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Second COVID-19 Stimulus Niceties and Notes

We have an agreement, which means we can begin to criticize it and plan for the investment and economic effects. The bill is a litany of half measures, no long term solutions, and likely sets up a couple of battles in the next congress. 

Congress punted on evictions, postponing medical payments until early next year, and there is still an ongoing debate regarding the amount it is issuing in direct payments. The looming liability concern for businesses is still being discussed.

Here is what got done: 

Individual payments for many

Easily the most asked about part of the legislation is the direct payment to individuals that begin going out today. The passed version included $600 going to individual adults with an adjusted gross income of up to $75,000 a year based on 2019 earnings.

An increased amount will be going to those that file as heads of households who earn up to $112,500 and couples (or someone whose spouse died in 2020) who make up to $150,000 a year would get twice that amount.

This continuing political battle to raise this number from $600 to $2000 is still going on today, passing with all democrat and some republican support in the house. The senate is questionable as a few Republicans have endorsed the idea, including the two high profile candidates in Georgia – Loeffler, and Purdue.

McConnell has blocked the bill as of 10:20 am as I am writing this article. 

Unemployment benefits

With almost 7% of Americans still unemployed and millions more under-employed, Congress acted to extend multiple programs to help those out of work, albeit at less generous levels than in the spring. Too much of the surprise of those tracking the issue, the final bill doesn’t include the expanded coffers many anticipated and is considered a skinny agreement. 

The agreement would include:

  • 11 weeks, providing a lifeline for hard-hit workers until March 14. 
  • Up to $300 per week (half the amount provided by the original stimulus bill in the spring)
  • Pandemic Unemployment Assistance — a program aimed at a broad set of freelancers and independent contractors — for the same period, providing an additional $100 per week

Better late than never, the expanded agreement is a second band-aid for those Americans that continue to seek employment as employers have halted hiring. The near term negative effect of unemployment cannot be understated. But as we look out to the intermediate (6 months) range seems to hold a fantastic capacity for consumers to unwind pent up spending in short order. The unemployment insurance isn’t expected to be much but will support many Americans who put more and more spending on credit cards in the second half of the year. 

Funds for Child Care, Schools, and Colleges

School budgets have been uniquely impacted by the pandemic and have left their outlook for the year to some impaired:

  • $82 billion for education and education service providers, 
  • That figure includes $54 billion for stabilizing K-12 schools
  • It also includes $23 billion for colleges and universities
  • $10 billion for the child care industry

K-12 schools saw more support than the initial package in dollar terms, and even more than the proposed package in November; however, the funds still fall short of what both sectors say they need to blunt the effect of the pandemic and to support operations in 2021. 

The majority of school districts transitioned to remote learning and as a result, we were asked to make expensive adjustments to accommodate while seeing enrollment drops upend budgets. Colleges and universities are also facing financial constraints amid rising expenses and falling revenue.

Child care centers that are struggling with reduced enrollment or closures will get help to stay open and continue paying their staff. The funds are also supposed to help families struggling with tuition payments for early childhood education. 

Funding for broadband infrastructure

The stress on national broadband has been higher than ever, remote work and education on top of the expanded requirements of technologies like Zoom, have put a major strain on national networks. The legislation includes $7 billion for expanding access to high-speed internet connections. Much of this spending was anticipated in an infrastructure bill, that has been brought forward as a result of the pandemic. Two major points in this part:

  • Half this stimulus is earmarked to cover the cost of monthly internet bills by providing up to $50 per month to low-income families.
  • $300 million for building out infrastructure in underserved rural areas and $1 billion in grants for tribal broadband programs. (Part of another infrastructure bills spending prior to the pandemic) 

Extension of aid for small businesses (PPP)

The bill puts forward $285 billion for additional loans to small businesses under the Paycheck Protection Program. This renews the program created under the initial stimulus legislation and is largely an extension of dollars that were repurposed.

