US stocks are in a bubble and it is unclear when it will burst, hedge fund manager says

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“I think we’re in a bubble like 2000,” veteran hedge fund manager Mark Yusko told CNN Business. “That doesn’t mean the market will crash tomorrow.”

Yusko, the CEO of Morgan Creek Capital Management, pointed to signs of extreme market speculation, such as the 1,625% peak for GameStop (GME) in January.

“Stock markets are generally in bubble territory. Look at the parabolic movements of some companies like Tesla,” he said.

Yusko also pointed out how Apples (AAPL) the net annual income has hardly declined over the past five years. But earnings per share, which is driving stock prices, has risen sharply as the iPhone maker has aggressively bought back its shares.

“That’s just financial engineering,” he said.

Impossible to time

Another exhibit in Yusko’s bubble chest is Snowflake. The money-losing cloud computing company, which went public in September, trades at 327 times its revenue, according to data provider Refinitiv. That’s well above even Zoom (ZM) and DocuSign (DOCU) trade at.

Yusko’s bubble warning echoes the warning of other well-known market players in recent weeks.

Last month, famed investor Jeremy Grantham said the bull market that began in 2009 had “grown into a full-blown epic bubble,” characterized by “extreme overvaluation, explosive price hikes, insane issuance and hysterical speculative investor behavior.”

Of course, no one can take the time when a bubble will burst. And overheated markets can get much hotter before they eventually cool.

“The challenge with extreme valuations is that they can last longer than you think,” said Yusko.

And Yusko was overly bearish before. Two years ago, he warned that the stock market was overvalued and tech stocks in particular would fall sharply. Yet the S&P 500 has since risen more than 40% – despite the worst pandemic in a century.

Morgan Stanley: Get on board or get out of the way

While Yusko and Grantham sound the alarm, some large Wall Street companies remain very optimistic about the economy and the stock market. They point to the persistence of the lowest interest rates that have forced investors to bet on stocks.

Goldman Sachs upgraded its forecasts for the second quarter of 2021 and 2022 GDP on Monday amid a sense that the Democrats will be passing on a significantly larger aid package than previously expected.

Meanwhile, Goldman Sachs expects the S&P 500 to rise to 4,300 by the end of the year, about 11% more than its current level.

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Michael Wilson, stock strategist at Morgan Stanley, thinks the stock market scare caused by Reddit is already firmly in the rearview mirror.

“It looks like greed has reignited fear again and the bull market is poised to resume in earnest,” Wilson wrote in a note to customers on Sunday.

After suffering its worst week since October, the S&P 500 quickly regained its losses last week peaking at 4.7%.

While Wilson has recently seen signs of complacency and extreme risk, he is warning his clients not to fight this market rally.

“The Fed’s prevailing view of better economic growth, increased fiscal stimulus and continued monetary pressure has got everyone all-in,” Wilson wrote. “When such periods do occur, it has rarely been easy or sensible to get in the way. Instead, these trends usually have to run until they derail or simply run out.”

SPAC mania

Even Yusko, Morgan Creek’s hedge fund manager, is diving into an area of ​​market speculation: SPAC mania.
Special purpose takeover companies, or SPACs, are shells without corporate assets that exist purely to disclose private companies. Virgin Galactic, DraftKings and Nikola have all gone public this way instead of a traditional IPO. Even former baseball superstar Alex Rodriguez is trying to raise $ 500 million through an SPAC called Slam Corp.

Late last month, Yusko Morgan Creek launched Exos SPAC Originated ETF, a fund focusing on pre- and post-merger SPACs of equal weight.

But some argue that SPACs are more evidence of bubbly behavior on Wall Street.

SPACs are “an invitation to give me your money and I’ll let you know one day what I’m going to do with them,” Grantham recently told CNBC.

In the first three weeks of 2021 alone, SPACs raised $ 16 billion, more than the $ 13 billion raised in all of 2019, according to Goldman Sachs.

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“Bubble-like sentiments surround SPACs,” said Goldman Sachs analysts.

Yusko disagreed with that sentiment, suggesting that Goldman Sachs’ criticism is useful because the Wall Street bank relies on traditional IPOs for some of its revenue.

“It’s intellectually lazy to make that statement,” he said. “To say SPACs are the problem is like saying hedge funds or mutual funds are the problem. It’s just a legal structure.”

Yusko said SPACs are cheaper, more flexible, and a smarter way to raise money than traditional IPOs.

Unlike the other two SPAC ETFs launched recently, Yusko’s fund is actively managed. That’s crucial, he said, because not all SPACs will be winners, especially given the loftiness of current market valuations.

“We are in an environment,” said Yusko, “where we think caution is warranted.”

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