David Tice, who runs the $720 million Prudent Bear Fund, said losses in fixed-income securities are getting worse and "much tougher times" for banks and brokerages will lead the U.S. stock market lower.
"We see a long-term, secular bear market with very few places to hide," Tice said in an interview from Dallas. "We don't think we've fixed these liquidity problems."
Financial, computer and consumer shares will fall the most as credit losses spread, he said. Tice's fund is also betting against homebuilders.
U.S. stocks rebounded for a fifth day Thursday, pushing the Standard & Poor's 500 Index up 4.1 percent since surging credit costs erased more than $4 trillion in global market value. The Federal Reserve's decision to reduce by 0.5 percentage point the rate it charges banks on loans has helped spur the rebound.
"Taking rates down 50 basis points is not going to save this," said Tice, who expects the Fed to cut its benchmark lending rate by the same amount by the next meeting of policymakers on Sept. 18. "It shows what kind of crisis you have."
Financial shares in the S&P 500 are down 4.5 percent since the index rose to a record on July 19 and fell to a 13-month low Aug. 15. Consumer discretionary stocks are down 8.7 percent, while computer shares have retreated 6.5 percent, the third- and fourth-most of 10 industries in the measure.
Losses in financial derivatives such as collateralized loan obligations and other forms of structured finance will keep banks from lending more in 2008 than they did in 2007, Tice said.
"Corporate profits are dependent on the overall economy, and the overall economy is dependent on credit growth," he said. "People are not going to be able to take out big mortgages, cash out and refinance. Corporate profits will be dramatically lower."
Analysts surveyed by Bloomberg expect profit among S&P 500 companies to rise an average 9.1 percent this year and 11.3 percent next year.
Tice said in an interview on July 26 that the sell-off in equities "could be a really big one" as "risk is being repriced." In March, he said the U.S. stock market may decline as much as 50 percent. The S&P 500 is up 4.4 percent since then.
Tice's fund is always positioned for a falling market. In part, he does this by shorting shares, which involves borrowing stock from a shareholder on the expectation of profiting by buying the securities later at a lower price and returning them to the holder. The fund is 75 percent short, he said Thursday.
Created more than a decade ago to allow investors to bet against the market, the Prudent Bear Fund has succeeded during previous declines. The S&P 500 lost 22 percent in 2002, helping Tice generate a 63 percent return, including the reinvestment of dividends, according to Bloomberg data.
Still, the fund has lost 21 percent, including dividends, since stocks began rallying in October 2002. The S&P 500 has more than doubled investors' money during the same period.