Monday, September 18, 2023

My thoughts on the new biography of Elon Musk; Time to exit cannabis stocks; EMDR Blew My Mind. Literally

By Whitney Tilson

1) In Friday's e-mail, I wrote this about Walter Isaacson's new book, Elon Musk, which I was halfway through:

Trust me, whether you love Musk or hate him (there appears to be nobody in between), read – or listen – to the book. Like its subject, it's endlessly fascinating, inspiring, and infuriating...

Over the weekend, I finished the book and highly recommend it.

Musk may well be the world's most interesting person. In addition to "fascinating, inspiring, and infuriating," other words that come to mind after reading the book are: brilliant, genius, driven, indefatigable, crazy (in a good way), entrepreneurial, and world-changing. As I've said before, humanity owes Musk a debt of gratitude.

That said, Musk has a very dark side, so other words that come to mind include: evil, cruel, petty, thin-skinned, reckless, tormented, obsessive, obtuse, crazy (in a bad way), emotionally stunted, anti-Semitic, racist, explosive, delusional, mendacious, lawbreaker, and fraudster.

Kara Swisher and Scott Galloway in their last two Pivot podcast episodes were quite critical of Isaacson, saying he should have shared more of his opinions about Musk and been more critical of his bad behavior. And as for Musk himself, Swisher posted on X:

My view of both Isaacson and Musk is less harsh. I think the book does an excellent job of fully and fairly capturing an incredibly complex man. From that, I'm capable of forming my own opinions about him – I don't need Isaacson to do that for me.

As for Musk, he creates a lot of cognitive dissonance in my mind. I can't recall anyone whom I both admire and despise to such a degree...

Here are some articles and interviews about the book:

2) I write favorably and unfavorably about a lot of stocks every year, both in this free daily e-mail and, more often, in our paid newsletters like our flagships: Empire Stock Investor and Empire Investment Report.

I closely track my picks and pans and am pleased to say that I get a lot more right than wrong – but today it's time to eat some humble pie and exit one of my worst stock picks ever: the AdvisorShares Pure U.S. Cannabis Fund (MSOS). Nearly two and a half years ago, in my May 11, 2021 e-mail, I disclosed that I had purchased MSOS, and even listed it as my favorite stock for 2022 in my December 29 e-mail that year.

I apologize to any of my readers who lost money on this dog. I'm right there with you, as I still own the MSOS shares I bought at $43.95 and all the way down. The only mitigating factor is that I always knew it was highly speculative and sized it appropriately, so it was never more than 3% of my portfolio...

After hitting an all-time low of $4.78 at the end of August, MSOS has had a huge rally on optimism that the legal limbo plaguing the sector may ease (see: Republicans soften on federal marijuana reform in a shift that could make it a reality), causing MSOS to nearly double to today's price of nearly $9 per share.

I think it's time to take advantage of this bounce and exit, for reasons my friend Doug Kass of Seabreeze Partners outlined in this missive he published this morning:

Why the Rally in Cannabis Stocks Has Limited Upside

* And why I have materially sold down my industry exposure

* Don't believe the continued and brazen hype from the pied pipers of cannabis

Fueled by a surprise rescheduling announcement in late August, cannabis equities have led the market to the upside over the last 2 1/2 weeks as outsized volume and price gains have awakened the animal spirits.

The excitement over legislative relief has resulted in large price increases since the last week of August and resulted in outsized market gains for the cannabis industry. Of note (and serving as a warning), selected cannabis equities are beginning to demonstrate meme status as SAFE Banking and Cannabis are trending on X.

While we were long into the rescheduling announcement, we have materially reduced our exposure to the space in recent days for the following reasons.

It still remains unclear regarding the timing and rescheduling level change (likely III but we can't totally rule out II) to be introduced through the rescheduling recommendation and whether SAFE Banking will be proposed/enacted in the relatively near term. On the later score (SAFE), it is hard to fathom (as it has been the case over the last decade) Republicans and Democrats being cooperative with regard to cannabis legislation – in an unprecedented period of partisanship and inter-party animus rarely seen in Washington D.C. Moreover, the expectation of cooperation is probably not a good bet as we move into a critical election year (in 2024). So, the notion, expressed by some, that rescheduling cannabis will accelerate SAFE (as Democrats/Schumer don't want to be preempted) may fall short in logic.

