Money WhizDom: Does your financial quotient line up with your EQ and IQ?

Adhvith Dhuddu, CT regular columnist

Wednesday, March 12; 12:00 AM

Your IQ is probably what got you into this excellent university, but developing your emotional quotient is equally important in shaping your personality. By graduation, our experiences in and out of class boost our IQs and EQs significantly.

But your financial quotient is what will shape your financial future. Your financial knowledge will dictate how well you handle credit, the quality of your savings and investments, how well-padded you are in a crisis and how well you plan for retirement. Whether you like it or not, financial planning is an integral part of everyone's life, and with a high FQ you can successfully plan your finances and finance your plans.

Closely scrutinizing yourself to see how you score on the FQ scale is relatively straightforward and easy. Your FQ is primarily derived from the following aspects: how well you handle debt, investment planning to battle inflation, spending habits, tax planning (when you step into corporate America), and finally, saving and retirement planning. Having worldly knowledge in these five areas will greatly help secure your wealth.

Many of us take on debt early on in life through credit cards, college, and car and home loans that we strive to pay off our whole lives. Although all debt is not bad, it's important to understand the difference between good and bad debt. Undertaking debt for college to add value to yourself, to help you climb the social and economic ladder, is without a doubt good debt. Devouring your credit limit for unnecessary purchases that you will spend years paying a 17 percent rate on is bad debt.

People undermine the importance of investing and often fall prey to myths suggesting the high risks involved in stocks, bonds and commodity markets. These are safe investment vehicles and will inevitably be part of your long-term portfolio to create wealth.

In the last 80 years, stocks have returned 9 to 10 percent compounded annually, compared to corporate bonds and government bonds returning 4 to 5 percent and treasury bills earning 3 percent. In the same period, inflation averaged 3.5 percent, and these numbers are likely to hold going forward.

So the best way to battle inflation is certainly not treasury bills and savings accounts earning 1 to 2 percent, but a balanced blend of quality stocks and corporate bonds. The power of compounding clearly shows how inflation devalues your money. For example, $1,000 you earned in 1980 is worth approximately $380 today.

Clearly, a penny saved is not a penny earned because that penny will depreciate in value (bacause of inflation) if it sits idle in a checking or savings account. This also does not mean all your earning should be invested in high-yielding securities and bonds. There are many risk-free financial instruments, such as certificates of deposits, high-yielding savings accounts, and treasury inflation protected securities, that will preserve the value of that penny.

The American economy is driven by spending and consumerism, and every individual seems to have an unending desire for material wants. Indulging in extravagant purchases beyond your means is sure to get you into a financial ditch. Clearing all outstanding debts before big purchases is vital.

Planning and managing your taxes will be another important part of your career. Mastering the voluminous tax code would take a lifetime, so this department also calls for basic understanding and an intelligent tax adviser.

Having basic understanding of the above-mentioned concepts is crucial for two reasons: to prevent your financial planner from exploiting your ignorance, and to understand what your adviser tells you so that you can cautiously assess the pros and cons of your financial plans.

Online link to this article:
http://www.collegiatetimes.com/stories/2008/03/12/does_your_financial_quotient_line_up_with_your_eq_and_iq_

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Money WhizDom: Is this stimulus package for real?

Adhvith Dhuddu, CT regular columnist

Wednesday, February 20; 12:00 AM

We all know that chugging a Red Bull to stay awake on exam night only works temporarily to make us more sluggish later on; this is exactly what the stimulus package will do to the economy. Exactly a week ago, President Bush signed into law a $170 billion "stimulus" package in an effort to avert an economic downturn.

Packed with housing subsidies to boost the ailing housing sector (which many say triggered this slump) and tax rebates checks to fuel consumer spending, the administration is hoping its delayed action will prevent a recession in the second half of the year.

Our economy experienced monumental expansion in the 1990s, and its primary drivers were low to minimum inflationary fears, moderate interest rates, extremely high productivity levels, an across-the-board explosion in investment activity, high levels of consumer spending and strong local currency. The environment was so conducive to growth it led to "irrational exuberance" and an eventual bust in late 2000.

