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May 12, 2017

A Beginner’s Guide to Cannabis InvestingCannabis…

It needs no advertising...

It will always be in demand, no matter which way the economy is headed…

It’s in abundant supply…

It has dozens of breakthrough medical benefits…

And thanks to a wave of legalization across the globe, it’s handing a small group of investors triple-digit gains…

In fact, according to this week’s Inner Circle expert, it’s the most lucrative investing opportunity of the past 20 years.

Life-Changing GainsCannabis has been illegal on a federal level in the U.S. since 1937. [See box on page 2.]

But unless you’ve been living in a bunker, you’ll have noticed a wave of legalization sweeping across the U.S. state by state.

And the movement against cannabis prohibition is not just a U.S. phenomenon. Canada… Australia… Spain… Germany… Chile… Colombia… and Mexico have given legal cannabis the green light.

This means potentially life-changing gains for

investors as this multibillion-dollar mass market moves out of the shadows and into the mainstream.

It’s why, this week, we’re taking a “deep dive” into legal cannabis investing… and how you can profit.

Easy MoneyOur mission at Inner Circle is to track the most profitable big-picture trends shaping the markets.

We do that by tapping into the global network of independent analysts and experts Agora founder Bill Bonner has built up over his more than 30 years in the

IN THIS WEEK’S ISSUE:

The product that needs no advertising

Jeff Siegel: The most lucrative opportunity I’ve ever seen Why Team Trump will leave cannabis alone

Six stocks to profit from the legalization boom

Cannabis is becoming legal around the world... This week's expert says it's the most lucrative investment opportunity in 20 years

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financial publishing business.

And thanks to that network, this week, I was able to talk with one of the nation’s leading cannabis investing experts, Jeff Siegel.

Jeff got his start as an analyst alongside Bill at his investment publishing company, Agora. And after learning the ropes with Bill, he went on to found Green Chip Stocks, an advisory service focused on renewable energy, organic agriculture, and legal cannabis.

As you’ll discover in this week’s Q&A, being an early investor in legal cannabis has led Jeff to the “easiest money” he’s ever made.

Below, he reveals why the Trump administration won’t be cracking down on states’ right to legalize cannabis… why cannabis will be legal on a federal level within five years… and the lowest-risk way to get exposure as the legalization continues to score new victories.

Q&A With Jeff SiegelChris Lowe (CL): What first got you interested in investing in legal cannabis?

Jeff Siegel (JS): I’m a libertarian. So I’m passionate about ending the government’s War on Drugs. I’m also passionate about allowing sick people access to cannabis-based medicines.

But I’m also an investor. I’ve been in this game for 20 years. Over that time, I’ve seen my share of raging bull markets and crushing bear markets. I’ve also seen my fair share of booms and busts. And in all those years, I’ve never seen an opportunity as lucrative as legal cannabis.

Cannabis stocks I’ve recommended to my Green Chip Stocks readers have shot up 557%, 462%... even 825%. It really is some of the easiest money I’ve ever made. And I suspect it will continue to be for many years to come.

CL: What makes legal cannabis so lucrative?

JS: We’re talking about a product that needs no advertising. A product that, despite what happens to the global economy, will always have plenty of buyers.

It’s also a huge, largely untapped market. According to United Nations data, the global market for illegal drugs is worth more than $300 billion a year. Cannabis

accounts for nearly half of that – or $142 billion.

To put that in perspective, the global market for coffee – one of the most valuable commodities on the planet – is worth just $80 billion a year. The cannabis market is also bigger than the market for corn and bigger than the market for wheat. In fact, cannabis is now the largest cash crop in the U.S. Its market value grew 77% from 2013 to 2014. And it’s expected to grow another 700% between 2014 and 2018.

Bottom line: The cannabis market is one of the most lucrative markets in the world. And today, you can invest in it legally.

CL: By now, folks are used to reading headlines about legalization in the U.S. What about the rest of the world?

JS: Cannabis is legal in Spain as long as you buy it in private cannabis clubs. Germany recently legalized cannabis for medical use. So did Australia. And just last month, Mexico approved cannabis for medical use – one step closer to outright legalization.

There are also big steps being taken in South America. In 2014, for example, Uruguay made cannabis legal for recreational use. You just go to a pharmacy and buy it. And in Colombia and Chile, cannabis is legal for medical use.

