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My personal belief is that the credit default swap, or specifically the misuses of the credit default swap, was the main culprit behind the financial crisis in the same way the spread of the limited liability corporate structure caused a British financial meltdown in the late 19th century. The lesson is that investors never learn how to spot manias and this likely has implications for cannabis stocks.

U.S. financial author Jamie Catherwood writes,

“In fact, from 1884–1893 the capital comprising limited-liability companies in Britain had more than doubled, from £475-million to £1.1-billion. Capitalizing on the opportunity, Sir Edward Guinness enlisted Barings Bank to underwrite a public offering of his company’s shares … The IPO was a huge success for Guinness, as shares rose 60 per cent in the first day of trading … However, investor’s response to the brewer’s public offering was a red flag, and signaled that a recession may be imminent. Sure enough, a crisis fueled by speculation occurred in 1890.”

As Mr. Catherwood shows, there were numerous warnings about the speculative craze of the period, from The Economist and other sources, yet hordes of investors managed to convince themselves to keep buying.

The tech bubble that ended in 2000 and the pre-crisis U.S. housing craze are the two most recent examples of speculative manias. In each case, a defensible investment thesis – that technology will eventually dominate the economy and American housing prices could only move in one direction – was extrapolated to a form of ridiculousness where no price was too much to pay for related investments., currently trading at 200 times trailing earnings, is considered one of the poster children for a wildly expensive equity market. But Amazon trades with a price to sales ratio of 4.6 times when Canopy Growth Corp. trades at 139.2 times trailing 12-month revenue.

This is, of course, an unfair comparison in that Amazon has been in business for over 20 years while marijuana is not yet broadly legal in Canada, and there will be a sharp surge in sales when business gets going.

Canopy’s huge price-to-sales ratio, however, provides an indication of the extraordinary growth that is already reflected in the stock price. The company could exceed these high profit expectations – it’s hard to know in an industry that’s brand new in a legal and financial sense – but any disappointments will likely be treated harshly by markets. Investors should be very careful about how much they are willing to pay in terms of valuations to go along for the ride.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you, you can sign up for Globe Investor and all Globe newsletters here.

Stocks to ponder

Sylogist Ltd. (SYZ-X). This stock is up 26 per cent year-to-date. Management is committed to returning capital to its shareholders announcing 11 dividend hikes since 2012 as well as special dividends for the past three consecutive years. Calgary-based Sylogist is a software and services provider, providing ERP (enterprise resource planning) software solutions to over 1,000 customers worldwide. Its ERP solutions include financial accounting, budget management, grant management and payroll administration to public service organizations such as school boards and nonprofit organizations. Jennifer Dowty reports (for subscribers).

Dream Global Real Estate Investment Trust (DRG-UN-T). This security appeared on the positive breakouts list (stocks with positive price momentum) in late-August. It has been a strong performer, providing investors with both growth and income over the past several years. Year-to-date, the unit price has rallied 19 per cent, while offering investors stable distributions and currently yielding 5.5 per cent. Toronto-based Dream Global REIT owns and operates office, industrial, and mixed use properties located in four European countries: Germany, the Netherlands, Austria, and Belgium. Jennifer Dowty reports (for subscribers).

The Rundown

Why this $620-million fund manager is reducing risk in his Canadian equity portfolio while loading up on U.S. value stocks

Portfolio manager Ryan Lewenza plays it straight with his clients around what to expect this year. “We’ve been telling clients we’re expecting a good year, not a great year,” says Mr. Lewenza, senior vice-president and portfolio manager at Turner Investments, citing volatility from trade wars and rising interest rates amid an aging bull market as weighing on overall markets. While he's expecting a rally in equity markets in the fourth quarter and believes we're in a longer-term secular bull market, Mr. Lewenza also believes the risks are higher today than they were in the past six to nine months. The Globe and Mail recently spoke with Mr. Lewenza, who manages about $620-million in assets, about what he’s been buying and selling. Brenda Bouw reports (for subscribers).

Three rock-solid REITs for income seekers

Real estate investment trusts deserve a spot in every income investor’s portfolio. They generate steady cash flow, provide the opportunity for long-term income and capital growth and – if you focus on high-quality REITs – let you sleep soundly. John Heinzl looks at three REITs that check of all these boxes. As a bonus, even though REITs as a sector have rallied this year, all three are trading at a discount to their net asset value, which makes them even more appealing. (For subscribers).