This was exactly when a similar "stimulus" package was announced, and history tells us this did little to prevent a recession. Although it did stimulate the economy temporarily, we experienced a recession for a brief period.

It is unfortunate that the same administration is adopting a failed strategy again and is not focusing on long-term economic stability. A good economic stimulus package should help develop long-term stability and create an environment like that of the 1990s. This package fails to achieve that.

Inflation is already at scary levels, and with more than $150 billion entering the economic system, we can expect higher inflation very soon as more money will chase the same goods and services. The low interest rates (which will continue to decline) are only adding fuel to fire (more borrowing, more spending, more inflation). Investment is slowing down drastically, with more money finding its way to developing nations and BRIC countries. This in turn is hurting productivity levels, which are either remaining constant or inching up at a snail's pace. The only good one can see is a boost in consumer spending, which is temporary.

One thing is for sure: This stimulus package will without doubt stimulate the Chinese economy. Close to 60 percent of the $150 billion of tax rebate money in the consumer's hand will be used to purchase goods manufactured in China (electronics, clothes, toys, etc.). That's appalling considering our huge debt to China and the proposed $3 trillion budget for the coming year. This stimulus package is sure to strain us financially, but I assume there is no need to worry because we can continue to borrow — from China.

The topic of the weak dollar has been beaten to death, and in no way is the stimulus package helping the dollar's perilous path. Though it has received some praise, seasoned economists and forecasters don't see how this stimulus package can prevent a recession or assist long-term growth.

Removing your clothes from the washing machine in the middle of a cycle will only get you wet, soapy and messy clothes; this is exactly what happens when one tries to manipulate and maneuver a business cycle when it enters a healthy temporary downturn. The result will be a bigger mess that needs to be cleaned up later. In every crisis lies an opportunity, and in this case the administration should have put forward a more comprehensive plan to support the economy and facilitate long-term growth.

Unfortunately, none of the presidential candidates are proposing an economic plan that touts long-term stability. The presidential candidates should outline economic plans that stimulate and increase investment, decrease inflation, increase productivity, increase savings, strengthen the dollar and should in no way be a growth deterrent.

Not so long ago, an economy on the other side of the planet experienced something similar. Drawing these scary parallels might be pushing the argument too far, but the similarities are so vivid that the U.S. should learn from its mistakes. I am of course talking about the Japanese economy from the 1980s and 1990s.

They experienced a stock market boom, a real estate boom, a credit crisis, a cleanup of the banking sector, regular stimulus packages and extremely low interest rates for years to try to stimulate the economy, and only now, 15 years later, is the economy getting back on its feet.

Online link to this article:

http://www.collegiatetimes.com/stories/2008/02/20/is_this_stimulus_package_for_real_

Calling all business majors: Chart your financial career

Adhvith Dhuddu, CT regular columnist

Wednesday, February 13; 12:00 AM

An undergraduate degree is only the first step toward a successful career in finance, accounting or business. Investment bankers, stock brokers and accountants who stand out and flourish early in their careers often equip themselves with additional certifications and credentials. They go on to earn specialized qualifications such as CFAs and CPAs to better comprehend their realm. It's important for everyone entering a career in finance to know about these programs and the potential boost they can have on your career.

The Chartered Financial Analyst program is a three-year, graduate level self-study program offered by the CFA institute headquartered in Charlottesville. The program primarily suits students looking at careers in investment banking and financial analysis. The CFA is an extremely rigorous and highly selective program requiring the candidate to pass three exams in a period of three years.

Early last year, the Pamplin College of Business was named a CFA Program Partner of the CFA Institute, giving both the College and students an upper hand for the CFA. This move indicated that the curriculum covers over 70 percent of the CFA syllabus and encourages many students to pursue the CFA. More information on how to register for the exam, eligibility criteria, study methods, etc., are detailed in the CFA's official Web site (www.cfainstitute.org).

Although not very mainstream, the Chartered Alternative Investment Analyst program is gaining credibility amongst private equity, venture capital and alternative investment management firms. Alternative investments cover a broad category of advanced financial instruments such as private equity, real estate, art, hedge funds, commodities and venture capital. This program has attracted many students (in the investment management and personal finance management fields) lately and has gained tremendous reputation for its curriculum and rigor.

