This weekend I was going through a file of forecasts that various people had made from 2000 through 2005 and saw one that I had printed out on April 22, 2002.
Before I get to the title of this piece, I'd ask you to take a short quiz -- two questions. I'll be referring back to these two items later in this article. First question:
What are the odds of someone winning the lottery?
If you're like most people, you answered something like, "they're very low." But that would be incorrect, because you answered a question that I didn't ask. The question you likely answered is the one that you're most familiar with: What are the odds that you (or another specific person, named in advance) will win the lottery?
But rather than looking at it from the point of view you're used to, look at the lottery as a whole. That's the question I asked. Someone usually does win the lottery. In fact, the point can be made even more plainly if we take the example of a charity raffle. You've probably been to one of these. Everybody buys a ticket and someone will win the prize. If the first winner isn't there, they pick another ticket out of the fishbowl. They keep doing it until someone wins. We don't know who will winin advance, but there's a 100% chance that someone will win.
Hopefully, you'll see my point later on and not think it's just a stupid question where I could say, "Fooled ya! Fooled ya!" But first, lets get to the second question which is more straightforward and rhetorical:
If a company has 90% market share of a market that is mature and is not growing, and the company isn't expanding into any other lines of business, how much more can the company grow?
Probably not much. In fact, the things that can happen are mostly bad. There's 10% more upside, but a whole lot of potential downside. A new competitor might undercut on price or on service and take away 10-15% of the market. Somebody might give away your product or service as a loss-leader to get the customer's business on something else. Another product or service might displace yours or make it obsolete, etc., etc. The point being, there is a time when the market becomes saturated and the risk becomes greater than the reward.
Hereafter, I'll be referring to these two items as the lottery example and the 90% problem.
Is Everybody Already Into The Pool Of Available Buyers?
In a previous piece, I asked a question that I'll put to you again: name an asset that you cannot buy with 100% financing. There are very, very few. Ironically, stocks are one of the few I can think of. Cars, boats, houses, furniture, stereos, you name it -- 100% financing is available. And that's a stingy deal. Nowadays it's no down, no payments, and no interest for a year or two. Greater than 100% financing on houses is often available. Twenty years ago, it was not like this. Even ten years ago it wasn't like this. The increase in credit availability is the reason for much of the increased demand in certain sectors of the economy.
The ability to purchase an asset on credit creates a huge additional demand for the asset because it increases the pool of available buyers. If we all had to pay cash for cars, let's say $30,000, the pool of available buyers would be small because many people have very little in the way of savings. But if the car can be purchased for a payment of several hundred dollars a month, the pool of available buyers increases dramatically. That's wonderful as the credit availability is being increased. But if it decreases, it also takes away potential buyers.
As an investor in assets, of course, you want the pool of available buyers to be small -- less competition. The time to buy real estate, for example, is when interest rates are 12-13%, no banks will lend money anyway, and nobody has cash. Nobody but you. Conversely, when lenders are offering easy credit, 125% financing, the lowest interest rates in 40 yrs, etc., this is about as big as the pool of available buyers is going to get. No one knows where the exact saturation point is, but it will come.
As discussed last time, much of the credit creation in this current bubble has taken place outside of the banking system itself. Now I'll invoke the lottery example and suggest that again we need to look at the whole -- the total amount of both money and credit available -- not just one specific part of it. Rather than looking at just the official banking numbers (M1, M2, M3, MZM, etc) for signs of an increasing money supply as we may be used to doing, we must also look at the increase in credit outside the banking system. It has exploded. Credit can affect asset prices just as much as real money. But, alas, at some point the market will get saturated with credit (whose payments still must be made), as the borrower simply cannot afford more payments given his current income. Then there are no new buyers, asset prices begin to fall, credit becomes less available, and the entire scheme goes into reverse.
Debt, Derivatives, SPEs, SPVs, and SUVs
It's quite possible that much of this credit has been effected because of a single faulty premise. If you think that's not possible, let's remember it was a very short time ago that almost the entire internet bubble was brought about by the single flawed premise that advertising would cover the costs of running a web site. Sure, you had some retailers and other businesses trying to sell stuff, but by and large everybody thought they could provide content for free, and make money from advertising. Almost everyone involved with the internet believed that faulty premise.
Where credit creation is concerned, that flawed premise may be the concept of financial insurance. Of all the "financial insurance" products, credit insurance is among the most worrisome. Think of credit insurance as being a bit like co-signing on a loan. If the borrower can't pay, you're on the hook. It would obviously be much riskier to cosign for an irresponsible teenager than for a reputable, able, qualified borrower. However, able borrowers obviously don't need a co-signer.
But Wall Street would have us believe something different. They would have us believe that you can take a bunch of sub-prime auto loans, consumer loans, or mortgage loans, etc., place them into an SPE (Special Purpose Entity) or SPV (Special Purpose Vehicle), slap a credit insurance product on them to turn them into AAA-rated paper, and the risk is somehow hedged away and just magically disappears into the system.
This is nonsense. I contend that not only is credit insurance not an insurance product, but the risks cannot be hedged away, and, in fact, the very existence of such "financial insurance" products is almost destined to bring about the very type of conditions that will expose their speciousness.
The '87 Crash Revisited
If there are two things that we should have learned from the stock market crash of 1987, they are these: (1) portfolio insurance was a flawed concept that served as nothing more than a giant stop-loss order, and (2) writing naked puts on the stock market seems like a great idea when the market is flat or going up, but you can get wiped out in a hurry when there is a large move down.
Now, in my opinion, Wall Street has combined these two great flavors to give us the new and improved concept of credit insurance. I want to make clear that when I speak of credit insurance I'm talking about the type of insurance used during the last 5-7 years (during the boom) in conjunction with the "structured finance" products: asset-backed securities, mortgage-backed securities, collateralized debt obligations, et al. This entire industry, in it's current form, is extremely young -- maybe 10 years old. It is a boom-time creation.
Credit insurance, as a concept, began by companies insuring municipal bond obligations. That, I consider to be a different and legitimate business. You're dealing with a municipality who has taxing authority and is providing a necessity to the citizenry. But then the industry began to expand into insuring other products to the point where in the last 5-7 years, I believe they are taking ridiculous risks in the structured finance area.
An insurable event must be random and mutually exclusive in order for an insurer to be able to pool a number of insureds, do the actuarial calculations, and charge an appropriate premium. Usually an insurable event is one that is mutually exclusive by geography, and/or demographics, and/or industry, and it is also not possible for the events to be contagious or interconnected, etc.
The point can be made clear with an example. An automobile insurance company, for example, may insure drivers in Dallas, Los Angeles, Denver, Omaha, etc. A car accident in Dallas is not going to cause one in Denver. Sure, accidents will happen at the same time in different cities, but it is all more-or-less random, whether happening to a 36-year-old or a 57-year-old, male or female, working in pharmaceutical sales or as a homemaker.
But now lets take that same concept and apply it to one type of financial insurance: stock portfolio insurance. None of the randomness and mutual exclusivity is there. All of your insureds are all taking part in the same event (in this case, a stock market downturn), which is cyclical rather than random. Imagine the CEO of a stock portfolio insurance company boasting, "We have a diversified insurance portfolio. Diversified geographically: we insure against stock losses in Dallas, LA, New York and Omaha. Diversified demographically: we insure people from age 28 all the way up to age 75 against stock losses. We're also diversified by industry sector, insuring against stock losses in the financial, retailing, real estate, and manufacturing sectors. We're very well diversified."
Obviously, such a portfolio is not diversified at all. The losses will come to all of your insureds in one fell swoop when the stock market heads down, regardless of their location, their age, or their industry. Attempting to write insurance for something cyclical is not insurance. It's guaranteed losses at some point, the only question is when.
But it gets even worse than that. The very existence of financial insurance for something cyclical will almost certainly lead to a boom followed by an inevitable bust -- the very thing the "insurance company" cannot withstand. Just so that we don't over-use the stock market as our only example of "insuring" a cyclical event, let's "insure" against a downturn in the semiconductor industry. What will happen? A boom. It's almost guaranteed. With "insurance" available, every semi manufacturer would go out and build as many new plants as possible in order to gain market share. After all, its losses are limited -- it's got "insurance." Every semi company would do the same. There would be a temporary boom. And the ultimate liabilities for the insurer would only get bigger as the boom grew. You'd get massive over-capacity that would lead to a huge bust in the industry, and huge losses for the insurer. The existence of the insurance product brings about the very bust it cannot withstand.