Funding for vaccines and eldercare facilities

The source of concern early in the pandemic and the ongoing requirements to overhaul the elderly care facilities are addressed by this legislation as it sets aside nearly $70 billion for a range of public health measures targeted at elderly care facilities and the distribution of the vaccine. This breakdown includes: 

  • $20 billion for the purchase of vaccines 
  • $8 billion for vaccine distribution 
  • $20 billion to help states continue their test-and-trace program
  • Earmarked funds to cover emergency loans aimed at helping hard-hit eldercare centers.

A ban on surprise medical bills

The Bill supports efforts to help Americans avoid unexpected medical bills that can result from visits to hospitals. The legislation also makes it illegal for hospitals to charge patients for services like emergency treatment by out-of-network doctors or transport in air ambulances, which patients often have no say about. This measure has had some long time support from Democrats and was criticized for not including some provision in the Affordable Care Act. 

Rental protections

One more month of halting evictions is pushed out to the end of January. The Department of Housing and Urban Development separately issued a similar moratorium on Monday that protects homeowners against foreclosures on mortgages backed by the Federal Home Administration. It runs until Feb. 28. This has had several enforcement issues and while the legislation is a fantastic lipservice, the issues of evictions for individuals with a history of rental disqualification from before the pandemic are a continued source of evictions.

The bill DOES NOT include liability protection for business

A criticism by many that Democrats largely held out a provision for liability protection for companies trying to reopen. This element, opposed by labor unions and supported by the national Chamber of Commerce was a sticking point that went without inclusion. The discussion was important because it would allow businesses to follow their local recommendations to reopen to have legal insolation from lawsuits later on. This will continue to be a discussion in congress as a “reopen” is structured and the liabilities for business owners regarding COVID exposures are defined. 

Conclusion:

This gets us through the winter and hopefully the hump of COVID as the vaccine gets rolled out. It still leaves too much for the 2021 congress to cover and cover quickly. What the continued political, monetary, and fiscal landscape reactions look like is still up for debate. The curvature of risk in equities peaks in February (as I write this) so markets are pricing in a 2 month include equities and a political battle come early spring.

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Should you own Zombie Apocalypse Insurance?

