Why You Shouldn't Panic about the Cole Memo

By David Jenison on May 14, 2018

Cannabis-related stocks experienced a massive post-Christmas rally as the market anticipated full legalization in California. Nearly every stock experienced double-digit gains, and many multiplied in value. Earlier today, the Associated Press reported that Attorney General Jeff Sessions planned to rescind the Cole Memo, which the Justice Department later confirmed. The Obama-era memo basically told federal attorneys not to focus on cannabis-related activities that don't violate state or local laws. 

"Today’s memo on federal marijuana enforcement simply directs all U.S. attorneys to use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country," said Sessions in a statement. 

Sessions' move created instant chaos in the market, and cannabis stocks took a nosedive across the board with some companies losing more than 50 percent of their value. The news started a panic, but it wasn't something the market hadn't seen before. When Donald Trump won the Electoral College in November 2016, the cannabis industry experienced a similar panic, but it didn't last. Just look at the majority of cannabis-related stocks. 

On election day, Denver-based General Cannabis Corp (CANN) opened at $4.70 a share, but by December 19, 2016, the stock price had fallen to $2.03. Yesterday the stock reached $10.35 before dropping more than $4 a share following the Cole Memo news. Cannabis Science Inc. (CBIS) likewise lost nearly half its value within three days of the 2016 election, but as of yesterday, the California-based company had quadrupled in value from its post-election plunge. The stock value plummeted as much as 40 percent this morning. 

Several factors contribute to the rise and fall of stock, including the ones mentioned above, but most of the companies that lost value after the election eventually made a comeback and surpassed their pre-election prices. Even today, some stocks that fell off a cliff this morning have already started regaining ground, including CANN and CBIS. 

Then there's the question of the Cole Memo itself. Why didn't Sessions rescind it last year? It's possible that he knew the country didn't have the stomach for such a move with legalization support at an all-time high, but the excitement about legalization in California, Canada and elsewhere possibly motivated him to play one of the few hands he had left. For this reason, rescinding the Cole Memo makes the current move seem more like a desperate Hail Mary pass, and Sessions certainly isn't Bengals QB Andy Dalton. 

Consider how this move might ultimately play out. A majority of conservatives now support legalization, and many of them lost millions in today's market plunge. Legalization is also generating jobs, which increases overall consumer spending, and stopping such growth hurts voters across all party lines. Congress will receive calls and emails about the Sessions move, and today's action could ultimately force a bipartisan push for new legislation that protects the cannabis industry. In other words, Sessions likely forced Congress to take a stand that many of its members hoped to delay taking. 

Several politicians have already spoken out through Twitter, press releases and elsewhere, saying the following:

  • Sen. Patrick Leahy: Rescinding that memo is a terrible, facts-backwards decision by Atty Gen Sessions.
  • Sen. Rand Paul: This is a states' rights issue, and the federal government has better things to focus on.
  • Rep. Ro Khanna: I will do all I can to stop Sessions' backwards decision to reverse the Cole Memo.
  • Sen. Cory Gardner: With no prior notice to Congress, the Justice Department has trampled on the will of the voters.
  • Sen. Cortez Masto: AG Sessions says he's an advocate for states' rights. His decision today exposes his hypocrisy.
  • Gov. Bill Walker: I remain committed to upholding the will of Alaska voters on this issue, and maintaining our State's right to manage our own affairs.
  • Rep. Scott Tipton: The people of Colorado voted to legalize marijuana in the state, and I am committed to defending the will of Coloradans.

In a press release, California Lt. Governor Gavin Newsom fully unloaded: "Today, Jeff Sessions and the Trump Administration destructively doubled down on the failed, costly and racially discriminatory policy of marijuana criminalization, trampling on the will of California voters and a year-long bipartisan implementation process led by Governor Brown and the California Legislature. This position defies facts and logic, threatens the promise of a safe, stable, and legal regulatory framework being pursued by twenty-nine different states…. As it has on other issues, California will stand together to pursue all legal, legislative and political options to protect its reforms and its rights as a state. I call on our federal leaders to move quickly to protect states' rights from the harmful effects of this ideological temper tantrum by Jeff Sessions."

Representatives from states like California, Oregon and Nevada scheduled a conference call for this afternoon to address the issue, and Sen. Gardner, a Republican, has already threatened to hold up all Justice Department nominees until Sessions backs off. If the A.G. simply wanted to test the waters, it's safe to say the water was colder than today's weather report from New England. If he wants a fight, Sessions is going to lose. 

Investors can expect more ups and downs in what will be a volatile market for the near future, but the long-term prospects for investors remain very strong, and many might see the current situation as the chance to pick up stocks at a bargain. Consider the rally inspired by the start of legal cannabis in California, and recognize how many more potential rally starters are coming up, including the following:

  • The start of recreational cannabis sales in Canada
  • Ballot measures in states like Oklahoma, Utah and Missouri
  • Legalization in New Jersey and Vermont 
  • Decriminalization in Virginia and several big cities
  • Republicans lose one or both houses of Congress
  • Any form of pro-cannabis legislation or schedule change

No one really thinks Sessions can stop the cannabis movement, and rescinding the Cole Memo does not mean the Justice Department has the resources, support or inclination to pursue a full crackdown. Even if he did push for a crackdown, the pushback from many state Attorney Generals would be fierce. 

Sometimes it takes a slap in the face to wake people up. Sessions' announcement is clearly a step back, but there's no reason to panic. He's merely awoken a beast that's about to take cannabis several steps forward. The Hail Mary pass is about to be intercepted and returned for a touchdown. 

Image credit: DonkeyHotey/Flickr.

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