Here is a guy who is almost always wrong.....
David Tice, Perennial Bear, Predicts 50 Percent U.S. Stock Drop
By Nick Baker and Connell McShane
March 9 (Bloomberg) -- David Tice, whose bet against U.S. stocks the past four years punished his Prudent Bear Fund, says the market is headed for a drop of as much as 50 percent.
The bull market probably ended last week, when shares suffered their biggest weekly slide since January 2003, according to Tice. The Standard & Poor's 500 Index retreated 4.4 percent and $837 billion of value was wiped out on concern more Americans will default on home loans, slowing economic growth.
``We see the first crack,'' said Tice, 52, whose Dallas- based Prudent Bear Fund is always positioned for a decline. ``I've never been more confident in our economic theories.''
His $651 million fund lost 21 percent since stocks began rallying in October 2002. The S&P 500 almost doubled investors' money, including the reinvestment of dividends, during the same period. ``We are bloodied, but not out,'' Tice said.
About 73 percent of the 11-year-old fund is allocated to short sales, Tice said. Short-selling is when investors borrow stock from a shareholder on the expectation of profiting by buying the securities later at a lower price and returning them to the holder.
This week he initiated a short position on General Motors Corp., the world's largest automaker, and estimates the shares may fall as low as $15. GM rose 29 cents to $31.06 yesterday. The automaker's spokeswoman Renee Rashid-Merem declined to comment when contacted by Bloomberg News.
Tice also owns U.S. Treasuries and shares of gold miners, whose prospects may improve should investors turn to bullion as a haven in a market decline.
Last Week's Slide
A worldwide rout in stocks that started in China on Feb. 27 accelerated amid concern defaults by the riskiest U.S. borrowers would reduce profit growth for financial companies. A gauge of banks, brokerages, and insurers accounts for 22 percent of the S&P 500's value, the biggest among 10 industry groups.
While the S&P 500 has rebounded 1.1 percent this week, Tice said the earlier slide was just the beginning of a tumble that will reach 40 percent to 50 percent within 18 to 30 months. The decline will be propelled by a waning appetite for risk among investors, who will also find it harder to leverage their market bets with cheap credit, he said.
The phenomenon is showing up in the subprime lending market, according to Tice. Shares of New Century Financial Corp., the second-largest U.S. home lender to people with blemished credit histories, have lost 88 percent this year. The company yesterday said it stopped accepting loan applications after some lenders refused to let it tap credit lines.
Higher Rates
More than two dozen mortgage companies have gone bankrupt, closed operations or sought buyers since the start of 2006, according to data compiled by Bloomberg.
Global borrowing costs are also climbing.
The European Central Bank yesterday announced its seventh interest-rate increase since December 2005, pushing its key refinancing rate to 3.75 percent. The Bank of Japan doubled its benchmark overnight lending rate to 0.5 percent last month, while the Federal Reserve's rate has been at 5.25 percent since June, the highest since January 2001.
``Subprime is a microcosm of the whole credit system,'' Tice said. ``People are now paying attention to risk.''
Created more than a decade ago to allow investors to bet against the market, the Prudent Bear Fund has succeeded during prior downturns. The S&P 500 lost 22 percent in 2002, helping Tice generate a 63 percent return, including dividends, according to Bloomberg data. The fund gained 2.8 percent last week, the biggest weekly advance since July.
`A Mistake'
Still, investors who have stuck with the Prudent Bear Fund since its inception have lost about 41 percent. The S&P 500 doubled in the same period.
On May 2, 2003, Tice incorrectly predicted the Dow Jones Industrial Average would sink to 4000 within the next year and a half. The 30-stock gauge closed above 9000 about a month after the forecast and reached a record 12,786.64 this year.
``We know we're going to lose money when the market goes up,'' Tice said. The fund exists as a way for investors to make a bearish bet against stocks whenever they choose, he added.
``Being perpetually bearish is a mistake,'' said Rob Arnott, who oversees $20 billion as chairman of Research Affiliates LLC in Pasadena, California. ``It's not smart to be positioning yourself for a market decline all the time because the market goes up far more often than it goes down.''
Nonetheless, Arnott agrees with Tice that U.S. stocks are going to slump. ``Right now, tactically, I'd agree with his view,'' Arnott said. ``I view the market as vulnerable.''
Tice and Arnott are at odds with all 15 Wall Street strategists tracked by Bloomberg News, who stuck with their forecasts that the S&P 500 will advance in 2007 even after last week's tumble. The group includes advisers from Citigroup Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co.
``People ask me, `Doesn't it get lonely out there? Don't you feel like you're wrong?''' Tice said. ``It doesn't. I feel very, very comfortable going to sleep at night knowing we're going to be right.''
To contact the reporters on this story: Nick Baker in New York at nbaker7@bloomberg.net ; Connell McShane in New York at cmcshane1@bloomberg.net .
