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Taking Apart David Tice on His Dow 3000 Call

Editor's Note: Arne Alsin's column runs exclusively on; this is a special free look at his column, which was originally published Nov. 25. For a free trial subscription to, where you can see Arne's commentary regularly, please click here .

Doomsday scenarios attract attention. Bill Gross made a Dow 5000 call in September that generated a lot of attention, though the underlying message was flawed. He said, "The market needs to yield close to 3.5% before it approaches fair value, and that means Dow 5000."

As I explained in my column on the subject , "dividend yields don't determine value," and any prudent buyer of a business knows that business value is determined by "earnings, cash flow and net assets... not dividends."

Bill Gross' message was worthy of attention because he may be the best bond manager around. Similarly, one of the best short-sellers around, David Tice, manager of the (PBRCX) fund, has been preaching a doomsday sermon of his own. Among other things, Tice says that the Dow will reach 3000 before the bear-market decline is through.

The David Tice Rationale

Although Tice was a few years early in shorting the '90s bull market, time eventually rewarded his diligence. With a top-notch reputation for research (e.g., Tice publishes "Behind the Numbers," a $15,000 per year research product), his prediction of Dow 3000 merits consideration. Here are the main points of his market call as well as my comments:

  • Stocks need to fall further; post-bubble drops are typically 90%. There aren't a lot of market bubbles with which to gauge the reasonableness of Tice's position. The market dropped 89% in the 1929-32 market. The backdrop for business was different then, though, with a depression and 25% unemployment, hardly comparable with the current economy. In the recent bear market, we came relatively close to the 90% mark anyway: The Nasdaq, the source of much of the '90s excess, dropped about 80% from top (more than 5000) to bottom (1108).

  • Stocks trade at price-to-earnings ratios of 20; at the bottom of previous bear markets, they traded at 7 to 8 times earnings. This assertion of Tice's isn't true: Only in the case of the 1973-74 bear market did equities trade at these levels. The economy isn't similar to 1974, when inflation was 11.1% and we were struggling with political uncertainty around Nixon and an oil embargo. The market didn't trade at 7 to 8 times earnings in 1932 because there were no earnings.
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