Nearly 2 1/2 years ago, around Halloween of 2007, I interviewed David Tice, one of the investment community's most notorious bears, while writing a column for the late New York Sun. At the time, bullish sentiment was running rampant, exemplified by the fact the Dow Jones Industrials were trading at around 13,900, just a shade below their all-time high of 14,164. Tice, running counter to the Wall Street herd, thought the bulls were out of their mind and he predicted that all hell would soon break loose, with both the economy and the stock market going into a tailspin.In response to his grim outlook--which turned out to be right on the money--one unhappy reader sent me a biting note, which I still recall.
"Why do you devote editorial space to such loonies? All they want to do is to suck the blood out of this market by driving stock prices lower. It will soon be Halloween and your guy Tice should dress up as Count Dracula."
But that was yesteryear. With stock prices shooting up nearly 28% in the past two months, coupled with indications that the economy may be moving from bad to less bad, just maybe, I thought, the Count might have had a change of heart. I was wrong. I caught up with Tice the other day and the portfolio strategist for the Pittsburgh-based $1 billion Federated Prudent Bear Fund, whose strategy is to make money in down markets, is still a growling grizzly.
"I'm confident," he says, "the market is heading back to book value or maybe less (versus its current book of about 1.7 to 1.8)." As far as the S&P 500 goes, such a decline in book value would knock the index down to below 400, which is what Tice expects to occur in the next 18 months or maybe sooner. Such a retreat would be devastating, as it represents about a 55% decline from present levels.
As bad as that scenario would be, it has the potential to get even worse in Tice's mind since he doesn't think such a collapse would mark the market bottom. The reason: his profit outlook calls for S&P 500 earnings this year of about $40, and he doesn't believe the bear market will end until the index reflects such earnings expectations with an accompanying multiple of between 6 and 9. Such a range would erode the market even further as such multiple valuations suggest an S&P 500 range between 240 and 360.
Tice, whose fund is down about 2% this year, following a 28% gain in 2008, further worries that we haven't yet seen the necessary capitulation, that wave of selling that could finally set the stage for a meaningful and sustained market rebound. He notes, for example, there was $6.5 trillion worth of equity mutual funds as of January 1, 2008. As of March 9, the figure dropped to $3.1 trillion. Of that decline, only $100 billion represented outflows, meaning relatively little actual selling.
As far as economy goes, Tice argues it's dysfunctional, asserting that the excesses--such as overleveraging and the government's issuance of excessive credit to grow GDP, leading to excessive borrowing and consumption for more than two decades--still have to be worked out. Pointing, too, to overexpansion on the consumer front, Tice insists we have, for example, way too many shopping centers, restaurants and theaters. "We have to cut down the consumer infrastructure," he says.
The economy of recent years, Tice observes, has largely been finance-driven through a credit bubble, resulting in a huge amount of borrowing, and luxury consumption, but this model is not functional anymore even though we're trying to perpetuate it.
He figures the economic decline still has another five years to run to work off the imbalances and that it's not something that happens overnight. "It's like drinking too much," he says. "You go through a heck of a hangover before you sober up."
A number of market pros, including former Merrill Lynch economist Richard Bernstein, believe the recent market rallies are for real and a signal that better days lie ahead. Tice, on the other hand, thinks such a view is off the wall. These rallies are gifts for investors, he says, nothing more than golden selling opportunities for them to get out of the market and curb their losses.
Wrapping up, Tice also says it's worth taking an historical look at the longevity of major bear markets and three periods that produced market 50% declines for an insight into what may lie ahead.. One such decline kicked off in the Depression era starting in 1929 and lasted 17 years. A second, 18 years in duration, began in 1966. Each was followed by rallies and subsequent multiple declines and prices eventually fell below their prior lows.
Noting we've already had another recent 50% decline (with the Dow falling to a low of 6,547 in March of 2009 from a high of 14,164 in October of 2007), Tice contends it makes no sense to believe that this time out the bear market will be compressed to just about two years. "We're in the midst of once again taking out the lows and it's only a matter of time," he says.
Or, as Transylvania's Count Dracula might put it, I want more blood.