There is no way you could charge enough for the product because every semiconductor company will have losses. Even if you knew in advance that there would be $5 million in losses for one company, you'd have to charge more than $5 million for the "insurance" policy, because all of your other insureds would have losses too. There are no offsetting "unharmed" insureds (whose premiums you get to keep) to make up for the claims you have to pay out. Everyone would be hit. Everyone would have a claim. Any attempts to hedge the risk dynamically would mean selling into a declining market and would only exacerbate the problem.
Much like insuring against a downturn in the stock market or in the semiconductor industry, the credit insurers are really insuring against a serious downturn in the economy. Loans everywhere will all go bad at the same time. And just as the semi manufacturers thought they could build with reckless abandon because they have "insurance," the purchasers of all this credit are willing to buy with abandon because the securities they are purchasing are insured. They're AAA-rated.
So it seems to me that this type of "credit insurance," can only exist for one of two reasons: (1) it is either massively under-priced and the under-pricing will be exposed during a significant downturn, or (2) it is properly priced and the buyers are stupid to buy it. Personally, I'd lean very heavily toward thinking it's number one. There is huge risk out there somewhere. As we've witnessed with recent events, these things can be hidden for some time. The credit insurers boast of very, very small losses. So small that one wonders why anyone would pay premiums for their products.
Much of the credit creation in the economy has occurred because there are ready buyers of this credit. The purchasers of these structured securities are buying them because they are AAA-rated. This is only possible because of credit insurance. If that insurance becomes too expensive or goes away because the insurers start suffering large losses or receive credit downgrades, etc., the AAA-rating would also go away, meaning the purchasers of these securities would disappear, and much of the credit creation could seize up very quickly. Thus, a significant portion of the money supply could contract, quickly. This is why I do not discount a financial accident scenario. Not to say that it will happen, only that it could.
Many of the hedge funds and leveraged speculators playing the chase-the-yield game and buying these asset-backs and mortgage-backs, et al, could go broke very quickly. Banks could be on the hook for loans to many of those hedge funds. The entire area of structured finance, in its current form, is new and untested by a significant economic downturn. It is a chain of many weak links. Debt, derivatives, credit insurance, hedge funds, special vehicles, banks, etc., are all interconnected. The losses can be contagious. Another LTCM-type debacle is not out of the question. We seem to just keep ignoring these head-on collisions and keep speculating wildly as though nothing happened. Just hose the blood off the dashboard and let somebody new start driving the car.
The Availability Of Financial Insurance Can Disappear Quickly
Interestingly, one of the reasons Kmart cited for having to file bankruptcy when they did was the "evaporation of the surety-bond market." I heard an analyst say that the potential losses from the surety companies on Enron transactions alone (we haven't even discussed the potential for fraud, which tends to be rife during bubbles) could amount to something like 75% of all surety premiums collected by all surety companies for the year.
Many money market funds are dropping default insurance because premiums have soared. USAA, Fidelity Investments, and Putnam Investments, have all dropped insurance. Vanguard and others are considering doing so. Those funds just got a lot riskier. One has to assume they weren't blowing the shareholders' money on insurance for no reason. Now it's no big deal?
My personal belief is that the puny additional yield in money market funds is no longer worth the risk.
If there are huge losses out there, they are likely to show up without warning. Take seriously the fact that money market funds are not federally insured. I will be keeping any uninvested funds in things that are federally insured or direct obligations of the US government. Because yields are so low (another unintended consequence of cramming interest rates down), many money funds are already absorbing expenses so investors don't take losses. There's the potential for funds to take additional risk to chase yield. We should also remember that money market funds are susceptible to the equivalent of bank runs. Obviously not in the sense that there are fractional reserves like at a bank, but in the sense that too many withdrawals could force funds to go bankrupt. Just because this has rarely happened before does not mean the risk isn't there.
Mortgage insurance is another financial insurance product of dubious nature. The Japanese mortgage insurance companies are still suffering to this day, requiring further injections of capital. Many analysts say our property bubble isn't nearly as bad as Japan's. Maybe they're right . . . but maybe not. Before it crashed, we also heard the Nasdaq wasn't a bubble and wouldn't collapse like the Nikkei.
Now, the main argument used to explain that we don't have a housing bubble is that there is no oversupply. There was no oversupply of telecom equipment either. . . . until there was. Companies couldn't keep up with demand. Remember those days? Easy money produced a temporary over-demand of telecom equipment that brought about the oversupply. When the easy money disappeared, the oversupply was exposed. In housing, I believe easy credit has made for a temporary over-demand of housing. When the easy credit disappears, there will be an oversupply.
In a recent article, Joe Birbaum, an executive retiring from Mortgage Guaranty Insurance Corp, urged caution in home lending. That's good. Except we read this, "His definition of high-risk: loans exceeding 100% of a home's value or beyond 103% for low-risk borrowers rolling closing costs into the loan; and deals requiring more than 41% of borrower income for the mortgage payment." So apparently, he thinks 100% loans are not high risk. That's scary.
Structural economic problems are often not readily visible; they're not peeling paint. The building just collapses, seemingly unexpectedly, and for no visible reason. If we have a serious economic downturn, the mortgage insurers will suffer mightily.
Good Times, Loose Morals
Keep in mind, everything gets loosey-goosey when times are good. "Close enough. Let it go through. Big fees riding on this." Normally, when a company sets up an SPE or SPV they must obtain a "true sale" opinion from a law firm, indicating that this really is a sale and not some sort of sham transaction. Stop and think about that concept for a minute. You're selling to such a closely related party that you have to get a law firm to step in and say, "Yeah, this is really a sale, not just two guys pushing paper back and forth to steal money." That's not to say such a structure can't be used legitimately; it's just to point out that this is obviously a very, very close relationship.
Now the bad news. Enron had "true-sale" opinions from a highly respected law firm. We now know that these were anything but true sales. Might there be more out there? If Wall Street is good at one thing, it's making a cookie-cutter and doing the same thing over and over. Everyone's morals become a little looser when easy money is at stake. These types of structured finance transactions have yet do go through a major economic downturn. If large losses are suffered by SPVs, do you think maybe the investors from two different entities might bicker over how the deal was set up? Or might bicker over the remaining assets? Or might sue the deep pockets (the insurers)?
The other day I saw a press release stating that a company had sold a series of AAA-rated sub-prime loans. Only on Wall Street could such an oxymoron be seen as financial genius. But somehow, turning sub-prime paper into AAA-rated paper doesn't sound risk-free to me. Somebody is holding that risk. The credit insurers claim they hedge this risk away dynamically. I don't see how this is possible. Who takes the other side of that trade? They might do it once, but once they take big losses, they won't do it again. The liquidity for such a market will disappear. Many of these SPVs also have a built-in liquidation feature where if the losses get to a level that is to great, the entire thing will be liquidated. "To whom?" one might ask. Liquidity is a coward; it disappears when things get tough.
So to use a stock market analogy, I contend that the purchasers of such credit insurance products are buying something akin to portfolio insurance, and they are buying the insurance from someone who is essentially writing naked, out-of-the-money puts on the economy. Neither is a smart thing.
[And similarly, with the bankruptcies of Kmart, Enron, Global Crossing, et al, many of the large banks are discovering that those credit lines they handed out so freely during the boom, are the equivalent of writing naked, out-of-the-money LEAP puts on a given company: very small fees collected in return for the risk of huge losses in bankruptcy. Worse, they can't "buy back" these LEAP puts in the open market. They just have to sit there and take the pain.]
Enron = MicroStrategy
MicroStrategy was the company that got everyone looking at the dubious accounting of many of the tech stocks. Everyone looked at tech revenues and earnings with a much closer eye after MicroStrategy blew up in March of 2000, if I recall. Enron will likely be the siren to go off for the larger companies and the market as a whole. Bond rating agencies will take a much closer look at companies now. We may now see a race to downgrade as none of the big three wants to be responsible for triggering credit clauses in loan agreements, or derivatives, or off-balance-sheet entities. The accounting will likely get tougher, as the accounting firms don't want to have to pay out huge lawsuit settlements.
We now find out that Enron was recording its revenues much like Priceline was. And the earnings were, well, non-existent. The self-dealing off-balance-sheet partnerships had plenty of profits, however. (It's ironic to see the Federal government, a big abuser of off-balance-sheet accounting itself, sit in judgment of Enron.)
Enron was supposed to be The World's Greatest Company. It now seems Enron's only claim to fame can be that it was Texas' biggest innovator in creative finance since Anna Nicole Smith's groundbreaking work in pioneering the viatical marriage. (In case you're not familiar with the subject, Ms. Smith, a Playboy playmate, married an octogenarian billionaire. Though men often describe her as a woman of "ample personality," whenever I see Ms. Smith on television I immediately become concerned that I may have over-inflated my tires.)