Should you own Zombie Apocalypse Insurance?: Four risk mitigation disciplines to get familiar with Zombie Insurance exists…yes really, if only as a marketing ploy for insurance shops. But it gives us a great reason to discuss the different types of risks, and the disciplines that exist to mitigate the given risk set. Zombie Apocalypse Risk is both an unmitigable risk, there is little if anything you can do to avoid an apocalypse. And it’s also not cost-effective, the replacement of anything lost in the apocalypse is unlikely – the insurer after all is very likely a zombie in this scenario. So it’s an easy “don’t buy it” recommendation. But how about others’ risks? Tax, fire, disability, market, etc. all exist daily, and all have nuanced methods for handling them. Cost-Effective Not Cost-Effective Mitigable Homeowners Insurance (Buy it) Annual Downside Puts for Market Protection (likely don’t buy it) Unmitigable Life Insurance (Buy it sometimes) Zombie Insurance (come on?!?!) Effective risk mitigation requires understanding both the financial risk at play and the full length of consequences that result from the strategy a person or family chooses. Tax Risk is a great topic to think about. Most investors “Accept” Tax Risk and pay their taxes at the end of each year depending on their income and gains from the year before. You bought the stock, it went up 20% forgo 5% as a cost of doing business and pay your income and gains tax on it. Some Investors might “avoid” tax risk by using investment strategies, 401ks, IRA’s, or other legal means of tax avoidance. Further, still, some may limit their tax exposure by using several different investment strategies and holding strategies by spreading out the tax risk over time or using income streams that are taxed in different ways. Further still, some may use tax risk transference through trusts, gifting, and other asset location strategies to manage it. Tax risk is just one flavor of risk, but almost every conceivable risk can be filtered through the strategies below to make the existence of risk far more tolerable. Risk Acceptance There are several risks you “accept” every day regardless of the calculus. The risk of an airplane part striking you at a wedding is really low, so you simply accept that risk and head outside. The risk of a single down month in the stock market is high, and so is the cost to insure against it. Risk acceptance as a strategy is about balancing the likelihood of that risk happening, the financial impact it would have, and properly pricing the below strategies to handle the risk. Risk acceptance does not reduce any effects however it is still considered a strategy. The “acceptance” strategy is a common option when the cost of other risk management options such as avoidance or limitation may outweigh the cost of the risk itself. A company that doesn’t want to spend a lot of money on avoiding risks that do not have a high possibility of occurring will use the risk acceptance strategy. Traditionally, risk acceptance can be the key to investment upside. The performance of the S&P 500 is a great example. If you simply accept the risk you will have more up years than down years, and the result will be net returns of about 9% year over year. If you used financial products to mitigate the financial consequence of a down year, it could cost you between 8-10% of the return to fully inoculate the risk. Leaving you with little to no return. So there are several times where risk acceptance is the more rewarding outcome. Risk Avoidance The risk management effort is a process to target and control the damages and financial consequences of threatening events, risk avoidance seeks to avoid compromising events entirely. This is equally an activity you likely engage in regularly. You, like me, may not attempt amateur base jumping daily for a myriad of reasons. This simple act of not participating is a risk management strategy. When determining how you will approach risk, it’s important to not confuse the strategies of risk avoidance and risk acceptance with a very different concept “risk ignorance.” Risk ignorance stems from two very different but connected problems. The first is a knowledge gap, this is a problem with risk-takers’ understanding of a market, investment, process, etc. where they simply don’t have the skill set required to uncover and handicap all of the potential risks. When I don’t work on the inner workings of my vehicle it’s an acknowledgment of that knowledge gap. The second gap, and likely harder to uncover, is a competency gap. This is the knowledge that the risk exists, but poor reconciliation of an investor or person’s skill to overcome the difficulties. Think about new building construction. The builder might know that the risk of financing can fall through, so they have crossed the knowledge gap, but if a project still falls through because of a lack of coordination, effort, or something else entirely it fell victim to mispricing of the competency gap. Risk avoidance is one of the least understood methods used by investors and as a result drives two negative behaviors. Rationalization or compartmentalization. In this first, investors fall in love with an idea, stated returns, or a story and begin down a path they believe is “risk avoidance” but is actually rationalizing them into risk ignorance. The second “compartmentalization” is a form of risk avoidance but for the wrong reasons. An investor may not understand a product or service and as a result, shut down a whole category of strategies. A great example is in derivatives, many people attribute the financial crises to derivative products and thus write off the whole group regardless of other tactics that might support their goals. A lack of sophistication and understanding of risk is a common source of aversion, failure to change advisors, or even seek investment advice in the first place. Risk Limitation Risk limitation is the most common strategy.

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May 6, 2021 No Comments
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Cash Flow: 6 Successes For Your Dental Practice (2/2)

