- confidential document, property of graduate leverage, llc, rev 033110 alpha realized today’s...
TRANSCRIPT
- Confidential Document, Property of Graduate Leverage, LLC, rev 033110
Alpha RealizedToday’s Financial Market Dynamics
& Consequences for MBAs
• Perspective on Today’s Market Conditions
• Potential Changes in MBA Career Pathing
• Implications for Management of Your Personal Finances
Agenda
Perspective on Today’s Market Conditions
Coming Off A Credit Crisis . . .
1. Subprime Mortgage Market: Poor underwriting standards
2. Lax Federal Reserve Interest Rate Policy: i.e. the “Greenspan Put”
3. SEC 2004 Rule Change: allowed budge bracket broker-dealers to increase leverage from 12-1 to 35-1 (three of five firms failed)
4. Unregulated Credit Default Swap Market
5. Rating Agencies: conflicting interests resulting in mispriced risk
6. Liquidity Issues: too many players borrowing short and lending long
7. Mark to Market Accounting
8. Fannie Mae & Freddie Mac
9. Political Issues: lobbyists wield too much influence
10.Too Much Leverage
Reasons for Great Contraction (Credit Crisis)
Leverage Measures
$5.1
$14.7$ Trillion
2001 2010
Federal Debt
All Debt Markets Experienced Unprecedented GrowthAll Debt Markets Experienced Unprecedented Growth
Source: US Treasury
Fed Re-Liquefied
Fed Monetary Base
Equity Rebound
Commodity Rebound
Silver Increased 88% in 2010Silver Increased 88% in 2010
Jan, 2010 Jan, 2011
Surprised Stocks Still In Favor
Stock Potential Returns (Shiller)
Today’s Level
Prediction of Future Stock Returns
Stock Potential Returns (Tobin’s Q)
Consumer Leverage
Corporate Leverage
Government Debt
Government Debt
Unemployment
Structural Unemployment Poses Greatest RiskAt Current Pace Of Hiring Full Employment Reached In 2017
Structural Unemployment Poses Greatest RiskAt Current Pace Of Hiring Full Employment Reached In 2017
Source: Haver Analytics
Average Duration of Unemployment
Economic Prospects
Risks:
• Lack of Deleveraging could cause another crisis (of greater proportions)
• Structural unemployment headwinds
• Impact of change in fiscal and monetary polices
• Housing market supply overhang and transition from federal support
Risks Have Shifted From Alpha To BetaRisks Have Shifted From Alpha To Beta
What’s Required To Restore Balance:
• Structural issues in labor and capital must be addressed
• Deleveraging of corporate, consumer and government
• Shift to current account surplus
• Restoration of market-based housing industry
Summary
Perspective on Today’s Market Conditions
1. US in need of potentially painful rebalancing
2. Macro issues will continue to dominate risk management
3. Valuations indicate potential for future volatility if not factored properly
Potential Changes in MBA Career Pathing
MBA Career Prospects
110
100
120
130
140
2005 06 07 08 09 10
Advanced Economies
Emerging Economies
GDP Growth
Source: The Conference Board
MBA Career Prospects
Financial Services
Consulting
Tech / Media
Fortune 500
Other
Pre-Credit CrisisPost-Credit Crisis
Source: Macroeconomic Advisors
Financial Services Sector
Source: World Economic Forum
World Economic Forum Report
US Still Showing Leadership:
• Innovation
• Access to Capital for Private Companies
Summary
Changes in MBA Career Pathing
1. Shift to International Corporations and EM-Focused Businesses
2. Entrepreneurship Will Still Thrive and Display Favorable Risk/Reward
3. Innovative and High Growth Companies
4. Financing of Emerging Markets and Other High Growth Sectors
Implications for Management of Your Personal Finances
Primary Theme
• Increased in Public and Private Leverage
-Government will need to increase taxes
-Slower growth in industrialized countries
-Greater macro volatility
-Need to manage debt with financial allocation framework
Looming Tax Increases
It Is Already Happening:• Jan 12, 2011: Illinois Lawmakers Pass 67% Income Tax Increase, Largest In History• 30 States Have Raised Taxes By more than 4% (Includes fees, excise taxes, etc.)
It Is Already Happening:• Jan 12, 2011: Illinois Lawmakers Pass 67% Income Tax Increase, Largest In History• 30 States Have Raised Taxes By more than 4% (Includes fees, excise taxes, etc.)
