What happened

Shares of U.S. cannabis companies Green Thumb Industries (GTBIF -4.95%), Curaleaf (CURLF -3.26%), and Cresco Labs (CRLBF -5.49%) were rallying on Friday, up 8.1%, 6.1%, and 10.2%, respectively, as of 12:23 a.m. ET.

These stocks sold off hard earlier in the week, as hopes for passage of the Secure and Fair Enforcement (SAFE) Act have faded in the lame-duck session of Congress. However, Friday morning news saw Senate Majority Leader Chuck Schumer make a last-ditch effort to include SAFE in the larger omnibus bill, which may be the last piece of legislation passed by this Congress.

Having sold off hard, these stocks are bouncing back strongly on a down day for the markets. However, it still looks like a long shot that this could get passed, due to opposition from Minority Leader Mitch McConnell. So today's action could just be a dead cat bounce.

So what

This morning, it was reported that Schumer was making a last-ditch effort to appease some Republican colleagues around language in the SAFE Act, in hopes it could be included in the upcoming comprehensive omnibus spending bill. The hesitation from Republicans revolves around enforcement and money laundering, reflecting concerns outlined in a Justice Department memo from earlier this year.

Of note, the SAFE Act would indemnify mainstream banks from liability in working with state-legal cannabis companies, but it would fall short of legalization or de-scheduling. Advocates say passage would lower costs for cannabis business while also improving safety, as cannabis companies now have to use more cumbersome workarounds, and many retail stores have to use cash -- and holding lots of cash makes these businesses vulnerable to crime. Moreover, cannabis companies would likely be able to get better interest rates on loans with more competition from large banks.

However, while SAFE has some Republican supporters, Minority Leader Mitch McConnell has consistently said he would refuse to include it in a broader spending bill. Earlier this month, McConnell refused to incorporate SAFE into the National Defense Authorization Act (NDAA).

So, while it's possible SAFE could somehow get passed in the lame duck session, this seems kind of like a Hail Mary from Schumer to appease pro-cannabis advocates. 

Now what

Since earnings season, basically all U.S. multi-state operators (MSOs) have traded on news regarding the prospect of passage for the SAFE Act. However, even if it does pass, U.S. cannabis companies won't find it a panacea for their current problems.

Schumer and Senator Cory Booker's push for a larger legalization bill this summer failed, as full legalization seemed too big a hurdle for 10 Republican Senators to clear a filibuster, even though another legalization bill had already passed the House.

While SAFE Banking would help, it would also not be an all-clear for U.S. cannabis stocks. Only legalization and de-scheduling would give relief to U.S. companies struggling under the weight of excessive tax burdens for state-legal companies under section 280e of the IRS code. Without that, it is hard for any cannabis company to earn real profits and cash flow. In addition, U.S. MSOs are struggling from some oversupply in certain markets and cash-strapped customers this year, which have depressed margins.

President Joe Biden has done what he can for cannabis advocates, including pardoning non-violent federal cannabis offenses, ordering the Secretary of Health and Human Services and the Attorney General to review how cannabis is scheduled, and recently signing a bill that Congress did pass to expand cannabis-related medical research.

However, that may not make a difference for years. Without near-term relief on the legalization side, many U.S. MSOs, which looked fairly strong this time last year, could find themselves in trouble, as many have taken on debt to expand their footprint ahead of anticipated legislation. Now that there may not be anything coming -- even the SAFE Banking bill -- all cannabis stocks remain extremely risky for investors, despite today's rally.