a record high and money is still relatively cheap to obtain. Just how flush consumers are these days will be revealed Thursday, when the Federal Reserve is due to release its quarterly report on household wealth. The last report on June 7 showed that the net worth of households and non-profit groups rose to a record $100.8 trillion in the first quarter, up 1 percent from the prior quarter. The bad news was that household debt increased at a faster rate of 3.3 percent. If that trend continues, it may not be long before consumers feel it’s time for some self-inflicted austerity, which could have consequences for the broad economy as consumer spending accounts for about two-thirds of gross domestic product.

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Robert Burgess is an editor for Bloomberg Opinion. He is the former global executive editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
To contact the author of this story: Robert Burgess at bburgess@bloomberg.net
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