It seems Enron was over-inflating things too. But who hasn't been? And it doesn't have to be fraud. If we just counted stock options as compensation and caused them to be expensed as they should be, earnings would probably fall another 8-15% at most companies. At some companies the earnings reductions would be much, much greater. Employee stock options are basically just another type of OTC derivative. When there is no regulated exchange to establish a market price, the company sort of gets to decide what they're worth. "Uh, we'll choose zero." Fox guarding the hen house. Mark-to-market accounting and gain-on-sale accounting for OTC derivatives work much the same way. "Mark-to-meet-earnings-estimates" may be a more appropriate term.
Pro-Forma, I'm Miss America
Lets pad the top a little bit and pretend that I have long, flowing, blond hair rather than a graying, balding pate. Take a few decades off my age, and cap my teeth while you're at it. Then, imagine my excessive nose and back hair isn't really there. Ignore my pot belly. Strip away the male genitalia (ouch). And finally, make believe my disgusting toenail fungus isn't as hideous as it really is. Do all these things, and you'll see that I'm actually an incredibly attractive, slender, leggy, 21-year-old female who has some very important views on world peace, plus I have the ability to keep every single one of my beautiful teeth exposed while excitedly uttering the phrase, "I'm majoring in COMMUNICATIONS!"
The gap between GAAP earnings and pro-forma earnings has never been greater. The one-time charge is now something that occurs approximately every three months. Big bath quarters, goodwill "cookie jar" reserves, off-balance-sheet transactions, aggressive pension assumptions, revenue swapping, etc., are all part of the game. Companies are not earning as much money as they are saying. It's that simple.
This leads us to a question.
New Economy Or Embezzlement?
The sole purpose of all these financial shenanigans is to make a company appear to be worth more than it really is.
If the company were private and management owned all the stock themselves, they would never report earnings to themselves this way.
It is clearly an attempt to mislead the public into bidding the prices of shares up to higher and higher levels so that insiders can sell out. At its worst, it can become the financial version of e pluribus unum. Roughly translated: from many Global Crossing shareholders. . . . to Gary Winnick.
I believe it was Teddy Roosevelt who said, "A man who has never been to college might steal a railroad car, but a man who has been to college might steal the whole railroad."
Embezzlement means to willfully take or convert to one's own use, another's money or property, of which the wrongdoer acquired possession lawfully, by reason of some office or employment or position of trust.
Not accounting for stock options, misleading accounting, etc., fits the definition of embezzlement, in my opinion. Let's call it what it is.
Employee stock options should either be accounted for fully as expenses, or outlawed for public companies. One or the other. Otherwise it's embezzlement.
Microsoft recently traded at 60 and the Jan '04 calls with a strike price of 60 were trading for 14. Think about that. At-the-money options with less than two years to expiration trade for 14, but employee options expiring in ten years are free, according to the income statement.
If we go the route of expensing options, perhaps we should consider having publicly traded 10-year LEAP options on all companies that issue employee stock options. That way, the market, not some formula, would determine their value. The more glowing hype that management spews about their company, the pricier their 10-year LEAPS would become in the market, and thus, the more expenses the company would have to deduct for new option grants. They would have to pay a current price for offering ridiculously rosy future scenarios. Employees would not be allowed to speculate in the LEAPS. (And why are employee options for 10 years anyway, with no cost of capital factored in?)
Alternatively, outlawing option grants for public companies is also worth looking into. Contrary to popular belief, I believe options do far more to pit management against shareholders, rather than put them in the same boat. Extensive use of options is only a couple of decades old (coincidentally, the same decades that stocks went up the most in history -- at least partially because of false, overstated earnings; victims are left holding the bag).
Options do much to encourage management to make money off the shareholders, rather than with them. Management has an incentive to issue bad news and drive the stock price down right before the option grant in order to get themselves a lower strike price. Options also encourage unhealthy risk-taking to get the share price up. They provide motivation for accounting chicanery and setting up structures that may be good for a few years (long enough for insiders to sell out) and then blow up later on, a la Enron. They encourage a company to engage in risky vendor financing to prop up sales and earnings short term. The list goes on. They provide much temptation for management to act in an immoral manner. What corporate board is going to vote against an option plan when they get some to? (Even when options "work," money has still been taken from shareholders because they are having to pay a higher price for the stock than it is really worth if all expenses had been accounted for.)
