20 July 2008

S&P 500 to Dive Below 800

The S&P 500 stock index is heading south and could break through the 800 level before it hits bottom, says David Tice, founder of the Prudent Bear Fund.


"We think this is going to be a secular bear market," Tice said in a recent Bloomberg interview. He went on to enumerate the many problems tugging the U.S. economy downward, including the disastrously high price of oil.


"We think we should break through the 800 level [to the down side] on the S&P where we were in '02," Tice said. That drop would represent an additional decline of about 20 percent from current S&P levels.


Tice believes the fall will not be precipitous, but rather incremental, "over the next 18 months, to two years," he says.


"We think the U.S. economy is going to have to adjust to a lot less consumption. There's going to be a lot of restaurants, gambling casinos, movie theaters, and shopping malls that are going to be closed down."


Among the major factors behind the slump in consumer spending — about 70 percent of which drives the U.S. economy — is the housing bust, according to Tice.


"We no longer have our houses as an ATM machine, and unfortunately, we're just going to have to adjust."


Unlike previous economic downturns in which the notable resilience of the American consumer spent the economy back into good health, this time is different, Tice observed.


"...We've had this great real estate bubble, back in '02, after 9/11."


President Bush and former Federal Reserve Chairman Alan Greenspan, "...were encouraging people to go out and spend. We had this historic real estate bubble [with housing prices increasing] 20 percent a year compound growth .... People were able to take equity out of their homes and spend money."


Unfortunately, said Tice, those days are over.


"Now people are spending on their credit cards, however, auto defaults are going up, credit card defaults are going up, mortgage defaults are going up."


And the price of oil, currently trading at record highs, is another negative factor, Tice said. "So we think the consumer is going to slow down."


Would a decline to $100 a barrel for oil make Tice "tweak" or rethink his market forecast?


"Oil will probably sell-off, and it wouldn't surprise us .. .Even if oil goes back down for a while and we get a bit of a rally, we think that rally should be sold."


Also troubling Tice are the problems of Fannie Mae and Freddie Mac, both of which suffered steep declines recently.


"They need to potentially raise 75 billion, which is triple what their current market capitalizations are," said Tice.


"The issue here is capitalization, and the issue is losses that are going to occur for their guarantee business ... Right now they are holding capital for only 45 basis points for those guarantees and there will be significant losses ..."


Tice sees similar problems for many other financial institutions. "We think a lot of financials could go down a lot further from here ... We happen to be short Fannie and Freddie right now."


When asked what other sectors he thought were most likely to decline, Tice answered with bluntly bearish gloom.


"We think the overall market is going to decline, and you can sell virtually everything."

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