About the Federal Reserve [FOMC]

Posted on November 25, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Always in the News … but, What Does the Federal Reserve Do?

[By Staff Writers]

Money lending, or extending credit, is probably one of the oldest professions. It precedes the creation of currency. It wasn’t long ago that the term “usury” was used to describe the charging of interest on borrowed money. Today it is associated with an unlawful rate of interest. The usury rate is the maximum rate that may be charged for loans made by non-regulated lenders. The rate is calculated and disclosed on the last day of each month by the Treasury commissioner.

Federal Reserve Activities

The price of the commodity “money” is its interest rate. There are two types of short term interest rates: the discount rate is what the Federal Reserve charges member banks, and the Federal Funds rate is what the member banks charge each other. A third rate, known as the prime rate, is what banks charge to their most creditworthy clients. Be aware however, that the law of supply and demand determines long-term interest rates, not the Federal Reserve banking stem.

Perhaps the most vital functions of the Federal Reserve itself includes keeping member banks afloat; providing a system of check collecting and clearance; supplying member banks with paper currency reserve balances; supervising and regulating member banks; and regulating the supply of money and credit. The Federal Open Market Committee (FOMC) achieves these short-term goals in the following two ways:

By decreasing the overall money supply, the Federal Reserve sells government securities, forcing member banks to pay for them with dollars. This shrinks free reserves and the capability of banks to supply funds to personal and business owns, such as medical professionals. The borrowed money ultimately leaves the money supply. This is called a tight or contractionary monetary policy.
By increasing the overall money supply, the Federal Reserve buys government securities paying banks with dollars. This expands free reserves and the capability of banks to supply funds to personal and business borrowers, such as medical professionals. The money ultimately enters the money supply. This is called an easy or expansionary money policy.

Of course, the ability to make new loans and increase the money supply is controlled by FOMC reserve requirements. For example, an increase in the reserve requirement lowers free reserves, reduces the ability to borrow, and is contractionary. On the other hand, a decrease in the reserve requirements, raises free reserves, and is expantionary. If the FOMC removes additional reserves, this extraction could begin a painful contraction process as interest rates rise, potentially causing stock market prices to fall.

Assessment

Physicians should be aware that many experts today expect the Fed to ease and lower rates in the coming future because of a slowing economy.

Conclusion

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Filed under: Investing | Tagged: Financial Planning | 14 Comments »

Of Bull and Bear Markets

Posted on November 25, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

What is a Bull or Bear Market?

[By Staff Writers]

A bull market is generally one of rising stock prices, while a bear market is the opposite. Metaphorically, a wild bull tends to throw prey up; while a bear claws prey down. There are usually two bulls for every one bear market over the long term.

More specifically, a bear market is defined as a drop of twenty percent or more in a market index from its high, and can vary in duration and severity. In the bear market of Y-2001, for example, the PE ratio of Standards & Poor’s fell from a high of 36, to a low of about 22. The PE for the Dow DJIA fell to about 19, from its high of 28. Recall, that PE is a measure of share price value relative to earnings per share. Historically, it has been about 15-16, according to most analysts.

However, as a physician investing for the long-term, do not worry since the average bear market has lasted only about a year. Sans the 2001 implosion, the bear markets of the prior past fifty years are listed below, using the Dow Jones Industrial average as a benchmark:

Dec. 1961 to June, 1962: Days lasted: 195 Decline: 27%
Feb. to Oct. 1966: Days lasted: 240 Decline: 25%
Dec. 1968 to May, 1970: Days lasted: 539 Decline: 35%
Jan. 1973 to Dec. 1984: Days lasted: 694 Decline: 45%
Sept.1976 to Feb. 1978: Days lasted: 525 Decline: 27%
April 1981 to Aug. 1982: Days lasted: 472 Decline: 24
Aug. to Oct. 1987: Days lasted: 55 Decline: 36
July-Oct. 1990: Days lasted: 86 Decline: 21%

Assessment

What about now?