Continued from Cash Flow: 6 Successes For Your Dental Practice (1/2) A cornerstone of any business is having a mastery over your revenue and cash flow. Lucky for our dentist clients, they have a fantastic capacity for inflow, but disproportionately high outflows from expenses and taxes. Analyzing your accounts receivable and operating activities is an intrinsic part of our income analysis process. The best leading indicator for the success of your practice and of your financial plan. Bring forward revenue There are several lending and credit schemes that will allow dentists to bring forward revenue instead of waiting for insurance and clients to pay. These can be a fantastic value add for your clients by helping them flatten out the payments and keep on your treatment plan. These lending and payment systems keep you from being the bank and put the money into your practice faster with little interruption or time on your part.  We don’t recommend any single group for offering these services, but find that dentists that enable their clients to have access to a trusted partner are able to keep their patients on track and stabilize inflow to their practice.  Diversify your inflows Even by having all of the above and doing everything you can to normalize the revenue of your practice, hiccups can still occur that are outside of your control. Changes to insurance coverages, business partners, and economics have always caused displacement of cash flow for dentists. Clients that have a good understanding of both their practice and non-practice cash flow are capable of weathering these changes.  Clients who have worked through the P.E.A.K Process® know exactly what their cash flow health looks like for both the practice and their personal assets and how much risk is associated with getting income from a single source. Most people don’t have the luxury of determining their own income like dentists we work with. So knowing exactly the source and vitality of profit from several diversified sources becomes helpful for practices that may be working through tight cash flow from expansion, contraction or transition.  Work with a dental financial advisor to analyze and provide action items to improve your cash flow  You have to be preemptive when it comes to monitoring your cash flow. Dentists often prefer to delegate cash management to one of the employees at their practice so they can have more time to care for their patients. This may however not be an effective way to manage or maintain a steady cash flow. Having a good understanding of your cash flow, its relationship to your practices financial health, and how dependent you are personally on the steadiness of that flow will make a measurable difference in the trajectory of your financial plan. Clients that use the P.E.A.K Process® CFP®’s at InSight understand your cash flow habits and provide a better understanding of the in’s and out’s of your practice. Dental financial advisors analyze, estimate, and help you predict your income over time. We find ways to better maximize your efforts, and discuss ways to better utilize that knowledge in your financial plan. This intimacy will help you plan on how to preempt any shortfall. Or, to broaden your current capacity to generate revenue into long term and diversified vehicles for cash flow generation.  Our CFP’s analyze your cash management habits but suggest ways to improve your cash flow and also find tax reduction strategies. We find opportunities you may not know about.  Invest in yourself and your practice, and we will help guide you through what you don’t know you should know to get you closer to financial freedom.

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October 27, 2020 No Comments

Income and Risk Management from Covered Calls

A covered call strategy is a popular options trading strategy that combines both risk management and income generation using stocks. It involves selling call options on a stock you already own, thereby generating additional income while potentially limiting downside risk. Here’s a basic description of a covered call strategy: You need to own the Stock: To implement a covered call strategy, you first need to own the underlying stock. This means you have purchased shares of a particular stock in your investment portfolio. A call can be written against each “round lot” or 100 shares. Selling Call Options: Once you own the stock, you sell call options against it. A call option is a financial contract that gives the buyer the right, but not the obligation, to buy the underlying stock at a specified price (known as the strike price) within a specified time period (known as the expiration date). By selling call options, you are essentially giving someone else the opportunity to buy your stock at the strike price if they choose to exercise the option. Generating Income: When you sell a call option, you receive a premium (payment) from the buyer of the option. This premium becomes your additional income. It’s important to note that by selling the call option, you are obligated to sell the stock at the strike price if the buyer decides to exercise the option. Risk Management: The covered call strategy helps manage risk in two ways. First, the premium received from selling the call options provides a buffer against potential stock price declines. It reduces the effective cost basis of the stock, thereby providing some downside protection. Second, if the stock price rises above the strike price, you are obligated to sell the stock at the strike price, but you still get to keep the premium received. While you miss out on potential gains above the strike price, you benefit from the additional income generated. Potential Outcomes: There are a few potential outcomes with a covered call strategy. If the stock price remains below the strike price, the call options will typically expire worthless, and you get to keep the premium as income. If the stock price rises above the strike price and the call options are exercised, you sell your stock at the strike price and still retain the premium received. If the stock price experiences a significant increase, you may miss out on potential gains above the strike price. In summary, a covered call strategy is a risk management tool and a way to generate additional income from stock. It involves selling call options on a stock you own, providing downside protection and potential income. While it limits potential gains if the stock price rises significantly, it can be a useful strategy for investors looking to manage risk and generate income from their stock holdings.

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October 17, 2021 No Comments

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