The CAIA requires a candidate to clear two extensive exams either within a year or two years. After passing the exams, all qualified candidates earn official CAIA charters and other member benefits, such as eligibility to attend international chapter meetings, CAIA seminars, exclusive high-profile job offers from fellow CAIA associates, and much more. Information about this program can be found on its official Web site (www.caia.org).

An accountant cannot survive merely with an undergraduate degree and has to get certified via the Certified Public Accountant program. This certification is essential for an accountant's success and many times is a basic requirement to garner employment at reputed accounting firms (fresh accounting recruits often go through a program that trains them to take CPA).

Eligibility for the CPA exam varies from state to state, and students from Virginia Tech become qualified to take the Virginia CPA exam by taking a minimum of 150 credit hours, 30 of which must come from accounting classes. The CPA is given by the American Institute of Certified Public Accountants, a world-class institute that helps set many accounting standards here and around the world. Accounting students can also pursue other certifications, such as the Certificate in Management Accounting exam, Certified Internal Auditing exam and Certified Information Systems Auditor exam if they plan to specialize in a certain field. Two informative Web sites for the CPA exam are www.cpa-exam.org and www.aicpa.org.

Almost all financial analysts and stockbrokers have to get the Series 7 General Securities Representative Exam to be able to buy and sell various securities legally on behalf of their clients. The Series 7 is given by the National Association of Securities Dealers, which also conducts other certification exams for compliance, operations and legal representatives in the securities arena.

As the CPA, obtaining the Series 7 license is the first step toward becoming a licensed stockbroker. Many high profile Wall Street firms sometimes require both the Series 7 and Series 63 exam. Unlike other certifications, one has to be sponsored by an NASD member representative just to take the exam. More information about this and other securities-related certifications can be found at www.finra.org.

Online link to this article:

http://www.collegiatetimes.com/stories/2008/02/13/calling_all_business_majors__chart_your_financial_career

Real estate's major impact on today's ever-changing economy

Adhvith Dhuddu, CT regular columnist

Wednesday, January 30; 12:00 AM

The housing market's tumble late last year, which started out as a normal correction in home prices, is now ominously appearing to have opened the Pandora's Box of a liquidity and credit crisis. Discouraging data released over the last few weeks has only dampened the sentiments of the economy and worsened the housing market outlook. Although a stimulus package has been announced recently, many fear it to be too little and too late.

A closer analysis of the real estate market will reveal a profuse amount of disturbing data confirming that this is just the beginning of a slump in home prices. For the first time in decades, sales of new homes dropped by 26 percent last year to stand at 774,000, exceeding the old record of a 23 percent decline in 1980. Likewise, sales of existing homes plunged 13 percent last year (biggest drop since 1982), and construction of new residential buildings dropped by close to 25 percent, again a record drop, the largest since 1980.

The average market price of a home is largely determined by the supply-demand relationship, and during the last six months demand declined. Unfortunately, supply has either increased or stayed constant. The inventory buildup of close to 2 million homes exceeds the medium term need of 1.5 million, and it would take close to a year to eliminate this backlog (given the economy doesn't enter a recession and grows normally at 2 to 3 percent). This will undoubtedly create an imbalance, leading to lower home prices in the future. Sellers have already been cutting their asking price to move homes out of inventory. Prices of new homes will be dented the most, as old and used homes tend to find a market in a depressed down cycle. Other credible proxies, like the stock prices of Home Depot and Lowes, also hint a significant slowdown.

Remember that a majority of borrowers use their house value as collateral for loans, and in the case of rapidly declining home prices, banks and lenders usually prompt faster and bigger payments fearing a rise in defaults. The subprime crisis found its roots for this exact reason. A double whammy of declining home prices and increasing number of defaults sent the banks and lenders into a spin, leading to multi-billion dollar write-downs and revaluations and tighter lending standards.

