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Medicine Men -- He's cooking

Grizzly bear

David Tice '76 (MBA '77) is among Wall Street's best at predicting stock market downturns. No bull about it, he says, a severe bear market is about to take a bite out of America' s assets.

By David Van Meter

IT IS A soupy gray day, but the hunt goes on. A strong breeze pushes the meadow every now and then, but the two foxhounds still sniff out the birds in hiding.

The oil painting -- just inside the offices of David Tice and Associates -- also hints at the hunt happening daily in this North Dallas investment research firm.

David Tice '76 (MBA ' 77) and his eight analysts work 60-80 hours a week, scouring the Internet, picking apart annual reports, looking between top and bottom lines, conducting storefront surveys, anything to figure the true worth of publicly traded companies.

"I' ll even ask my daughter what clothes her friends are wearing," said Tice, who laughs... but is not joking.

The result since 1987 has been Beyond the Numbers, a buyer-beware report that has become a must-have for serious institutional investors. It reads something like this, in this case against the world' s most popular soft drink maker this past August: . . . . We continue to see the market duped by the accounting methods and other measures we have documented thoroughly in the past. Coke has kept the dream alive on Wall Street and now trades for an incredible 51 times earnings . . . . The drink may be the 'real thing,' but the earning picture is something not to be believed . . .

In 1996, Tice took his business a step further by starting the Prudent Bear Mutual Fund, a $160 million dollar fund that "sells short" overpriced stocks. It' s simple really: Tice "borrows" an inflated stock on collateral, sells it, and then goes back and buys it back for less, hoping that his informed hunch will hold true and the stock will have tumbled to a more realistic price.

It' s risky business in a bull market. In its first year, Prudent Bear lost 13.7 percent of its value. In 1997, it lost 4.3 percent. But in a bearish market, it can pay off admirably.

In the third quarter of 1998, Prudent Bear was the nation' s most successful mutual fund. While the benchmark S&P 500 slipped 9.9 percent, the Bear gained 21.9 percent.

"We started Prudent Bear two years too early, but we felt that this market has been overvalued since 1995," said Tice, whose analysts include Gregg Jahnke (MBA ' 84), Jeff Middleswart ' 89 and Bill Whiteside Jr. ' 91.

"I like prosperity as much as the next person.I like to go to parties. But this economic party has gone on too long, and a long hangover is on the way. In fact, it' s here. It' s so clear now as it begins to play out in the economy."

For a guy who should be laughing all the way to the brokerage house, this MBA and CFA and CPA keeps a grim face and, on this October morning, has a nasty cold coming on; the night before he was in Chicago, debating his views on a panel. Afterward, he couldn' t hail a taxi and ran six blocks in the rain to catch the subway.

It' s of little consequence to what has become a crusade. A column in Barron' s here. An appearance on CNBC there. A spot on PBS' s Nightly Business Report. Behold, he brings bad tidings.

"It' s more clear to us than ever before that this is the worst global economy we' ve had in 50 years," Tice said. "The last three bear markets have taken less than two years to recover from. What we fear is the market that takes two decades for investors to get back to even."

Tice knows a bear market when he sees one. He' s among the TCU grads who have gotten their investment start managing the Neeley School' s nationally acclaimed Educational Investment Fund.

The market was so wobbly then that Tice earned his accounting degree, followed up with his finance MBA, and then stayed away from Wall Street for a decade.

"David is one of the most brilliant students I ever had the privilege of teaching," said Dr. Chuck Becker, associate professor of economics and finance."He had this amazing ability to integrate economics, finance, accounting and even history. He was really ahead of his time. And he apparently still is."

Finance Prof. Stan Block agrees.

"I have a tremendous amount of respect for David," Block said. "His Behind the Numbers is the best analysis in the country, and he' s as tough as he can be. . . . He takes such a strong position, and he doesn' t let anybody knock him off of it."

But is he right?

"Certainly, David' s analysis has already been partially reflected; whether it' s ultimately reflected remains to be seen," Block said. "There are still some positives out there [a gross domestic product of around 3 percent, for instance]. Every time it looks like the world is going to end, the market shows unusual resilience and bounces back. But there' s no question that what David is saying needs to be said."

Added Becker, "Any time the market reaches this high a level for such a long time, it becomes much more dangerous because it sucks in inexperienced investors who think that the market will always be this wonderful."

Tice' s mantra is that America is in a "mania" stage and on top of an economic "bubble" -- where fear has been replaced by greed, and risk by return. He gathers his perspective by looking beyond the bears of 1991, and 1987, past the slump in 1966, even past the crash of 1929. He looks at manias such as Holland' s run on tulip bulbs in the 1600s, which led to a 93 percent drop in value, or Britain' s South Sea shares in the 1700s, an eventual 84 percent loser.

This market is worse than any other previous U.S. stock market," he said, and flies in the financial face of major economic indicators. Corporate pricing power, consumer confidence, the trade deficit and individual savings are all on the ebb and -- he underlines -- "there is way, way too much debt in the world."

"We' ve had a great party up until now because there' s been so much credit," he said. "(Federal Reserve Bank Chair) Alan Greenspan has helped preside over all of that. He' s become the most respected person in the financial world, so there' s this feeling that the central banker will continue to be able to fix everything.

"The fact is, nothing is bigger than the market. Asia' s come down. Eastern Europe is coming down. Latin America is having its problems. There are not too many other markets we can sell our stuff to. Jobs will be lost, credit will go bad, and so it doesn' t matter how much interest rates are cut, the banks lending to the sub-prime borrowers and the 125 percent home equity loans are going to dry up."

To paraphrase a recent Newsweek article, Tice concludes, the only thing that stands between the world and a vicious deflationary bust is the IMF (International Monetary Fund) acting as lender of last resort and the U.S. consumer being buyer of last resort.

Magazines, financial reports and spreadsheets lie in a disorganized mess around Tice' s desk, where three monitors keep him plugged in to world markets. On this day, Tice is dressed in an average suit, no tie, wearing brown loafers with frayed shoelaces and listening to a radio that is at least 20 years old.

His parents drilled the value of a dollar into him, he says with a shrug, and he just can' t shake it. But that' s probably also partly why he has the cents sense he does. The bear has already started to run, he concludes. The Dow Jones Industrial Average will probably drop below 7,000 by early next year. By the end of 1999, Tice believes it could be as low as 4,000.

"Not many people believe what I have to say; it' s so out there relative to what others are saying. But I have all the logic on my side."

And he has advice for anyone who will heed it.

"Right now," he said, "you' re better off investing money that gives you an embarrassing 4 percent return than losing 40 percent of your investment." In short, he adds, "Think preservation of capital."

"We feel like it' s our job to warn people; some people criticize me, saying that I' m only making it worse. To me, this is like musical chairs. And I' m going to grab seats for me and others before the music stops."

To find out more about David Tice' s bear market views, visit www.prudentbear.com.