This bear is betting on Nasdaq 500
The Prudent Bear Fund is up a whopping 109% in the last 27 months. Its manager, David Tice, thinks he has plenty of room to run yet and sees the Nasdaq falling deeper into the hole.
By Timothy Middleton
moneycentral.msn.com
Look for Timothy Middleton on "Squawk Box."
It sure is to some people. The benchmark tumbled 71% from its peak in March of 2000 to the end of June, hitting a five-year low. The distance to 500 from here would be less, just another 63%.
Bears have made a killing on the move so far, and David Tice predicts there are more fortunes to be made by selling the country short. Selling short is highly unpopular -- and, since Sept. 11, something a lot of people see as vaguely unpatriotic, as well -- but his Prudent Bear Fund (BEARX) is up 109% in the last 27 months.
“Unfortunately, markets overshoot their fair value,” says Tice, whose Dallas-based fund is approaching a five-year high. “We will correct excesses and imbalances, and we have an imbalance -- a maladjusted U.S. economy where there’s too much debt in the system.” He thinks the Nasdaq “could easily fall to 500,” as the Dow Jones Industrial Average ($INDU) tumbles another 67% to below 3,000.
Investors who cling to their stocks, which is most of us, are confident Tice is wrong. “I think it’s too late” to make money by betting on a steep further decline, says Sheldon Jacobs, editor of the No-Load Fund Investor newsletter. He notes some gold funds, the only sector in which Tice is long, tumbled 20% last month.
“I think we’re going to have a real slow summer,” Jacobs says, “but I remain -- for not a lot of reasons -- hopeful that we’ll get a bull market in either the fourth quarter or the first quarter.”
Tice is betting the carnage will continue. The 18-year bull market that ended in 2000 was preceded by 17 years of bear market. “We have gone from record low participation by individual investors to a record high, and what happens in secular bear markets is you wash all of that out,” he says. The process has, he thinks, about 15 years to go.
A bear sharpens his teeth
For 14 years, Tice has published research for institutional investors in a report called "Behind the Numbers". He launched his mutual fund at the end of 1995, which he admits was four years too early, as it lost money in each of them. “Remember, 1996 was the year that Greenspan called what was going on 'irrational exuberance,'” he says. “Our mistake was that we didn’t think policy makers would let the bubble get so far out of control.”
What the Fed missed, Tice thinks, is that massive inflation was occurring in the late 1990s, which would have called for much tighter monetary policy, except that it wasn’t happening in goods and services, which is where everyone looks, but in assets such as stocks and real estate.
Even today, after a huge fall, the price-to-earnings ratio of the stocks in the S&P 500 Index ($INX) is 30. When the last bear market ended, in 1982, it was 7.
Tice sponsored a symposium in the fall of 1999, predicting a massive crash. At the same time, he demonstrated the depth of his research by predicting a tumble in shares of Tyco International (TYC, news, msgs), criticizing the conglomerate’s accounting.
The shares were trading north of $50 when he published that opinion, and they fell to less than $40 within three months. Subsequently they surged to more than $60, however, and Tyco became a darling of growth investors as it resisted the bear market in 2000 and 2001.
Now those accounting methods have become controversial again, and the stock is down to less than $13.
Profiting from tech's collapse
Tice's investors have benefited the most, however, from the collapse of the technology sector. One of his most spectacular shorts was Juniper Networks (JNPR, news, msgs), which went from a high of nearly $220 in the fall of 2000 to its current price below $7.
“It was obvious the entire telecommunications market was in disarray,” he says. Juniper had been gaining market share on Cisco Systems (CSCO, news, msgs), but remained a niche player highly vulnerable to cutbacks in capital spending. That’s what happened.
He still thinks technology is too richly priced, and is currently shorting IBM (IBM, news, msgs). “IBM has, we think, taken quite a bit of latitude in its accounting,” Tice says. Much of the company’s revenues derive from services, rather than goods, and he says that opens the door to slippery numbers.
Also, the high-tech company’s share price hasn’t fallen nearly as sharply as that of other many tech companies. It trades around $70. The high was around $130 in the summer of 2000.
Shorts account for roughly 80% of Tice’s $330 million of assets, with the balance evenly divided between long positions in gold stocks and a few special situations. He trimmed the gold position in the spring, as the group surged, but retained Goldcorp (GG, news, msgs). The Canadian mining company produces gold for about $70 an ounce and is selling it currently for more than $300.
When the bear gets bitten
Investing with the bears is, however, fraught with its own problems. The upside on a short position is the difference between its current price and zero; in other words, it’s limited. There is no limit on the downside.
Short squeezes, or organized efforts to ratchet up a share’s price in order to bankrupt shorts, are often successful. Tice acknowledges this and uses put options and other derivatives to lessen his exposure to short squeezes. Still, the risk can’t be eliminated.
Also, there are many profitable alternatives to big-cap U.S. stocks. Value and small-company investors have largely sidestepped the bear. So have investors in basic industries like manufacturing. Bond investors have also done well.
Overseas, moreover, Japan has staged a serious rally -- the Nikkei 225 index ($NI225) is up 14.3% since early February. And emerging markets have been rallying as well. Investing in these markets carries its own share of risks, but they are easier for most investors to understand than the risk in short-selling.
Finally, there is serious timing risk in bear-market investing, because buried within a secular bear market will be some cyclical bulls, each one capable of squeezing shorts mercilessly.
For example, a secular bear market began in 1965, but that downward slide was reversed in 1970, when the Nifty Fifty rally took the S&P 500 up nearly 30%. The index was crushed again in 1973.
So a prudent investor has to make two decisions before approaching the Prudent Bear Fund. He first has to accept the argument that major indices will continue sliding nearly as much as they already have, only excruciatingly slowly. He then has to believe no cyclical rally will spring up anytime soon to savage him as much as the bear market already has.
I’m with Jacobs. Whatever you call what lies ahead -- secular or cyclical (bicyclical?) -- I think the easy money has been made on the bear side. The risk of some sustained good news is just too great.
At the time of publication, Timothy Middleton owned the following securities mentioned in this article: Cisco Systems. |