In the interim interval, the cannabis industry faces continuing challenges:

  1. The total addressable market (TAM) has been grossly overstated by industry optimists. This is reflected in the slowdown in cannabis sales over the last two years in states that were not considered to be mature. (Indeed, some cannabis companies, prior to the rescheduling announcement, announced plans to exit several state markets, with consequent and material write-offs).
  2. For the foreseeable future, the continuation of state silos means an extension of the industry's diseconomies of scale.
  3. The illicit cannabis market continues to make inroads – and there is no evidence of a substantive/effective effort to crackdown on the illegal sales of cannabis-related products.
  4. In theory, the illegal cannabis market will find it harder to compete with the elimination of 280E. However, this is not a certainty. For example, an additional retail excise, sales or national tax – following a possible 280E change – could serve to widen the "value proposition" of illicit over legal cannabis. Elimination of 280E may also put more downside pressure on cannabis prices and profitability at a time in which sales activity remains sluggish.
  5. To summarize, sales and non-adjusted cannabis industry profits continue to be plagued by illegal sales activity, maturing markets and pressure on ASPs – as noted, these factors, will continue even despite the improving prospects for legislative relief next year.
  6. Since early 2022 interest rates have risen dramatically in historical terms – both in degree and swiftness. The cannabis industry's cost of capital has been raised exponentially. Given the high company debt loads on many of the cannabis companies' balance sheets, interest coverage has deteriorated dramatically, especially when evaluated against non-adjusted EBITDA.
  7. As a consequence of high debt loads (and years of aggressive accounting and financial management in which growth and working capital needs have been financed through the deferral of tax payments), many cannabis companies have weakened balance sheets and have a need to raise capital through dilutive equity offerings. 

One final note, which I feel necessary to bring up and vent about.

Don't believe the hype.

"The Italians having a Proverb, 'He that deceives me once, it's his fault; but if twice, it's my fault."

– Anthony Weldon (1651)

Paid "advisors," some of the industry's managements and many of the conflicted sell-side, are back to their too-often flagrant, non-objective and incessant cheerleading of the cannabis industry – with little or no contrition and delineation of the clear risks/negatives/threats. Nor is there any recognition of the adverse operating conditions and worsening trend in profitability seen over the last few years (that led to a -90% drawdown in the value of the industry's shares).

My blood boils and I hold this group in contempt as so many investors have paid the price of listening to these pied pipers of cannabis.

As always I praise by individual and criticize by category. But, to these groups, I reminded them of Albert Einstein's famous quote:

(With rising cannabis share prices), the cheerleading (principally highlighting the promise of legislation) has intensified in recent days but, again, with little analysis or discussion of the disappointing industry trends of 2022-23 or future risk factors.

The expression fool me once, shame on you; fool me twice, shame on me comes to mind.

Thank you, Doug!

3) My friend Deb Copaken was in a car accident earlier this year and was suffering from post-traumatic stress, which was alleviated by a therapy that I'd never heard of before, eye movement desensitization and reprocessing ("EMDR"), which she wrote about in her latest blog post. Excerpt:

A few weeks ago, I mentioned – in a footnote, so you might have missed it – that I was about to seek out the care of an EMDR specialist to deal with the lingering post traumatic stress I was experiencing from my car crash. What did that PTSD look like? It looked like a woman who couldn't sleep, drive, or function due to the constantly intruding image of that black Land Rover running a stop sign, turning my windshield from light to dark like a shutter closing, followed by the sounds and crushing pain of impact.

"I need help," I told a friend, who'd lived through the trauma of losing her daughter in a car accident several years ago. I remembered her telling me about a specialist she and her husband saw in the wake of that tragedy, if only to get them through the day without screaming. I also remembered her telling me how surprised she was when it actually worked.

Her specialist is no longer practicing in the area, she said, but she knew someone else who was equally excellent. "Call Dr. Patricia Tidwell," she told me. "EMDR will change your life."

I'm also friends with the friends Deb mentions, and wasn't aware that EMDR had helped them as well.

To read the rest of Deb's post, you need to subscribe... otherwise, you can watch her 21-minute conversation with Dr. Tidwell here.

Best regards,


P.S. I welcome your feedback at [email protected].