Today, it’s possible that the United States is already slipping into recession; downturns are recognized only in retrospect, and the Dow is down 10.3 % this last quarter of 2007.

Ironically, The Economist noted recently, 95% of American economists polled in March 2001 said a recession was not likely, but it was already under way. So, go figure!

Still, the Fed’s Beige Book report showed a slowing economy in October 2007. The anecdotal snapshot of the economy said retail sales were relatively soft, and retailers are bracing for a weak holiday shopping season; while demand for residential real estate remained depressed.

So, what do you think? Are we heading for a bull, or bear market?

Conclusion

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Economic Crisis Management

Posted on November 25, 2007 by Dr. David Edward Marcinko MBA MEd CMP™

Personal Financial Stress Management for Physicians

Dr. David E. Marcinko; MBA, CMP™

[Publisher in Chief]

The physician who remains in practice long enough is sure to undergo some adverse situation that may negatively affect his financial life. When it occurs, you must have a crisis management plan in place to deal successfully with the matter. In fact, the following three scenarios typically occur somewhere along life’s journey for the average doctor:

· Office Crisis Management

· Employment Crisis Management

· Financial Windfall Crisis Management.

1. Office Crisis Management

Crisis management is a matter of perception versus reality. For example, a high profile patient may die under your watch inducing a PR fiasco. But, then again, such a celebrity had confidence in you in the first place, so all is not lost. Therefore, honest spin control is needed when tragedy strikes:

· Stay calm and relaxed; but act immediately

· Release detrimental but accurate information and stay neutral

· Educate your staff and local community

· Fix the problem, or minimize recurrence

· Continually release information

· Monitor and report your strategy to all affected parties.

2. Employment Crisis Management

Sooner or later the employed doctor will be terminated or reduced. Or, a partnership will dissolve; a major local employer will relocate or your hospital will close. If you become aware of impending job loss, the following may help:

· Decrease retirement contributions to the minimum company match

· Place retirement contribution differences in an after-tax emergency fund

· Eliminate unnecessary payroll deductions and deposit the difference to cash

· Replace group term life insurance with personal term or universal life

·Take your old group term life insurance policy with you, if possible

· Establish a home equity line of credit to verify employment

· Borrow against your pension plan as a last resort.

After you loose your job, negotiate your departure and execute the following:

· Prioritize fixed monthly bills: rent or mortgage; car payments, utility bills; minimum credit card payments; and restructured long-term debt.

· Consider liquidating assets: emergency fund, checking accounts, investments, or assets held in a child’s name

· Review coverage and increase deductibles on homeowner’s and automobile insurance

· Sell stocks or mutual funds; personal valuables like furnishings, jewelry or real estate; and assets not in pensions or annuities

· Keep or rollover any lump-sum pension or savings plan distribution to your new practice. Pay taxes and penalties as a last resort

· Apply for unemployment insurance and review COBRA coverage

· Consider a high-deductible health plan using tax-deferred dollars.

3. Financial Windfalls

Although ironic, a financial windfall may be more problematic than short-term financial disadvantage. Consider these suggestions:

· Be discrete; don’t quit practice or disrupt your life materially

· Deposit cash into a money market account and limit access

· Title securities correctly

· Redefine your financial plans, and continue to save and invest

· Pay down non-deductible debt

· Review insurance policies, will, estate plan or trusts

· As an executor, be aware of estate tax freeze benefits using the alternate valuation method

· Consider charitable gifting carefully.

Hire an Expert

If any of the above occurs, get tax advice immediately, retain an attorney and hire a financial professional. And, unlike stock-brokers and most financial designees, the Certified Medical Planner© is an emerging new financial-advisor subspecialist and fiduciary with focused medical specificity.

Conclusion

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About the Federal Reserve [FOMC]

Always in the News … but, What Does the Federal Reserve Do?

[By Staff Writers]

Federal Reserve Activities

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Of Bull and Bear Markets

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Economic Crisis Management

1. Office Crisis Management

2. Employment Crisis Management

3. Financial Windfalls

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