Canada’s pot ETFs are struggling to bring in new cash

Canada’s largest marijuana ETF is on a roll – but it’s not attracting cash like it used to. The Horizons Marijuana Life Sciences ETF (HMMJ), the first exchange-traded fund to track the cannabis industry, surged 32 per cent in August, just shy of its best monthly price gain to date. The fund saw a net inflow of $12-million for the month, according to Bloomberg data, and only swung into positive territory thanks to a $23-million infusion on the final two days of August. The subdued inflow marked a significant departure from January, when the ETF brought in nearly $250-million as many marijuana stocks were scaling new heights, and comes as other Canadian cannabis funds struggle to attract investor cash. Matt Lundy looks at the numbers (for subscribers).

Short-seller Citron takes aim at Tilray Inc. less than a week after sounding alarm on Cronos

A prominent American short-seller is taking another swing at Canada’s red-hot cannabis industry, this time sounding the alarm on the drastic run-up in Tilray Inc.’s stock. Citron Research tweeted on Tuesday that it is now betting against shares of the Nanaimo, B.C.-based cannabis grower nearly three weeks after Citron said that Tilray was both “best in class” and “the next company to get a white knight at a premium to market” after Constellation Brands Inc. revealed plans to invest $5-billion in Canopy Growth Corp. Now, Citron is changing its tune about Tilray, calling it “by far the most expensive in the space,” in a tweet on Tuesday. Christina Pellegrini reports (for subscribers).

Attention investors who want to avoid foreign exchange fees in their DIY accounts

One of Canada’s better online brokers has filled a big hole in its product lineup. Scotia iTrade has finally introduced U.S.-dollar registered accounts, joining almost every other play in the online brokerage business. This means that investors who sell U.S. stocks or receive U.S.-dollar dividends can now let the cash pile up in their registered accounts and avoid a costly forced conversion into Canadian dollars. Rob Carrick explains (for subscribers).

Who is in control of your economic fate, anyway? It’s getting harder and harder to tell

Who among central bankers and politicians are in control of the fates of their national economies? This seemingly easy question has no clear answer. Mainly because no one central banker or politician is in control as we are in an age of tyranny imposed by capital markets. Both monetary authorities and politicians seem to respond to the markets rather than the other way around. Strong men are only strong in name. If they do not play by the rules and desires of the markets, they will inevitably pay a price and be humbled. George Athanassakos delves into this topic.

Top Links (for subscribers)

‘At these levels, there’s a 70% chance of the S&P 500 being down 12 months from now’

Others (for subscribers)

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: COO sells over $1.5-million worth of this stock

Wednesday’s Insider Report: Three bank stocks that insiders are trading

Wednesday’s analyst upgrades and downgrades

Others (for everyone)

Facebook, Twitter fall as they face U.S. Congress

Number Crunchers (for subscribers)

Canadian firms that can weather Donald Trump’s NAFTA storm

Ask Globe Investor

Question: You have urged readers to be cautious of the global mess being created by U.S. President Donald Trump and the possibility of a stock market crash. My question/conundrum is this: is it worth incurring the capital gains to move to a cash/defensive position to avoid a possible market fall?

Answer: This is an excellent and timely question. I wish I could provide a definitive answer. But to do that would require clairvoyance, which I do not claim to have.

Here is what we know. This current-year bull market is the longest in modern history and won’t run forever. Stock prices are high, and the risks of an all-out global trade war are real, which will not be good for anyone’s economic prospects. Many respected market analysts are warning that there is trouble ahead.

You have to make your own decisions in that context. Review your portfolio and determine how vulnerable it would be if we had a repeat of 2008. Would the potential loss be worse than the capital gains tax exposure on your profits?

I would never suggest selling everything, since we can’t know how events will evolve, especially given the unpredictability of President Trump. But I do think that increasing cash reserves is not a bad idea at this point, especially for older people with a relatively short time horizon.

--Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

The largest reclassification of industries within major stock indexes on record is coming in late September, which will change the make-up of some key sectors, and consequently, how investors navigate them. Tim Shufelt will explain what Canadian investors need to know.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Gillian Livingston

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