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Archive for May, 2009

The Power of Unity – Indian Election ’09

May 19th, 2009 No comments

Whether you’re an executive meeting in a corporate boardroom, a student in a group meeting, or an organizer planning a community event, there’s nothing quite as frustrating as having a plan to achieve a goal, but then having dissenters blocking your way. Now I’m all for a democratic approach – listening to the opinions of all those involved, contemplating the information carefully, and then making the best decision, but sometimes that just doesn’t work. There will sometimes be people who, no matter how much you may reason with them, just won’t come around. What’s more, if these people are a significant influence (a key business partner, a team leader, or your boss) you just can’t move forward until they you both see eye-to-eye. Just think of the frustration and lost productivity while you engage in a game of strategy and negotiation trying to get to an outcome that works.

Now, let’s scale up the problem – imagine you’re a country with the same problem. That was India until the recent elections. The ruling Congress Party and their Prime Minister, Manmohan Singh, won the elections of 2004 with the support of the Communist Party in India. It was clear that Congress by themselves could not win a majority, and the only way to win the election was to embrace the Communist Party. This big political hug came at an expensive (and frustrating for legislators) price – the disagreement about key issues like foreign investment, the privatization of major industries, and nuclear issues. Where the Congress Party wanted to reform and open up to the world, the Communists wanted protectionism and isolation. Since the Congress Party was in power because they had the support of the Communist Party, they couldn’t exactly ignore the concerns of the Communists and move forward with their agenda. Many initiatives that would have benefited the country were put on hold due to disagreements between the two parties. India has enjoyed much growth over the past five years, though it has indeed been stifled. In contrast, look at China. They underwent this “opening” of their economy prior to India and have enjoyed much prosperity for it.

Well, all that has changed. In a massive surprise to the common man and experts alike, the Congress Party won many more seats than expected. Yes, they did still have to rely on other parties to gain a majority, but that reliance is much smaller than last time – small enough that they don’t have to turn to the Communist Party, they can get the support of a couple of smaller parties. Now the giant roadblock that has so far limited India’s growth and success has been (hopefully) removed. The only limitation to what the ruling government can do now is their own – any issues that come up within their party, or inefficiencies in how the government is run. Prime Minister Singh can now bring back on track his plans to privatize industries, resulting in innovation and prosperity, and a reduction in the national deficit. It’s amazing what unity (in this case, of the government) can do. When all the players get behind the problem and stop bickering, a lot more productivity can be achieved and great things can indeed happen.

So, what does this mean to the investor? Well until now investors had always kept India in the back of their minds – it was interesting, but not enough so to warrant investment. There were still many political issues that had to be resolved. With these elections we have every reason to believe that the issues that plagued the country over the past five years now have a chance to be resolved. So, my opinion is (and I note the legalese that basically says “my opinion is my own and should not in itself be taken as investment advice. Please talk talk to your investment advisor before trading as investing can result in losses”) that investors should certainly move India to the front of their minds. There is a lot of growth coming and so you should get in on it now while you can. Certainly the market has already priced in some of this growth (the market rallied 17% within minutes of opening on the election news, and then was shut down for breaching daily limits on upswings), but there’s still a way to go. Use pullbacks as a buying opportunity and hopefully the unity in the Indian government will translate into strong returns for investors.

Categories: Economics Tags:

Housing Woes

May 15th, 2009 No comments

Okay, so we all know that the bursting of the housing bubble is one of the main catalysts of the current recession. Lenders got sloppy with their lending standards in an effort to make a quick buck on fees, home prices were bid up supporting lax lending standards (if the collateral to the loan – the home – appreciates really quickly, then a borrower with very little-to-no equity will all of a sudden have ample equity to support the loan), and people were leveraging themselves more and more by taking out loans against the equity they had in their homes. What no one saw coming was the fact that though borrowers may rapidly develop equity from home appreciation, if their incomes can’t support the low interest, adjustable rate mortgages when the rates go up, there will be mass defaulting, as we see today (and have seen for about two years now).

So, the metaphorical earthquake has already happened and we’re still watching the dust settle. The government is also trying to kick start the rebuilding, by kick starting the housing market. Home prices are down over 25% nationally from their high in fourth quarter of 2006 (see here for supporting stats). A lot of people have lost money in their homes as well as other investments (the S&P 500 is down about 45% from its high in October, 2007), and many others have lost their jobs. There is a glut of homes on the market, and no one wants to buy them for either: 1) not having the money or financial stability to support buying a home and paying a mortgage, or 2) persistent uncertainty about whether home prices have bottomed yet or not – after all, who wants to buy an asset that may still drop in value?

So, what does the government do to incentivize people to buy homes and try to turn this mammoth economy around? Well, first we drop the interest rate on mortgages to make home buying cheaper (it’s ironic how one of the main causes of the housing bubble itself was the availability of cheap credit and record low interest rates for too long a period, and that same thing is now the solution), and second we give people money (via the $8,000 tax creditfor first time home buyers) to make their decision to buy a home cheaper. Of these two solutions, I find the first - the artificial lowering of interest rates – to be the most worrisome. Though I understand that the government is trying to make borrowing cheaper so more people buy homes, I think it’ll have an unwanted side effect. Interest rates are at record lows now. Let’s suppose that Americans take advantage of this and buy homes (as the government hopes). This causes home sales to increase now, and for the economy to appear to be turning around. All is well and everyone is happy. Now, fast forward 10 years or so. Given that rates are at historical lows, they only have one direction to go from here – up. (Some argue that given all the financial stimulus the government has engaged in recently, they’ll have to inflate away some of the debt, causing rates to rise even faster than they otherwise would). So, ten years from now when the average American family goes to buy a new home, they’ll be faced with an unpleasant surprise: the rise in mortgage rates will be very prohibitive to buying a new home. Suppose they pay $100/month for their mortgage. Borrowing the same amount of money with higher rates will cause them to pay much more than $100/month. Couple that with their likely desire to move into a larger, more expensive home, and the whole proposition becomes very scary. Thus I would expect future home sales to fall relative to where they would have been had there not been such a large difference between the natural interest rate then and the artificially low rate now.