CL: And where are we now with legalization in the U.S.?

The History of Cannabis Prohibition

In 1911, Massachusetts required a prescription for the sale of cannabis. And by 1933, 29 states had criminalized cannabis.

Then, in 1937, President Franklin D. Roosevelt signed the Marijuana Tax Act, which effectively prohibited cannabis.

And in 1970, President Richard Nixon made cannabis a Schedule I controlled substance under the Controlled Substances Act. Other Schedule I substances include heroin, LSD, MDMA (“ecstasy”), mescaline (peyote), and psilocybin (“magic mushrooms”).

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JS: Twenty-nine states – 30 if you count Washington, D.C. – have legalized cannabis for medical use. And cannabis is legal for recreational use in eight states… nine if you count D.C.

But in California, Maine, and Massachusetts, voters only made cannabis legal for recreational use last November. There won’t be any dispensaries – places to legally buy cannabis – until next year. That’s when these states will begin issuing licenses to dispensaries that allow them to sell nonmedical cannabis.

CL: Is it a big deal that cannabis will now be legal for recreational use in California – the biggest state in the U.S. by population and GDP?

JS: There are about 40 million people living in California. And its annual GDP is about $2.4 trillion. That makes it the sixth-largest economy in the world – ahead of France and Brazil… and just behind Britain. For legal cannabis companies to have access to the Californian economy is a huge, huge deal.

To give you an idea of just how huge, by January 1, 2019 – one year after nonmedical use becomes legal – California is expected to have raised an extra $1 billion dollars in tax revenue from cannabis-related activity.

Another reason it’s a huge deal is that California sends 53 representatives to Congress. That’s 53 votes in Congress to support states’ rights to legalize cannabis. And that’s 53 votes to support cannabis use on a federal level.

CL: Are there companies positioned to capture the cannabis market on a national level? Or does each company operate on a state level?

JS: The way it works in the U.S. is that cannabis use is legal in some states. But on a federal level, it’s still a Schedule I controlled substance. Meaning the brilliant minds that run our country have determined that cannabis is as dangerous as heroin.

So everything is done within state boundaries. If you are a producer of cannabis in California, you can’t export that cannabis outside of California because it’s illegal under federal law. Every state is like its own little economy for cannabis.

CL: The other big news is that, last month, Canada’s prime minister introduced a bill to legalize recreational cannabis use. Will there be similar regulatory conflicts

north of the border?

JS: First off, cannabis is expected to become a $5 billion-a-year business in Canada. So it’s another huge win for the legal cannabis business.

The way it will work is that Canadian provinces will be able to mold the new cannabis laws as they see fit. For instance, Ontario may require you to be over 18 to buy cannabis. Whereas the Maritime provinces may say, “No, you have to be 21.”

The big difference is that the Canadian federal government is saying, “Cannabis is going to be legal on a federal level. But we will let the provinces decide how they want to handle it.” In the U.S., the federal government is still saying cannabis is illegal. But individual states are saying, “We know it’s federally illegal, but we’re going legalize it in our state anyway because it’s our right.”

CL: According to a recent survey, 61% of Americans support cannabis legalization. If you go back to similar surveys taken in the 1960s, only about 10% of Americans supported legalization. Why the big change?

JS: It’s just a natural change in society. A ton of stuff is legal now that wasn’t legal before. Women now have the vote. There’s no longer a big push to ban alcohol. And it’s easy to get a divorce. None of that was true at the turn of the 20th century.

Cannabis or Marijuana? Cannabis is one of 11 genera within the Cannabaceae family of plants, along with Humulus (hops).

There are several slang terms for cannabis, including “weed,” “pot,” and “ganja.” But the most interesting is “marijuana.”

According to Baltimore newspaperman H.L. Mencken, there are no known examples of the use of this word prior to 1894.

Early supporters of prohibition – and President Nixon – used the Spanish word to reinforce the connection between cannabis and Mexican immigrants, who first introduced it to the U.S.

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Thanks to the internet, we also have access to information in a way that we've never had before.

CL: How does access to information help?

JS: Because if you look at the history of the prohibition of cannabis… and the anecdotal evidence of its medicinal qualities… it’s really hard to fight against legalization.

In terms of prohibition, I recommend your readers google a guy called Harry Anslinger. He was America’s first national drug czar and the architect of cannabis prohibition during the 1930s.