Private startup companies, often short on cash, could still issue whatever options they want. This would also encourage companies to stay private until their house is in order. The big risk-taking would be done in private companies and not with the public's money. But for public companies, pay management in cash after they have produced cash earnings. That way all the expenses will be accounted for. Then let the management buy stock at the market price if they want, so they are in exactly the same boat as shareholders rather than getting free lottery tickets. No sweetheart deals for management. That's the whole idea of being a fiduciary.
Officers are fiduciaries of the shareholders, meaning they are supposed to put the shareholders' interests ahead of their own, not the other way around. They are supposed to watch out for shareholders, not conceal expenses from them.
At the very least, options almost guarantee that at some point the most aggressive accounting possible will be used in order to get the stock price as high as possible. Innocents will get sucked in to purchasing at a falsely inflated price.
Now, consider reading the following headline in your local newspaper:
Strong Sex Drive Leads To Poor Punctuation Study, Says
In other words, sometimes the statement itself gives you some unintended insight into the person making it. This brings us to General Electric. GE is a large company very representative of the economy as a whole. GE's CEO Jeff Immelt recently admitted that he does not see a recovery in 2002, but at the same time announced that earnings would increase by up to 18% in 2002. Not that they might, or that they could, but that they would. Ponder that one. He's telling you the earnings will be up, even before the results have come in. That should tell you something. No executive should be making that kind of statement. If I'm not mistaken, Mr. Immelt's predecessor once remarked that they could grow earnings in any economic environment. A ridiculous statement, unless you know you're going to torture the books until they tell you the number you want.
GE's financing arm can do lots of things to make earnings look better than they are. I have no idea what GE is really earning. I don't think anybody does. Oh, I know what they're reporting, I just don't know what they're earning. I don't know the risks they're taking. But something is very fishy when the CEO announces earnings a year ahead of time.
What Can Get Better?
While many people are saying that the worst is all behind us, I don't see it that way at all. The 90% problem discussed earlier is something we face in many areas of the economy. Companies are already as aggressive as they can be with their accounting. Options aren't being accounted for. P/E ratios are either very near, or way above, all-time highs depending on whose figures you use. Unemployment is still ridiculously low for a recession. Energy prices are back down. Home ownership is at all-time highs. Home equity is at all-time lows even as home prices are at all-time highs. Interest rates are at 40-year lows and everybody has already done a ReFi on their house. Credit is available everywhere. The savings rate is nil. Consumer debt is at all-time highs. Gas is around a buck. Everybody's driving a new car they don't need but got for 0% financing. The dollar is still amazingly strong, even though the trade deficit is enormous. On and on.
What if just a couple of these things start going in the other direction? What if many of them do? Things are already leveraged to the upside in nearly every way. But you can only leverage-up once. After that, what do you do for an encore?
Isn't the risk to the downside much greater than the potential upside?
"Looking Beyond The Valley"
Every time the market rallies, we continually hear stock salesmen tell us that investors are "looking beyond the valley" to the imminent recovery, the improvement in earnings, and the inevitable increase in stock prices. This phrase paints a wonderfully rosy picture. It suggests we are standing on one high point, looking across to another high point (you can't be in the valley and looking beyond it). We aren't even in the valley yet, you see, but once we get there it's going to be so shallow, that it's not really even worth thinking about.
This reminds me of a passage in the book Cadillac Desert (a history of the American west's water resources) that has always stuck with me:
In 1539, Don Francisco Vasquez de Coronado, a nobleman who had married rich and been appointed governor of the Guadalajara by the Spanish king, set out on horseback from Mexico with a couple of hundred men, driving into the uncharted north. . . . .A few of his party on a side excursion discovered the Grand Canyon, but they were unimpressed by its beauty, and guessed the width of the Colorado River far below them at eight feet or so.
This was the biggest bubble in financial history. Step back and have an appreciation for what we're looking at.
If you're "looking across the valley" and plan to journey there, be sure you have a realistic assessment of how wide the valley is, how steep and lengthy the descent into it is, how arduous it may be to get across the valley, and how painstakingly slow and difficult the climb up the other side may be.###
Remember, that was written in February 2002, Enron was all over the headlines and the market was still eight months from the October 8, 2002 bottom that set up the five-year speculative frenzy that topped out on October 9, 2007.
The author is a fellow named Tim Picks who used to write for Gold-Eagle.
Here's the index of his essays for their site. He seems to have dropped out of sight in 2004.