Dr Doom: shares 40% too high

NOTORIOUS doom-monger Tony Dye believes US shares are overvalued by a colossal 40%. A fall to what Dye sees as fair value would drag the blue-chip Dow Jones index down from 9000 points to 5400.

He believes UK investors also have reason to be worried but told This is Money: 'The UK market tends to follow the US, but at the moment it is not as overvalued as the American market.' The Dow has fallen 14.7% in the past year compared with a 20.8% tumble for the FTSE 100.

His comments came as the FTSE 100 dived again on Wednesday, plunging 154.2 to 4392.6. The index is more than 35% off its peak of two years ago.

Dye famously refused to be drawn into soaring technology stocks as chief investment officer at pension fund manager Phillips & Drew. His prediction through the late Nineties that an enduring bear market was around the corner earned him the nickname Dr Doom. His funds missed out on the surge in 'new economy' stocks and Dye stepped down in February 2000 - a month later the dotcom bubble began its long deflation vindicating his decision.

Now running his own hedge fund firm, Dye Asset Management, the money manager told his peers at the Hedge 2002 conference this week that stock markets could remain in the doldrums for 10 years, with investors struggling to make gains in a market trading sideways. He even suggested sticking cash into savings accounts instead of stock markets.

His stock market concerns are based on two calculations: by comparing a company‘s share price with its earnings, known as the price to earnings or p/e ratio and using Tobin‘s cube, a complicated investment tool devised by the economist James Tobin in the Fifties.

However, despite his pessimism he has told This is Money there has been some 'amazing falls' that must present buying opportunities, even in the technology sector. 'There a few stocks that are beginning to look attractive,' he said. Although he claims not to know which.

Dye has not been alone in spreading gloom this week. Merrill Lynch cut its year-end Footsie forecast from 5500 to 5000, although that represents expectations of an 11% rally in the next six months. Other investment houses fear the only way is down. Credit Suisse First Boston recently issued a research note warning that history suggests shares need to 'drop vertically' before they pull out of a bear market, known in investment circles as 'final capitulation'.

Like Dye, John Chatfield-Roberts, a fund of funds manager at financial house Jupiter, also believes price to earnings ratios suggest markets have further to fall. He points out that UK share prices trade at a heady average of 20 times their earnings. The lower the figure, the cheaper the market. Over the past century, he said, the average p/e ratio at the end of a bear market has been 11. After the last recession in 1973, it was just five.