Anslinger had been an assistant commissioner at the Bureau of Prohibition, which no longer had a purpose after the repeal of the prohibition of alcohol in 1933. He needed to find something to be illegal, or else he was out of a job. And he figured the easiest thing to do was to go after cannabis because, as he put it, most of the people who smoked it back then were “colored people.”

Anslinger made some outrageous claims about the effects of cannabis. For instance, he said smoking it made white women want to “seek sexual relations with Negroes, entertainers, and others.” When people read this kind of thing, they’re like, “Wow… this is why cannabis became illegal?”

From the medicinal point of view, one thing that’s helped the legalization movement is how cannabis can help children with extreme epilepsy.

One case that got a ton of press about four years ago was of a little girl from Colorado called Charlotte Figi. She was about 6 years old at the time, and she suffered from a severe form of epilepsy called Dravet syndrome. Charlotte was having about 300 “grand mal” seizures a week, meaning she lost consciousness and suffered violent muscle spasms.

That all changed after her mother tried dosing Charlotte with medical-grade cannabis – cannabis that doesn’t get you “high” but still has medicinal effects. She made an oil out of it and gave a small dose to Charlotte in her food. Now, Charlotte has seizures only two to three times per month. It’s completely changed her life… and her parents’ lives, too.

We’re seeing something similar happen with veterans who suffer from post-traumatic stress disorder, or

PTSD. A lot of vets who came back from Iraq and Afghanistan with PTSD use cannabis on a regular basis to manage their symptoms.

Access to information is a beautiful thing. Thanks to the internet, you can't hide this stuff anymore.

CL: A lot of folks are worried that the Trump administration will crack down on cannabis at a federal level. Is that something that concerns you?

JS: I doubt the president is going to wage war against states’ right to legalize cannabis. That isn’t going to change even with Jeff Sessions – who’s made it clear he’s not a fan of legalization – as attorney general.

Take, for example, the recent budget extension that Congress passed. It includes something called the Rohrabacher-Farr amendment, which prohibits the Department of Justice from spending money to stop states implementing medical cannabis laws. It didn't get a lot of attention. But for cannabis investors, it’s a big deal. It offers a bit more safety – at least until September, when they'll have to include it again.

Granted, a lot of people were worried about Sessions being such a heavy prohibitionist. In a Senate hearing last month, he claimed that cannabis was a “danger” and said that “good people don’t smoke marijuana.” But there’s nothing the Trump administration could gain from cracking down on individual states.

I already mentioned that California is set to boost its tax revenues by $1 billion thanks to legalization. And last year, Colorado – which legalized cannabis for recreational use in 2012 – took in $200 million in taxes from $1.3 billion in cannabis revenues. That’s a lot of much-needed extra tax revenues. There’s no way a crackdown by the White House would happen without a fight.

Trump is not going to do anything unless he thinks he can win. He’ll keep Sessions on a tight leash and just leave it alone.

CL: That said, the possibility of a federal crackdown – no matter how remote – is still a big concern for a lot of folks thinking about investing in the cannabis industry. Is that also your experience?

JS: Sure. That keeps a lot of investors out of this space. But all investments come with risk. That is just

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part of the game. In the case of cannabis, the biggest risk happens to come from government policy.

As we’ve discussed, I don’t see the federal government making any major efforts to clamp down on cannabis sales in states where it’s now legal. But some investors don’t want to take that risk. And I get that.

CL: Five years down the road, where will the legal cannabis industry be in your view?

JS: In about five to six years, cannabis will no longer be prohibited at the federal level in the U.S. It’s like gay marriage. Individual states first made it legal. Then the federal government was like, “All right, fine. We give up. Clearly this is not a battle worth fighting.”

That means the opportunity to invest in individual cannabis stocks is now. Once it becomes legal on a federal level, Big Pharma and Big Tobacco – these huge corporations – are going to come in and buy up everything of value. And it will no longer be a niche.

CL: Are there already moves by tobacco and drug makers to muscle in?

JS: It’s not something these big corporations talk about – especially with cannabis still illegal at a federal level. But on an informal level, there’s plenty of interest.

A good example is a privately held Canadian cannabis grower called PharmaCielo. It’s the first company to be given a growing license from the government of Colombia to grow cannabis there. And PharmaCielo’s directors include former executives of tobacco maker Philip Morris and pharmaceutical firm Bayer. It’s just one of many examples where you have guys from tobacco and pharmaceutical firms involved in cannabis companies.

Because it’s against the law on a federal level, there’s nothing these big corporations can do except be ready to pounce when the federal ban goes away. I’m telling you: The day cannabis becomes legal in the U.S. on a federal level, they’re going to buy up everything.

CL: Sounds like good news for folks holding individual cannabis stocks. Won’t they profit big time when these buyouts happen?

JS: Absolutely. That’s why I want to have all this exposure

now. I mean, I’m making money now anyway. But once cannabis goes legal on a federal level, the big bucks will swoop in, I’ll take a huge win and move on to the next thing.

CL: What’s the best way for Inner Circle members to profit from the legal cannabis boom?

JS: There are a lot of publicly traded cannabis companies out there. More than half are garbage. And sadly, I’ve watched a lot of investors plow thousands of dollars into random cannabis companies just because those companies were in the “weed business.” Believe me, just because the company has the word “canna” or “green” in it doesn’t mean it’s a company worthy of your hard-earned cash.

Most of the really solid cannabis companies are listed in Canada. That’s why in my recommended portfolio at Green Chip Stocks, every cannabis stock – except two – is Canadian.

That’s partly because there’s just not a lot of great companies listed in the U.S. But it’s also partly because there’s much less risk in Canada, because cannabis is legal at the federal level. For instance, when White House Press Secretary Sean Spicer came out in February and said he believed we’d see “greater enforcement” of federal cannabis laws, U.S. cannabis stocks just tanked.

Some of my favorites right now include growing companies Canopy Growth [WEED.TO], Aphria [APH.TO], Emblem [EMC.V], Emerald Health Therapeutics [EMH.V], and Hydropothecary [THCX.V].

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Today, most U.S. investors should be able to buy Canadian stocks, especially if they’re with a good broker such as Interactive Brokers. But there are plenty of popular online brokers that won’t allow U.S. investors to buy Canadian stocks.

So if it’s a hassle for your readers to buy Canadian stocks, another way to get exposure is through a cannabis real estate investment trust, or REIT, called Innovative Industrial Properties [IIPR].

This company doesn’t grow cannabis. Instead, it leases facilities to companies that grow cannabis for medical use. The advantage of IIPR is that it trades on the New York Stock Exchange. That means it’s not only easy to buy for your U.S. readers, but it’s also an obvious target for bigger U.S. investment groups.

The downside is that it’s still early days. The company has only been public for maybe four or five months. It has one property in New York. And it’s buying another in Maryland. So it’s one to sit on and be patient. But with cannabis sales in the U.S. expected to reach $20 billion by 2021, the wait could pay off handsomely.

What to DoChris here – The importance of the legalization of cannabis goes far beyond investing.

In 1933, after 13 years of disastrous Prohibition, politicians finally realized that it was better to trust people not to drink too much alcohol than to have a

law saying nobody could drink…

The same thing is happening today with cannabis. Governments are allowing citizens to take back control of their personal decisions.

Of course, that’s not how everyone views it. Cannabis use remains a controversial subject. So don’t hold back. Feel free to push back on the ideas in this week’s dispatch at feedback@bonnerandpartners.com.

And keep an eye out for future Inner Circle dispatches on this big-picture investing theme.

If Jeff is right, it could be one of the most profitable we cover…

Until next week.

Regards,

Chris Lowe Editor, Inner Circle

P.S. Jeff also recently published a new e-book called A Beginner’s Guide to Getting Rich in the Legal Cannabis Market. It includes a list of 46 legal cannabis stocks you can buy right now. For details on how to download it, read on here.

P.P.S. To make it easier for you to invest alongside the Inner Circle network of experts, I’ve consolidated our Top Themes (see box below) to focus on just six of the most promising big-picture investing opportunities.

THE INNER CIRCLE TOP 6

Ride the cannabis legalization wave – A wave of cannabis legalization is sweeping across the globe. Buy cannabis stocks (5/12/17).

Follow the golden ratio – Middle-aged big spenders are the biggest population group, and U.S. stocks will benefit. Dollar-cost average into U.S. stocks (4/21/17).

