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

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“I think we’re in a bubble like we were in 2000,” veteran hedge fund manager Mark Yusko told CNN Business. “It doesn’t mean that tomorrow the market is going to collapse.”

Morgan Creek Capital Management CEO Yusko pointed to signs of extreme market speculation, such as the 1625% peak for GameStop (GME) in January.

“The stock markets are basically in bubble territory. Look at the parabolic movements of a number of companies like Tesla,” he said.

Yusko also pointed out how Apples (AAPL) annual net income has barely budged over the past five years. But earnings per share, which drives up stock prices, rose sharply because the iPhone maker aggressively bought back its shares.

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

Unable to time

Snowflake is another exhibit in Yusko’s bubble case. According to data provider Refinitiv, the money-losing cloud computing company, which went public in September, is trading at 327 times its revenue. It’s way above what even Zoom (ZM) and DocuSign (DOCU) trade at.

Yusko’s bubble warning echoes those launched in recent weeks by other well-known market players.

Celebrity investor Jeremy Grantham last month said that the bull market that started in 2009 had “matured into an epic full-fledged bubble” marked by “extreme overvaluation, explosive price hikes, frenzied issuance and behavior. hysterically speculative investors “.

Of course, no one can time when a bubble bursts. And overheated markets can get a lot hotter before they finally cool down.

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

And Yusko has already been too bearish. 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 been up more than 40% since then – despite the worst pandemic in a century.

Morgan Stanley: get on board or step aside

As Yusko and Grantham sound the alarm bells, some big Wall Street companies remain very bullish on the economy and the stock market. They point to the persistence of very low interest rates which have forced investors to bet on stocks.

Goldman Sachs revised its forecast for second-quarter 2021 and 2022 GDP on Monday over sentiment Democrats will adopt a much larger-than-expected relief plan.

Meanwhile, Goldman Sachs expects the S&P 500 to climb to 4,300 by the end of the year, up about 11% from current levels.

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Michael Wilson, an equity strategist at Morgan Stanley, believes Reddit’s fear of the stock market is already firmly in the rearview mirror.

“It looks like greed is winning out over fear once again and the bull market is poised to take over for good,” Wilson wrote in a note to clients on Sunday.

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

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

“The dominant vision of better economic growth, more fiscal stimulus to come and the continued printing of Fed money on everyone,” Wilson wrote. “When such times do occur, it has rarely been easy or wise to get in the way. Instead, these trends usually have to run their course until they are derailed or simply exhausted.”

SPAC Mania

Even Yusko, Morgan Creek’s hedge fund manager, dives head first into an area of ​​market speculation: the PSPC mania.
Special Purpose Acquisition Companies, or SPACs, are shells without operating assets that exist only to bring private companies to the stock market. Virgin Galactic, DraftKings, and Nikola all went public this way instead of a traditional IPO. Even former baseball superstar Alex Rodriguez is trying to raise $ 500 million through a SPAC called Slam Corp.

At the end of last month, Yusko launched Morgan Creek Exos SPAC Originated ETF, a fund that will target pre-merger and post-merger PSPCs with an equal weight approach.

But some argue that PSPCs are more evidence of bubble-like behavior on Wall Street.

PSPC is “an invitation to give me your money and someday I’ll let you know what I’m going to do with it,” Grantham recently told CNBC.

In the first three weeks of 2021 alone, PSPCs raised $ 16 billion, exceeding the $ 13 billion raised in 2019, according to Goldman Sachs.

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“A sense of bubble surrounds PSPCs,” Goldman Sachs analysts said.

Yusko disagreed with this sentiment and suggested that Goldman Sachs reviews are practical because the Wall Street bank relies on traditional IPOs for part of its income.

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

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

Unlike the other two recently launched SPAC ETFs, Yusko’s fund is actively managed. This is critical, he said, because not all PSPCs will be a winner, especially given the height of current market valuations.

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

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