* Based on data collected by GL internal student database
Changes in Student Debt Levels
Rapid Increase In Debt LevelsRapid Increase In Debt Levels
$30k
$41k
1996 2003
$84K
2010
Salary
$120k
$70k
$55k
Debt Considerations
Non-Profit
$150,000
$100,000
Student Debt
$50,000
$84k $84k $84k
Salaries and Debt Levels
Large Corporation or Financial Markets
Small Firm or Start-up
Career Path Determines Debt Management Strategy Career Path Determines Debt Management Strategy
Current MBA Career Path Breakdown
Large Corporation or Financial Markets ~ 55%
Banking Consulting General Management Private Equity Hedge Fund Wealth Management Corporate Treasury Sales or Marketing
Non-Profit Sector ~ 10%
Non-Profit Private Sector Federal Sector State or Local Municipality NGO
Small Firm or Start-up ~ 45%
Small or Medium Enterprise Venture-backed Business Start-up Sole Proprietorship
Source: US News, Select School Reports
Debt Implications
Corporation or
Financial Markets
Corporation or
Financial MarketsSmall Firm or
Start-up
Small Firm or
Start-upNon-Profit
Sector
Non-ProfitSector
• Liquidity Management
• Subsidy & Loan Forgiveness
• Financial Allocation
New Program Details
Income Based Repayment:
• Limits monthly payment to 15% of discretionary income
Loan Forgiveness:
• Outstanding debt forgiven after 10 years for public service
• Outstanding debt forgiven after ~20 years for private sector
Small Firm or
Start-up
Small Firm or
Start-up
New Federal Programs (March, 2010)
Non-ProfitSector
Non-ProfitSector
Liquidity & Loan Forgiveness
= Standard
= IBR$1,000
$500
$1,500
$988
1st 5th 10th
Repayments Years
Monthly Payment Loan Repayment
$498Debt
Forgiven ($97k)
Total Debt Payments of $118,601
Total Debt Payments of $54,234
Total Debt Burden Reduced By More Than 50% Total Debt Burden Reduced By More Than 50%
Non-ProfitSector
Non-ProfitSector
Liquidity & Loan Subsidies
= Standard
= IBR$1,000
$500
$1,500
$988
1st 5th 10th
Repayments Years
Monthly Payment
Loan Repayment
Liquidity Relief & $5,000 In Loan Subsidies Liquidity Relief & $5,000 In Loan Subsidies
Small Firm or
Start-up
Small Firm or
Start-up
Lower Loan Payment
& Subsidies Over 4 Year
Liquidity & Financial Allocation
Small Firm or
Start-up
Small Firm or
Start-upCorporation or
Financial Markets
Corporation or
Financial Markets
1st 5th 10th 15th 20th
$500
$1,000
Repayments Years
Monthly Payment
Utilize Deferment or Forbearance Increase in Liquidity of $24,000
Excess Liquidity For Start-up Equity Or Home Down PaymentExcess Liquidity For Start-up Equity Or Home Down Payment
Financial Allocation
1960 1987 2001
7.4% Average S&P Return (A/T)
7.4% Average S&P Return (A/T)
0%
1940
PLUS Loan
S&P 500
A/T Returns
8.1% AveragePLUS Return
8.1% AveragePLUS Return
Sources: Yale Econ/Robert Shiller, Standard & Poor’s, Federal Reserve, Bloomberg
Today’s PLUS Loan Has Outperformed S&P Over Past 70 Years Today’s PLUS Loan Has Outperformed S&P Over Past 70 Years
Corporation or
Financial Markets
Corporation or
Financial Markets
15%
7.5%
Financial Allocation
11.1% Pre-TaxS&P Return
11.1% Pre-TaxS&P Return
0%
10%
20% PLUS Loan
S&P 500
Pre-Tax Returns
12.2% Pre-TaxPLUS Return
12.2% Pre-TaxPLUS Return
1960 1987 20011940Sources: Yale Econ/Robert Shiller, Standard & Poor’s, Federal Reserve, Bloomberg
AAA Munis
PLUS Loan Has Sharpe Ratio Greater Than Any Potential Investment On Efficient Market Frontier
PLUS Loan Has Sharpe Ratio Greater Than Any Potential Investment On Efficient Market Frontier
Corporation or
Financial Markets
Corporation or
Financial Markets
Financial Allocation
Where would PLUS Loan plot?
Now Legendary Hedge Fund Investor John Paulson’s Favorite “Asset” Class?
Fixed Income Liabilities
In Good Company
Required Action Items
Grace End DateGrace End DateTodayTodayGraduationGraduation
1) Complete High Rate Consol 2/15/2011
Large Firm
Small Firm
Non-Profit
3a) Consol Low Rate Loans 10/15/2011
4a) Enter Targeted 12/10/2011
3b) Consol Low Rate Loans 8/15/2011
4b) Enter IBR 10/1/2011
3c) Consol Low Rate Loans 5/1/2011
4b) Enter PSLF 7/11/2011
* To maximize IBR Subsidy borrower should establish credit or deductions prior to year end
2) File Taxes Minimizing AGI
3/20/2011
Corporation or
Financial Markets
Corporation or
Financial MarketsSmall Firm or
Start-up
Small Firm or
Start-upNon-Profit
Sector
Non-ProfitSector
New Financial Issues
PositiveNet worth
NegativeNet worth
$100k
$200k
$300k
$2.2m
$1.2m
$600k
Professional Development Period
(10-15yrs)
Asset Accumulation Period
(25yrs)
Start UndergradFinish MBA
Program
RetainFinancial Advisor
Intermediary Period
Corporation or
Financial Markets
Corporation or
Financial MarketsSmall Firm or
Start-up
Small Firm or
Start-upNon-Profit
Sector
Non-ProfitSector
Historical Approach To Financial Management Neglects Liquidity, Debt & Proper Financial Allocation
Historical Approach To Financial Management Neglects Liquidity, Debt & Proper Financial Allocation
within 1 week
Support Process
Personal Info Card
Fill out Card
Review Personalized Assessment
Retain GL Advisor to Carry Out Process
Complete Process Yourself
Execute Debt Management Objectives
Please Initiate Process By Feb 15th To Ensure Completion Please Initiate Process By Feb 15th To Ensure Completion
Contact Info:[email protected]
Cell: 949.943.9954
Overview• We have compiled and analyzed your personal debt portfolio in order to determine
the optimal debt management strategy. The tasks outlined below include each step required to minimize your cost of debt.
• Below your task list you will also find a detailing of the savings as well as your loan portfolio for your records.
Required Tasks To Achieve Plan Objective:1. November 15, 2010: Consolidate all low rate loans as initial in-school application
2. February 15, 2011: Complete Add-on Consolidation application form to include all low rate loans occurred in spring disbursement
3. March 1, 2011: Verify in-school deferment status on all consolidated loans to prevent payment and ensure subsidy
4. March 20, 2010: Complete tax filing process according to specific filing status: i)Non-Exempt: File using deductions for AGI to maximize subsidy and minimize