Housing has a significant 4.5 percent share in the GDP calculation, and unfortunately, because only new home sales are counted, gloomy GDP numbers could surface to push the country into a recession (two negative quarters of GDP growth confirms a recession).

The woes of the economy only pile up, as the weak dollar is attracting foreign buyers to stock up on U.S. homes. Although this has its own pluses and minuses, a surge of foreigners buying U.S. homes is the last thing we need when in the process of cleaning up our own mess. The only silver lining of a weak dollar is the surge in exports, which many optimists feel could overwhelm the housing market slump and prevent a recession.

Only a crisis often forces corrective action. This is clearly happening now, as the stimulus package not only puts money into the hands of consumers but is trying to revamp Freddie Mac and Fannie Mae. The approved package will now allow Freddie and Fannie to approve bigger mortgage packages by increasing the loan limits. This way, more loans are approved and liquidity remains average.

The biggest fear is the potential of this slump slipping over to other sectors of the economy. Just as homes are used as collateral, other assets, such as stocks, mutual fund holdings, etc., are also used as collateral. If asset prices across the board start to decline (stocks already have), the problems could multiply to get out of control. Recently, for the first time in 23 years, the president of the International Monetary Fund appealed to many nations to stimulate their economies to avoid a liquidity crisis.

Last week, the Federal Reserve convened an emergency meeting to cut interest rates by 75 basis points, preventing a crash in the stock markets. Again, this broke all records and was the biggest one-time cut in interest rates in two decades. All these numbers draw parallels to the housing slump and banking crisis of 1980, and we could well be at the start of a long drawn real estate market crisis. We can only hope that a recession or a slowdown doesn't convert to a long, drawn-out depression.

Online link to this article:

http://www.collegiatetimes.com/stories/2008/01/30/real_estate_s_major_impact_on_today_s_ever-changing_economy

Demystify America's credit meltdown, potential recession

Adhvith Dhuddu, CT Regular Columnist

Wednesday, January 16; 12:00 AM

Historically, the root of all financial innovations and the origin of most global financial meltdowns has been (ironically) the United States. Although this is changing with a leveled playing field and the democratization of finance, the source of the most recent credit turmoil has been the United States, and unsurprisingly, this is where subprime securities first found their market.

The recent financial credit crisis is creating jitters around the world among central banks, private banks, and other financial institutions. Even now, six months after the damage was discovered, no one knows the true extent of the ramifications. The "R" word is being tossed around freely and economists fear a global slowdown in business and investments. The crisis is far from over, but a root cause analysis will help understand what is going on and, more importantly, how and to what extent it affects us.

Understanding the ABCs of liquidity and how its game has changed since the emergence of securitization helps us assess the situation better. Central bankers primarily use two instruments to control the flow of money (or level of liquidity) in the economy. They are calibration of reserve requirements for banks and modification of interest rates at which banks can borrow from central bank (the banker's bank) and inter-bank loan rates.

By these mechanisms, central bankers not only control the capacity to which a bank can lend out money, but also the level of inflation. Excess, or easy credit, can lead to surplus liquidity, which might later translate to high inflation for a country.

Normally, a bank's balance sheet is supposed to include the money loaned out, helping keep tabs on how fully loaned out they are. But the ability to "securitize" a loan helped them move it off their books. Institutional and individual investors who invest in debt primarily use two methods to securitize debt in order to make it more accessible. One way is to group all the loans and divide that cluster into smaller units to sell as bonds. And the other, more complex, way is to eliminate default risk and lock in interest rates using credit default and interest rate swaps, respectively.

So once the bank's loan is sold off via securitizing, disappearance of the loan from the bank's balance sheet essentially frees up the capacity of the bank to lend out more money. This obviously renders the reserve requirements frivolous because as long as the bank can keep selling off its loans to individuals investing in debt, they can keep lending out more and more money. Central banks have no control over this phenomenon because there are no controls over how much debt can be securitized or how many loans can be sold off, thereby losing control over liquidity and money flow in the country.

