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Alpha Realized
Today’s Financial Market Dynamics
& Consequences for MBAs
- Confidential Document, Property of Graduate Leverage, LLC, rev 033110
Agenda
• Perspective on Today’s Market Conditions
• Potential Changes in MBA Career Pathing
• Implications for Management of Your Personal Finances
Perspective on Today’s Market Conditions
Coming Off A Credit Crisis . . .
Reasons for Great Contraction (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
Leverage Measures
Federal Debt
$ Trillion
$14.7
$5.1
2001 2010
Source: US Treasury
All Debt Markets Experienced Unprecedented Growth
Fed Re-Liquefied
Fed Monetary Base
Equity Rebound
Commodity Rebound
Jan, 2010 Jan, 2011
Silver Increased 88% in 2010
Surprised Stocks Still In Favor
Stock Potential Returns (Shiller)
Prediction of Future Stock Returns
Today’s
Level
Stock Potential Returns (Tobin’s Q)
Consumer Leverage
Corporate Leverage
Government Debt
Government Debt
Unemployment
Average Duration of Unemployment
Source: Haver Analytics
Structural Unemployment Poses Greatest Risk
At Current Pace Of Hiring Full Employment Reached In 2017
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
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
Risks Have Shifted From Alpha To Beta
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
GDP Growth
Emerging
140 Economies
130
120
110
Advanced
Economies
100
2005 06 07 08 09 10
Source: The Conference Board
MBA Career Prospects
Pre-Credit Crisis
Post-Credit Crisis
Other
Fortune 500
Tech / Media
Consulting
Financial Services
Financial Services Sector
Source: Macroeconomic Advisors
World Economic Forum Report
US Still Showing Leadership:
• Innovation
• Access to Capital for Private Companies
Source: World Economic Forum
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.)
Changes in Student Debt Levels
$84K
$41k
$30k
1996 2003 2010
Rapid Increase In Debt Levels
* Based on data collected by GL internal student database
Debt Considerations
Salary
Salaries and Debt Levels
$150,000 Student Debt
$120k
$100,000
$84k $84k $84k
$70k
$55k
$50,000
Large Corporation Small Firm or Non-Profit
or Financial Markets Start-up
Career Path Determines Debt Management Strategy
Current MBA Career Path Breakdown
Non-Profit Sector ~ 10%
Large Corporation or
Non-Profit Private Sector Financial Markets ~ 55%
Federal Sector Banking
State or Local Municipality Consulting
NGO General Management
Private Equity
Hedge Fund
Wealth Management
Corporate Treasury
Sales or Marketing
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 Small Firm or Non-Profit
Financial Markets Start-up Sector
• Liquidity Management
• Subsidy & Loan Forgiveness
• Financial Allocation
New Program Details
Small Firm or Non-Profit
Start-up Sector
New Federal Programs (March, 2010)
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
Liquidity & Loan Forgiveness
Non-Profit
Sector
Monthly
Payment Loan Repayment
$1,500
Total Debt Payments Total Debt Payments = Standard
$988 of $118,601 of $54,234
= IBR
$1,000
$498
Debt
$500
Forgiven
($97k)
1st 5th 10th
Repayments Years
Total Debt Burden Reduced By More Than 50%
Liquidity & Loan Subsidies
Small Firm or
Start-up
Monthly
Payment
$1,500
Loan Repayment
= Standard
$988
= IBR
$1,000
Lower Loan Payment
$500
& Subsidies Over 4 Year
1st 5th 10th
Repayments Years
Liquidity Relief & $5,000 In Loan Subsidies
Liquidity & Financial Allocation
Corporation or Small Firm or
Financial Markets Start-up
Monthly
Payment
$1,000 Utilize Deferment or Forbearance
Increase in Liquidity of $24,000
$500
1st 5th 10th 15th 20th
Repayments Years
Excess Liquidity For Start-up Equity Or Home Down Payment
Financial Allocation
Corporation or
Financial Markets
A/T Returns
15% PLUS Loan
8.1% Average
PLUS Return S&P 500
7.5%
7.4% Average
S&P Return (A/T)
0%
1940 1960 1987 2001
Sources: Yale Econ/Robert Shiller, Standard & Poor’s, Federal Reserve, Bloomberg
Today’s PLUS Loan Has Outperformed S&P Over Past 70 Years
Financial Allocation
Corporation or
Financial Markets
Pre-Tax Returns
20% PLUS Loan
12.2% Pre-Tax
PLUS Return S&P 500
10%
11.1% Pre-Tax
S&P Return AAA Munis
0%
1940 1960 1987 2001
Sources: Yale Econ/Robert Shiller, Standard & Poor’s, Federal Reserve, Bloomberg
PLUS Loan Has Sharpe Ratio Greater Than Any
Potential Investment On Efficient Market Frontier
Financial Allocation
Where would PLUS Loan plot?
In Good Company
Now Legendary Hedge Fund Investor
John Paulson’s Favorite “Asset” Class?
Fixed Income Liabilities
Required Action Items
Corporation or Small Firm or Non-Profit
Financial Markets Start-up Sector
Today Graduation Grace End Date
3a) Consol Low Rate
Loans 10/15/2011
Large Firm
4a) Enter Targeted
12/10/2011
1) Complete High Rate 3b) Consol Low Rate
Consol 2/15/2011 Loans 8/15/2011
Small Firm Enter IBR
4b)
10/1/2011
2) File Taxes
Minimizing AGI
3/20/2011
3c) Consol Low Rate
Non-Profit
Loans 5/1/2011
4b) Enter PSLF
7/11/2011
* To maximize IBR Subsidy borrower should establish credit or deductions prior to year end
New Financial Issues
Corporation or Small Firm or Non-Profit
Financial Markets Start-up Sector
Professional Development Period $2.2m
(10-15yrs)
Positive $1.2m
Net worth Retain
Finish MBA Financial Advisor $600k
Start Undergrad Program
Negative
Net worth
Asset Accumulation Period $100k
(25yrs)
$200k
Intermediary Period
$300k
Historical Approach To Financial Management
Neglects Liquidity, Debt & Proper Financial Allocation
Support Process
Fill out Review Execute Debt
Card Personalized
Overview Management
Assessment
• Objectives
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
Contact Info: 2.
3.
February 15, 2011: Complete Add-on Consolidation application form to include all
low rate loans occurred in spring disbursement Complete Process
Yourself
March 1, 2011: Verify in-school deferment status on all consolidated loans to prevent
payment and ensure subsidy
ccatrina@gladvisor.com
Personal within 1
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
Info Card week
Cell: 949.943.9954 Retain GL Advisor to
Carry Out Process
Please Initiate Process By Feb 15th To Ensure Completion
