Bear Leads in Bull Run

A big stake in mining firms has helped David Tice's bearish fund outperform.
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Here's something you'll never see during the running of the bulls on Wall Street: A bear leading the charge.

While the major stock indices are streaming toward record highs, David Tice's $505 million

(BEARX) - Get Report Prudent Bear

fund has, quite ironically, flourished because of its long position in gold-mining stocks. The Dallas-based manager's fund, which mainly shorts stocks, is up 8.7% year to date. That's 10 basis points better than the


, which is flirting with its all-time high, and about two percentage points better than the

S&P 500

, which is closing in on a five-year high.

Of course, it hasn't been easy being a short-seller on Wall Street over the last few years. In the bull markets of 2003 and 2004, Tice's bearish fund lost 10.4% and 14.1%, respectively. But his significant precious-metal holdings lifted him to a 2% gain in 2005 -- only 3 percentage points behind the S&P -- and are again propelling him this year as gold keeps climbing to new heights.

checked in with Tice to see how he felt about being the best bear in a bull market. What's it like to be the big, bad bear when the bulls are running wild on Wall Street?

David Tice

: It feels lonely, but we are used to that. We were very lonely from 1996, when we started our fund, to 1999. People thought we were crazy, so we are used to that feeling of being the lone ranger.

Although lately we've been getting company from high-profile people like Warren Buffett and Bill Gross. More people are talking about the current-account deficit, the housing bubble and the declining dollar. Just because the stock market is going up does not mean there are not significant problems lurking out there for the economy.

Ironically, you run a bear fund that is soundly beating the S&P 500 index. How has a bear fund performed so well in a bull market?

It's been tough to make money on the short side, but precious metals have been great for us. That's somewhat by design, because corporate profits are going to rise in very accommodative credit conditions. And stock markets can rise just due to this massive credit creation.

But that also stirs people to buy precious metals because the currency is in decline. Astute investors will see the currency weakening and buy precious metals, or a fund like ours, to protect themselves.

I'll put it out there. Gold just breached $700 an ounce. How high can it go?

Gold can go a lot higher, maybe even to $2,000 an ounce. If you look at the debt-to-GDP

ratio, the $1.4 trillion of mortgage debt we created in 2005, the dovish central bank chairman in Dr. Bernanke and the huge buildup of financial claims abroad, then you can see quite clearly that gold can still go a long way.

You own gold- and silver-mining stocks in your portfolio, but nowadays you can get direct precious-metals exposure via the streetTRACKS Gold Shares (GLD) - Get Report or the iShares Silver Trust (SLV) - Get Report. Why not buy the ETFs instead?

First, we get operating leverage with the miners, because when the price of gold goes up 20%, the miners can go up 70%. Also, we believe we can create value in our fund by finding the best companies. The big mining companies cannot replace their reserves, so they have to make acquisitions. We have benefited from that trend as well.

Aside from making money in gold, how are you doing in the more traditional bear-market plays, like shorting stocks?

We are very diversified in our short portfolio. A 1% position size for us is large. Let's face it, it's been a tough year so far to short individual stocks, as is our practice. A lot of short-dedicated managers have not done well because the companies with the worst fundamentals have risen the most.

We have big short exposure all the time. Nevertheless, in market rallies, we play as much defense as we can while staying true to our mandate. We keep our beta down, and we stay away from widely shorted stocks. We start with small positions and build them as they work.

From a short perspective, it doesn't seem like much is working out there now. What in particular is working for you?


(DELL) - Get Report

has been a successful short for us this year. We took in our Dell position, though, because expectations have come down. And


(GM) - Get Report

has been good for us, although it's lost us money this year.

Doesn't shorting Round Rock-based Dell make you unpopular down there in Texas?

We don't talk about our shorts too much. We realize that we are not out to win friends, and we are not on a lot of company Christmas-card lists. But it is our contribution to efficient markets.

Another issue with shorting stocks is that you have to be right at the right time. And you've been waiting for doomsday for a while now. When does it finally hit?

First of all, we don't want bad things to happen to people. It saddens us that it is eventually going to happen. It's not like we are cheering for doomsday. But in our opinion, the bull market has gotten too far out of control. We should have had these excesses and imbalances wrung out along the way, rather than have our central bank bail us out and fuel it with more credit creation.

We think the current-account deficit is a big problem, and we are not alone on that. It could reach $900 billion this year. That's a huge number. The economy is still very strong, but it is imbalanced. We think housing has gotten out of control. A lot of stimuli to the economy has come from cash-out mortgages, and that was roughly a trillion dollars in 2005. That can't continue.

We see real estate starting to decline in some markets. We see higher interest rates globally. And we see people buying commodities like gold, silver and copper because they see the credit environment is way too loose. We think it will result in increased inflation. We are also seeing wage inflation based on the last employment report.

Eventually the consumer will roll over, because the stimuli from cash-out mortgages will be removed. Once everything starts heading downhill, it will turn from a virtuous circle to a vicious cycle.

Do geopolitical troubles factor into your thinking as well? Because we obviously have been seeing plenty of those, too.

We think it does. But we don't make bets based on the current situation with Iran or Iraq. It increases the uncertainty, which is good for a fund like ours, but we have no energy exposure, so it does not filter down to particular stock choices one way or the other.