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Morning brief: There are mini-bubbles everywhere

Yahoo Finance’s Myles Udland, Brian Sozzi, and Julie Hyman discuss the stock market action and outlook.

Video Transcript

JULIE HYMAN: We've been talking a lot about froth and bubbles here on Yahoo Finance on a frequent basis. You're not seeing it in the market today, of course. We've got the Dow, the S&P, the NASDAQ, all trading lower as President-elect Joe Biden rolls out his proposal for relief for Americans. And as we got a retail sales report for December that was considerably worse than estimated. But those bubbles do continue in certain segments of the market. We've had a number of IPOs in recent days, of firm Poshmark that have done very well.

And then there is, of course, this SPAC issue, which Myles you continue to examine in your morning brief that you send out to Yahoo Finance subscribers. And this seems to be the latest sort of mini bubble. Now just because there's a bubble doesn't mean it's going to pop, I guess, is always the question. Are we going to see big come downs in some of these SPAC deals?

MYLES UDLAND: I mean, look. I saw something yesterday that I couldn't verify it, so I'm not 100% sure if this is exactly right. But someone on Twitter said that not a single SPAC that has come to market now trades at a discount. So all SPACs come to market at-- at $10 per share, that's the NAV, net asset value guess, as you'd think about it from like a mutual fund perspective. And they said that not-- not a single one is being discounted at all, which means that there's clearly froth when it comes to how investors are thinking about SPACs as a vehicle. And basically the argument that I made in the morning brief today is that if we're talking about SPACS as an asset class or a sector, then clearly there is something frothy here.

SPACs are a financing scheme, SPACs are a way that you can come to market that's different from a direct listing or an IPO. SPACs, very often, you know, offer more, a larger ownership stake to the sponsor than you would have to dilute existing shareholders through a direct listing or an IPO. You know, you only have to offer sometimes a couple of percentage points of your business in a public offering. SPAC sometimes you're talking about 20% dilution or more.

And so the initial use for them was as a turnaround story and there are some uses for that. But now it's just a default method and when you see the kinds of numbers of SPACs, I mean that chart that we just had up showing the explosion in the number of SPACS coming to market, those are companies that are looking for targets and will eventually hope to take businesses public via that route. I mean upwards of $60 billion here, coming into the market. That just says, very forthrightly, something is a little overheated here.

And the point we made in the morning brief this morning is we've seen this happen several times in the last couple of years. Low volatility blew up spectacularly in 2018. Crypto has had a boom and a bust and now another boom cycle. It doesn't mean it's dead forever but weed stocks, OK, they're up today but remember with Canopy Growth, they went to 300 some odd dollars per share and then back to 180 within one session.

I mean, when this kind of heat gets on to anything, it reverses quickly and that's fine. I mean, some SPACs are going to be great companies, great long-term winners, but you don't have to be like a huge skeptic or the most negative person in the world to look at this and say, it seems a little overheated, doesn't it? And that's the source we use for the story today. It was like, look, if this ends differently than the others, sure, come back and see me. But there's been very-- you know, there's been a number of examples that have had this exact same pattern in the last couple of years and it seems like it's a feature, not a bug of this market.

BRIAN SOZZI: Myles, I'll toss this one to you. I was talking to a couple of bankers the other night about SPACs and why they've been so hot. And really they flat out said it's because as a SPAC when you come to market, you could come out with four looking projections. And we've had a lot of SPACs on so far and one theme through all of them are very upbeat, very upbeat five year projections for revenue, operating profits, net profits, you name it. And that is exciting a lot of investors.

And to Julie's point, I think what pops its bubble, it's earnings reports. Because when these earnings reports start to pop up, it will-- might just become clear that most of these SPACs can't achieve some of these very, very robust out year estimates.

MYLES UDLAND: Yeah. I mean now we all know what it's like to be a venture investor. You sit in a presentation, someone says, we're going to go 100% a year for the next three, or whatever it is and-- and you say, great, here's-- here's some money. It's one thing when you're funding a business at $5 million valuation, even a billion dollar valuation given kind of what we've seen the last couple of years. It's another thing when you come to the public market and that's the only level, that's kind of the level of disclosure that you're required to have.

So Sozzi, I think that that's-- that's going to be very interesting as we get into the heart of 2021 is what that first round of reports from businesses that are finally releasing fully audited financials for the first time. That is going to be real interesting to see some of those numbers.

JULIE HYMAN: It is. Because sort of the initial accountability, in these cases, when these companies first start trading. At-- the public markets have-- have been kind, shall we say, and they're giving them a pass, at least initially.