This vicious cycle created an environment conducive to extremely cheap credit and outrageous asset prices (which is why real estate prices rose from 2001 to 2006). Like all good things, this came to an end when a higher-than-expected number of home owners defaulted and triggered a chain reaction leading to lower home prices and a decrease in demand for home building materials. Eventually cheap credit became a thing of the past even with the Federal Reserve continually lowering interest rates.

We are a credit nation and a chief ingredient for our growth is access to cheap credit. But as the cost of borrowing increases, everything from savings to expenditures and investing will experience a slowdown.

The Dow Jones has gotten off to its worst start in 16 years and is down over 5 percent in the first two weeks of the year. This is just the beginning, and we can expect more woes to follow. Credit will continue to be expensive, and individuals with adjustable rates on their mortgages, car loans and student loans will have to shell out more for their monthly payments.

Unemployment rates may rise and uncertainty about the economy will continue. Economic recession is now more of a possibility than a probability. The best investment strategy during these troubling times is to stay in cash to wait for opportunities (preferably in non-dollar denominated currencies) or invest in safe havens such as gold and silver.

Online link to this column:

http://www.collegiatetimes.com/stories/2008/01/16/demystify_america_s_credit_meltdown__potential_recession

Power shifts pose problems for U.S.

Adhvith Dhuddu, CT Regular Columnist

Wednesday, January 23; 12:00 AM

The rise of BRIC countries (Brazil, Russia, India, and China) in the last decade has transformed the world in many ways. Significant changes in political, economic and social battlegrounds will result in a power struggle and the future will see a shift in the balance of power. Prosperity and economic muscle will dictate in large part the new power centers of the world.

The United States largely derives its superpower status from its resilient economy, powerful military and terrific political and legal structures. The U.S. will continue to remain a superpower but will lose a significant amount of its market share in the global power equation over the next few decades.

A slow migration of power to the East is a phenomenon that is already underway. Although many Asian countries are not necessarily beacons of economic and political freedom, the potential muscle they will obtain cannot be ignored. India and China, commonly referred to as "Chindia," are poised to be leaders in Asia, offering remarkable opportunities in many arenas.

China's story is an awe-inspiring one. For more than two decades it has experienced positive GDP growth at close to 5 or 6 percent compounded. It has become a country with the highest number of mobile phone users, highest number of engineering graduates, largest producers and consumers of steel and other metals, largest textile market and second largest energy market, and it still has a long way to go. One can only comprehend the advancement of China by visiting and exploring the country.

India is not far behind at all. It, too, boasts similar accomplishments and is on track for long-term financial stability and sustainable economic growth. With the advantage of a democratic process, free press and dominant English-speaking population, the future clearly looks sanguine.

Thomas Friedman eloquently described the rising economies of India and China in an interview a few years ago. "India and China," he said, "are two six-lane super highways. In China, the super highway looks excellent with perfectly paved roads, clean sidewalks and bright streetlights. Here there are one billion people traveling at a very fast pace. Often there is a speedbump called political reform and at such a high speed, some people get thrown out and left behind when they land back on the road with a thud. So what matters here is not the pace of reform but how well the economy and politicians can drag along over a billion people to avoid an internal uprising by the ones left behind."

"In India on the other hand, the superhighway is not very well done with many ditches and holes, broken streetlights, wrecked sidewalks, etc. Here one billion people are traveling at a normal pace but off in the distance, it smoothens out into a perfect six-lane superhighway with shining bright lights, no potholes, no bumps and a buoyant future. But the only question here is whether this image is a mirage or an oasis. So what matters here is India has the potential to become prosperous if they can overcome many economic and political barriers."

Two other important geopolitical regions in the coming decades are the Middle East and South America. Often our perception of the Middle East is clouded by the war in Iraq and tensions with Iran. This region is flush with cash and young people are more capitalist than ever before. Economic and financial hubs such as Dubai and Abu Dhabi are ever expanding, offering some remarkable opportunities. Other countries such as Bahrain, Egypt and Oman are quickly moving up the economic ladder, welcoming new businesses and investments. Many of these countries fared extremely well in a recently released report discussing the ease of doing business in different nations.

