Wall Street Getting High on Weed

January 12, 2014

Weekly Market Outlook

By Keith Schneider

outlook20140113This week contrary to the iffy action in mainstream stocks, pot stocks took off after Colorado legalized recreational use starting the first of this year. Sales exceeded even the highest expectations. The only returns expected at the retail outlets were repeat customers who due to unprecedented demand were sold only rationed amounts. This is unlike many retailers who were slammed with returns after a strong holiday season. Many Pot stocks skyrocketed this week, with some posting several hundred percent gains.

The fundamentals are pretty strong for this resilient plant for a multitude of reasons. First, current surveys show a dramatic shift as the majority of Americans now support legalization. 21 states have already legalized the use of medical marijuana including New York. New York State Governor Cuomo feels that does not go far enough and is pushing for full legalization. The first day of sales in Colorado was about $1 million and it's fairly obvious that other states, not willing to pass on a good business opportunity, will legalize it as well. Why would any state force their potheads to Colorado to spend their hard earned money?

The $1 trillion dollar (since 1970) war on drugs currently costs the US $40 billion a year and has not had any material or lasting effect on the overall addiction rate which is relatively steady at 1.5% of the population since 1970. This wasteful budget item could also be reduced or eliminated.

The incarceration rate in the US stands at about 760 per 100,000 people (2.3 million people), the highest in the world rivaled only by North Korea. Since stats are not readily available about North Korea, our staff here at MarketGauge attempted to verify this unofficial data and called North Korea's Supreme leader Little Kim, but he was playing basketball. The call was forwarded to his uncle's office that has insider knowledge about their penal system, but his secretary said he would be permanently unavailable for comment. The truth about who really leads in this rivalry between the US and North Korea will remain a mystery.

The huge growth in the US prison population is a direct result of the war on drugs. Over 20% of those now incarcerated are for drug charges, a 12x increase since 1985. This huge increase in the incarceration rate has been the root cause of the emergence of the Prison-Industrial Complex, privately managed for profit corporations with substantial lobbying power. One of the leading players in this growth business generated (GEO Group) 1.6 billion in revenue last year. This business hardly existed in 1980 and current figures for incarceration costs in the US top $63 billion annually. Beside the human toll, cost of the war on drugs plus the added incarceration costs for drug offenses all add up to significant numbers for the US taxpayer.

The inevitable legalization of marijuana use will have tremendous impact on the US from both a social and financial perspective. This major shift of social mores will put a spotlight on the inter relationship of harsh drug laws, the war on drugs, and incarceration rates. The big question in terms of how fast this occurs depends largely on how fast those that are opposed to legalization on moral grounds but want fiscal responsibility will cave.

The Prison-Industrial Complex is about to undergo a sea change. It's not surprising that GEO Group is in a bearish phase on its daily charts, while the marijuana stock group is poised for even more stellar returns this year. What is a bit tricky is that almost all trade as Bulletin Board stocks or by appointment only. Caveat Emptor.
Getting back to the overall market, we need to clear the highs of the first two weeks of 2014 to get back into full bull mode, which would send our calendar range system into a buy along with an already bullish phase for all the key indexes. Gold, Silver, and Bonds all seem to be carving out an interesting pattern with the start of 2014 which will be covering in this week's video.

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