So, my conclusion  is that we may stimulate home purchases now by lowering rates to record lows, but this comes at the expense of housing sales in the future. So all we’re really doing is pushing the problem from now, into the future. Though that may be welcome for many right now, as investment portfolios are in tatters and many are unemployed, I would argue that if I have to suffer, let me do it now while I’m already suffering, not later after I’ve gotten over the bad times and am looking forward to enjoying prosperity. I can’t help but wonder if it wouldn’t make sense to just let interest rates float to their natural level right now and just give the economy time to work its way thorough the excess inventory of homes. Yes, this process will take longer than the lowering of interest rates approach, but at least we won’t have to deal with much more expensive homes in the future. Besides, I can’t help but feel that a lot of the economic issues we face now are the result of our band-aiding things so we don’t have to “face the music”. Maybe it’s finally time to live within our means, buy as much home as we can afford (which may be much less than what we may want), and build a strong financial and economic foundation for our children. Of course, that won’t get me votes with the public if I were running for any kind of office…

Categories: Economics Tags: , ,

CallVantage: The End of a Good Thing

May 14th, 2009 No comments

So we received a letter in the mail recently from AT&T informing us that our CallVantage phone service will be disconnected around the end of the year. Most of you won’t know what CallVantage is, but let me tell you one thing: this sucks. CallVantage is (or pretty soon “was”) AT&T’s VOIP phone service. It competes with the likes of Vonage, with the difference being that the call quality is consistently better. We started using CallVantage about 4 years ago and have been happy customers ever since. Though it’s a little more expensive than Vonage (about $5/month more expensive), it was well worth it for us since the quality was always superb, which was essential since at various points in time we’ve worked from home a lot. Besides call quality it was attractive because it offered a very rich set of features for a great price. For $20/month we got unlimited calling to anyone in the U.S., and may other features like call waiting, call forwarding, three-way calling, caller ID, locate me service, safe forwarding in case the Internet connection goes down, and our favorite: control-by-phone. The latter is a feature I can’t seem to find anywhere, which is was really makes this unfortunate. Control-by-phone basically gave us a local number for every city in the U.S. that we could dial, then enter our phone number and password and make calls using our CallVantage service. So, if we’re visiting someone but don’t want to rack up their phone bill we could make a free local call to the local control-by-phone number, tap into our CallVantage account, and from there make a free call to anyone in the U.S. Another example would be if I wanted to call family internationally using my cell when not at home: I’d just call a U.S. number from my cell, tap into our CallVantage and then call internationally, without paying the cell phone company’s ridiculous international rates. Alas, all good things must come to an end, and after four years the same is true of CallVantage. We’ll certainly miss the reliability, call quality, and features.

So, what’s next you ask? Well I refuse to pay the insane phone company rates for the features we had. I could look at service offered by the cable company or something like AT&T U-Verse. In fact I did call U-Verse but abandoned that idea when I learned that given that AT&T was forcing me off of CallVantage because they want to discontinue it, they couldn’t port my number to U-Verse. That whole idea seems silly to me – it’s a number AT&T owns with one service that they’re discontinuing, but they can’t port it to the other service they’re trying to migrate customers to?! Seems pretty short sighted.

I then found Ooma in an email from Costco. Ooma is quite intriguing. Apparently the company has been around for a few years but was never successful because the hardware was too expensive. Now the hardware is about 40% cheaper, so hopefully things take off. You buy the Ooma device ($220 at Costco), and it works just like any other VOIP phone – it connects over your Internet connection. Though you pay a chunk up-front, unlike CallVantage and most other VOIP providers, there’s no monthly fee whatsoever. That’s right, no monthly fees for unlimited long distance in the U.S. I figured given that I’d likely pay about $25/month with taxes and all for phone these days, I’d break even in eight months, and then everything else is upside! Of course, the company could go bust before then, but then that’s the beauty of buying from Costco – you can always return the product. Seems like a good setup if the call quality is good. We got the product shipped in two days and set it up. It looks very Apple-esque for all you Apple fans out there (especially you Aaron and Adam!). The call quality is very good – so far just as good as CallVantage. Furthermore, they can port our number, so that’s a big win. It doesn’t have a feature similar to Control-By-Phone and a couple of other features that AT&T had, but for all intensive purposes, it’s a great replacement (and hopefully in the long run, a cheaper replacement). If you pay $100/year ($8.34/month), you get premier features which gives you a second line, three-way calling, and several other privacy features. Since the premier comes with a free number port (which would otherwise cost $40), I figured I’d sign up for it and give it a shot (by the way, there’s a free 6-month trial of the premier included anyway).

So, overall we’re happy for now. Hopefully the call quality will stay great, the company won’t go under, and they’ll continue to bring new features to the device. In the meantime, the prospect of having no phone bill (except for the $8.33/month IF you choose to get premier, and any international calls you may make) is certainly appealing. Anything that can be done to save a buck or two in this day and age is welcome! If you’re thinking about switching, give it a shot! If you have Costco membership, even better – you’ll save $30 off the regular price ($220 at Costco vs $250 other places), and you have the peace of mind that you can return if you don’t like or the company goes under.

Categories: Life Tags: