US stocks fall, plus why cannabis regulation is a big deal for investors

Key Concepts

• Cannabis Rescheduling: The potential reclassification of cannabis from Schedule I to Schedule III under the DEA, impacting taxation and business operations.
• 280E Tax: A US tax code provision that prevents cannabis companies from deducting standard business expenses, leading to significantly higher tax burdens.
• MSOS ETF: The AdvisorShares Pure US Cannabis ETF, an actively managed fund focused on US cannabis companies.
• AI in Drug Discovery: Eli Lilly’s significant investment in artificial intelligence to accelerate and improve the drug development process.
• Intel’s Rebound: Intel’s recent breakout from a long-term trading range, driven by government backing and Nvidia partnership.
• Bitcoin & Crypto Market: Recent positive momentum in the cryptocurrency market, particularly Bitcoin, with analysis of support and resistance levels.
• US Dollar Index (DXY): The US dollar’s recent breach of its 200-day moving average and potential implications for the stock market.
• Eli Lilly’s Weight Loss Pill: The anticipated approval and market impact of Eli Lilly’s oral weight loss medication.

Market Trends & Cannabis Rescheduling

The broadcast began with a review of market performance, noting a slow start to earnings season with JP Morgan and Delta’s results disappointing investors, leading to declines in the S&P 500 and Dow. The primary focus quickly shifted to the potential rescheduling of cannabis at the federal level and its implications for the industry.

Dan Arenss, Portfolio Manager of the AdvisorShares Pure US Cannabis ETF (MSOS), described the potential rescheduling as “the most consequential federal cannabis policy shift in more than 50 years.” He explained that currently, cannabis is classified as a Schedule I drug, alongside substances with no accepted medical use. Rescheduling to Schedule III, a category for substances with potential medical applications, would unlock significant opportunities for US cannabis companies. Currently, these companies face limitations in listing on major stock exchanges, accessing banking services, and are burdened by punitive taxes.

A key benefit of rescheduling is the potential elimination of Section 280E of the US tax code. Arenss detailed that 280E currently prevents US cannabis companies from deducting any business expenses, including payroll, rent, and mortgages, effectively treating them as narcotics traffickers. He noted that Canadian cannabis companies do not face this restriction and can list on major exchanges like NASDAQ and the NYSE. While the exact implications of removing 280E are still uncertain, it could significantly improve the financial performance of US cannabis companies. He cautioned that while Trump requested the rescheduling, it isn’t signed yet and there are questions about safe harbors and banking access.

Arenss acknowledged the risks, emphasizing that investors have been “burned so many times” by past legislative efforts that failed to materialize, such as Safe Banking and the MORE Act. He highlighted the need for clarity on banking regulations and exchange listings following rescheduling. He described the process as “a multi-leg process” involving an initial “pop” followed by volatility and subsequent steps related to banking and program implementation. Despite the volatility, the MSOS ETF has outperformed the S&P 500 in the last calendar year, albeit with greater volatility.

Eli Lilly & the AI Revolution in Drug Discovery

The segment then transitioned to Eli Lilly’s significant investment in artificial intelligence (AI) for drug discovery. Eli Lilly is partnering with Nvidia to launch a $1 billion AI drug discovery lab in San Francisco. The lab will combine scientists and engineers from both companies to tackle challenging problems across Eli Lilly’s therapeutic areas.

Lucas, Eli Lilly’s CFO, explained that the investment includes both personnel and computing infrastructure, including a supercomputer being built in Indianapolis, expected to be operational next month. The goal is to accelerate drug discovery by leveraging AI to test and discover different targets and combinations more efficiently. He emphasized that while AI will augment the work of scientists, their expertise remains crucial.

Lucas also addressed the potential for AI to reduce drug development costs over time, primarily by speeding up the process of bringing molecules to market. He highlighted the company’s focus on obesity treatment, with an anticipated second-quarter approval for an oral weight loss pill. He stated that the oral pill will provide convenience and scale, potentially reaching a much larger patient population than current injectable treatments like Mounjaro and Zepbound. He estimated that the oral pill could potentially reach 20% global penetration, particularly in markets like China, India, and Brazil.

Technical Analysis & Market Movers

Jared Blickry provided a technical analysis of several stocks and market indicators.

• Intel: Blickry highlighted Intel’s breakout from a 10-year trading range, attributing it to US government backing and a partnership with Nvidia. He identified $45 as a key support level and $65-70 as the next resistance level. He quoted Dan Newman, CEO of Futurum Group, who stated, “The catalyst has actually already happened. It was the backing by the United States government than the backing that came from Nvidia because Intel needs to be the US chip champion and foundry.”
• Bitcoin: Blickry noted Bitcoin’s best day in several weeks, pointing to a breakout above prior highs and the importance of testing the $75,000 level.
• US Dollar Index (DXY): Blickry observed the DXY breaching its 200-day moving average, cautioning that this could be a warning sign for the stock market.
• Bank Stocks: Blickry noted the negative impact of JP Morgan’s earnings on the banking sector, with the stock down 4.10%. He previewed upcoming earnings reports from Wells Fargo, City, and Bank of America.

Logical Connections & Synthesis

The broadcast demonstrated a clear connection between macroeconomic trends, regulatory changes, and technological advancements. The potential cannabis rescheduling is a direct result of evolving political and social attitudes, and it has significant financial implications for companies in the sector. Similarly, Eli Lilly’s investment in AI is driven by the desire to improve efficiency and accelerate innovation in drug discovery. The technical analysis provided context for these trends, highlighting specific stocks and indicators that are likely to be affected.

The main takeaway is that investors need to be aware of these evolving trends and their potential impact on the market. The cannabis sector presents both opportunities and risks, and the success of US cannabis companies will depend on the timely and effective implementation of regulatory changes. Eli Lilly’s investment in AI underscores the growing importance of technology in the pharmaceutical industry, and investors should pay attention to companies that are embracing these advancements. Finally, the technical analysis provides valuable insights into market sentiment and potential trading opportunities.