Prepare for peak globalization – U.S. stocks with a lot of overseas revenues will get destroyed. Buy these “America First” stocks instead (3/10/17).

Cybersecurity splurge – Governments, banks, and companies around the world are spending big bucks on cybersecurity. Get ready for a rally (12/8/16).

Bullish on Bitcoin – Cryptocurrencies are the “new gold” (7/21/16). Use them to bet against the doomed fiat money system (9/15/16).

Defense stocks for a bellicose era – The world is experiencing a rise in militarism. Go long defense stocks (11/5/15).

Global Intelligence RoundupBitcoin leaves gold in the dust…

Gold is dipping while bitcoin surges.

The world’s most popular cryptocurrency is now up almost 80% in 2017 (from $998 to $1,774 on the Bitstamp exchange).

Meanwhile, gold is steady sliding toward $1,200 an ounce.

For more on what’s sending bitcoin higher, here’s analyst Nick Hubble in our London office:

Bitcoin’s rise is easily explained. Why gold isn’t following suit is harder to figure out.

Just like bitcoin, gold’s features make it useful as money. It’s rare, and it can’t be created. It’s durable and divisible into smaller portions. And it’s fairly easy to transport, although nowhere near as easy as bitcoin.

And in contrast to the U.S., in the last few months, Japan’s government has moved to allow bitcoin to become part of financial markets and even an allowed payment system in the rest of the economy. Russia may follow suit.

The increased demand for bitcoin is sending the price soaring.

Japan’s and Russia’s plans are an enormous political move. Bitcoin is nationless. Its payment infrastructure is decentralized. This means it challenges the U.S. government’s control over the international financial infrastructure.

For example, the U.S. shut Iran out of the SWIFT system, preventing international funds transfers in and out of the country. With bitcoin, Iranians can bypass this easily.

You also have the self-destruction of Venezuela to add to the list of bitcoin bonanzas. Many Venezuelans use bitcoin to order day-to-day necessities from Amazon.com in the U.S. These are then smuggled to Venezuela by dedicated companies.

Yes, smuggling is alive and well in our modern world.

And bitcoin is the currency of choice.

U.S. stocks – disastrously overvalued?

Writing in his daily e-letter, Bill Bonner’s Diary, Bill Bonner recently warned about “disastrously overvalued” U.S. stocks.

Bill’s argument was simple…

With the S&P 500 trading at 25 times last year’s earnings, investors today are willing to pay 60% more than the historical average for each buck of earnings.

And Bill isn’t the only member of our network who’s noticed this. Here’s our chief strategist in Australia – and another stock market bear – Vern Gowdie:

I like simple logic.

Logic like: If it looks like a duck, walks like a duck, and quacks like a duck, then it’s probably a duck.

Experience has taught me that there are times in the market cycle when logic does not prevail.

Sir Isaac Newton best summed this up after he lost a fortune in the South Sea Bubble: “I can calculate the motion of heavenly bodies, but not the madness of people.”

Markets are, in my opinion, not behaving rationally.

And the growing divergence between S&P 500 price performance and underlying earnings is an indication of the madness of people.

If we travel back to July 2013, EPS were at about the same level as today… just under $95.

But in July 2013, the S&P 500 Index was at 1,685 points. Today it’s at 2,390 – over 40% higher and with no increase in earnings.

Moving forward to September 2014, and EPS peaked at $106. The S&P 500 was at 1,970 points. Since then, earnings have fallen 10%, and the market has risen over 20%. Does “paying more for less” sound logical to you?

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Bill BonnerBonner & Partners

55 NE 5th Avenue, Suite 100 Delray Beach, USA

Charlie MorrisMoneyWeek Research

45 Blackfriars Road London, Britain

Marília FontesEmpiricus Research

913 Rua Joaquim FlorianoSão Paulo, Brazil

Iván CarrinoInversor Global

4945 Gorriti Street, 1414 Buenos Aires, Argentina

Simone WaplerPublications Agora France

8 Rue de la MichodièreParis, France

Vivek KaulEquitymaster Research103 Regent Chambers

Mumbai, India

Vern GowdiePort Phillip Publishing96-98 Bridport Street Melbourne, Australia

Fred Hsu3rd Stone Investment Research

Tong Cheng Da BuildingBeijing, China

INNER CIRCLE STRATEGIC COUNCIL

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