South American economic powerhouses such as Brazil and Mexico cannot be ignored. Brazil is a BRIC country and economists predict Brazil to be one of the top five countries (in terms of GDP) in a decade or two. Brazil has come a long way from a gloomy and murky economy to a vibrant, transparent and thriving one. It has reformed many policies by opening up its markets, established credible regulatory bodies to help sustain economic growth and become an energy-efficient nation. It fared extremely well in the ease of doing business report.

We can only hope that this rebalancing of power unfolds peacefully and does not trigger a cold war between U.S. and China.

Online link to this column:

http://www.collegiatetimes.com/stories/2008/01/23/power_shifts_pose_problems_for_u_s_

New economic trend: When a country buys a company

Adhvith Dhuddu, CT Regular Columnist

Wednesday, December 5; 12:00 AM

"Singapore buys Burger King," "Norway purchases Bank of America" or "Saudi Arabia buys stake in Microsoft," could be some of the headlines you might come across in the future. A country purchasing a company might sound absurd, but a number of foreign governments are setting up sovereign-wealth funds to do just that.

Think of a sovereign-wealth fund as a mutual fund set up by a country. The primary sources of capital are the foreign exchange reserves held by the country and trade surpluses that have accumulated over the years. These funds invest in debt, equity and assets for long term capital appreciation, a steady flow of interest rate payments or dividends.

These wealth funds have gained prominence in the recent years and have simultaneously created a stir in some parts of the world. About 20 nations have a fund like this and are valued at approximately $3 trillion in total. These staggering numbers are reflective of the potential influence they can exert on the global financial system. In less than a decade, by 2015, these wealth funds will have close to $10 trillion at their disposal, making them dominant and influential players in the financial markets.

The petrodollar boom has boosted the fortunes of oil-rich nations and these countries (Saudi Arabia, Kuwait, United Arab Emirates and Russia) account for 70 percent of these funds. Cash flows to these nations are not slowing down anytime soon, and recipient governments are determined to put the excess cash to work. Heavy exporters of products and services (mostly southeast Asian countries) are the other major players.

Recently, the Abu Dhabi government bought a 4.9 percent stake in U.S. banking giant, Citigroup, for $7.5 billion. Reactions to this capital infusion were mixed, but two important and contradictory statements that capture the essence of the on-going debate are worth mentioning. The United States Treasury Secretary, Henry Paulson, expressed that foreign investments from sovereign wealth funds are welcome, and they represent the highest vote of confidence anyone can pay to the U.S. economy.

But, Sen. Evan Bayh (D- Ind.) raised a red flag by correctly pointing out that the lack of transparency in these funds undermines the theory of efficient markets and jeopardizes the proper functioning of the financial markets. Bayh's remarks raise a vital question about the true objectives of some of these funds. History is being created with the rise of these funds because such huge capital was previously invested only by private investors, banks and mutual funds for one purpose: to make money.

But now, the strategies of these government-controlled funds are being questioned, due to the increased risk of making investments for political rather than economic reasons. The temptation to exert political influence rises with an increase in capacity to buy strategic assets and natural resources of other countries. The close-ended and opaque approach adopted in handling these funds, without a doubt, raises significant and valid concerns.

Many economists have, however, been critical of some governments for allocating too much capital to these funds when poverty, unemployment and famine are rampant in their own backyard. They argue that governments are deviating from their primary functions: to improve the quality of life of their citizens.

The most vivid example is China, where poverty is widespread, and the gap between the wealthy and poor still exists. But the government sits on $1.5 trillion of foreign exchange reserves (highest in the world) and is exploring how it can expand its already existing $200 billion sovereign wealth fund.

Nobel Prize winning economist, Joseph Stiglitz, points out that the excess foreign exchange and trade reserves generated by Southeast Asian economies should definitely be put to use and not sit idle. But where the governments use these funds is pivotal to the success of the nation. Governments should invest in their people, infrastructure and education and not become a for-profit corporation.

Although these sovereign-wealth funds have not attracted widespread limelight, their rise will affect the global, political and economic arenas in the coming years.

Online link to this column:
http://www.collegiatetimes.com/stories/2007/12/05/new_economic_trend__when_a_country_buys_a_company