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Glass-Steagall Act

After the stock market crash of 1929 and subsequent bank run that led to the Great Depression, Congress wanted to eliminate the potential for another financial disaster. In order to mitigate future bank runs and crises, the Banking Act (known as the Glass-Steagall Act) was passed in 1933.

The Glass-Steagall Act had two main provisions; the creation of FDIC and the separation of commercial and investment banking. The Federal Deposit Insurance Corporation guaranteed bank deposits up to a certain amount. This alleviated the fear that depositors may feel during a banking crisis and potentially eliminate the catastrophic effects of a bank run.  The separation of commercial and investment banking was notable because banks were no longer able to invest savings deposits into anything other than government bonds. Any investments in securities or other speculative holdings could not be made using savings deposits. This provision in the Glass-Steagall Act prevented banks from insolvency.  Investing deposits into risky securities during a market crash could put a bank in a bind if the value of the securities can no longer cover withdrawals during a run on the bank.

While there were recessions and difficult economic periods after the Glass-Steagall Act was passed, one can argue that this legislation prevented another event like the Great Depression. Over time, certain parts of the Act and clever financial products gave banks more leniency when it came to using savings deposits as leverage for investments. Eventually, the Glass-Steagall Act was repealed during the Clinton Administration and replaced with the Gramm-Leach-Bliley Act, which allowed for the consolidation of investment banks, commercial banks and insurance companies.

One can argue that the financial recession of the late 2000’s occurred partially due to the repeal of the Glass-Steagall Act. The Gramm-Leach-Bliley Act led to the rise of comprehensive banks that utilized deposits as leverage for investing in mortgage-backed securities and other complex financial instruments. Once the housing bubble burst, the value of these securities was less than the amount of deposits in some banks, leading to insolvency and subsequent federal bail outs.

The late 2000’s recession was a complex event that was caused by many legislative events and a Federal push to make it easier to own a home.  Had the Glass-Steagall Act been in place prior to the burst of the housing bubble, the effects of the recession may have been somewhat mitigated.

Please contact Mitlin Financial with any financial questions or if you would like more information regarding the Glass-Steagall Act.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Important Information Regarding the Basic Star Program

All homeowners who are enrolled in the Basic STAR program must re-register with the New York State Department of Taxation and Finance (NYSDTF) by the end of the year in order to continue receiving the STAR exemption for 2014 and beyond.  As part of the program, the NYSDTF is mailing each homeowner a personalized STAR code and detailed instructions that will enable them to re-register.  Homeowners will need this code to re-register.

Homeowners in Suffolk County can now access their personal STAR code online so that you can re-register via the Internet today.  That will enable you to complete the process quickly in order to maintain your tax benefit.

To get your code, simply visit the NYSDTF website by clicking here.

If you would like more information on this re-registration process, please visit the NYSDTF STAR Registration Program by clicking here.  Please remember that current recipients of Enhanced STAR are not affected and do not have to take any action in regard to this re-registration program.

The deadline for re-registration is December 31st, 2013.


Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

U.S. Default

The disagreement between Republicans and Democrats over the U.S. budget, debt ceiling, and Obamacare has led to the first government shutdown since 1995. Millions of federal workers have been furloughed until an agreement can be reached (although salary for missed time will be reimbursed), however the primary concern for many Americans is whether or not the U.S. government will default on its obligations come October 17th. This is the expected deadline for raising the debt limit based upon tax revenue and accumulated debt. Based upon negotiations during the fiscal cliff in 2012 and the 2011 debt ceiling disagreement, it appears that a deal will most likely be accepted in the 11th hour, however it is important to understand the ramifications if the U.S. were to default on its financial obligations.

One of the primary fears for U.S. Treasury bondholders is that they will not receive their specified interest payment on October 31. Just like corporations, if the U.S. were to default on its financial obligations, investors would seek higher interest rates in order to offset the potential of a credit default. In addition, an investor led run away from U.S. Treasury bills and a potential sell-off could drive interest rates even higher and unravel domestic finances. If the United States needs to pay-out higher interest rates without any spending cuts, it will only drive the national debt up further.

On the equity side, a credit default can have a major impact on consumer confidence similar to 2011 and negatively affect stock prices.  During debt ceiling negotiations in 2011, the global equity market lost nearly $6 trillion in value. It is a fair assumption, given that the U.S. did not default in 2011, that a failure to reach a budgetary agreement will have an even greater impact on the markets this year.

During a time of high market volatility and political uncertainty, it is imperative to fall back upon your financial plan in order to ensure that decisions in your portfolio are not made on emotion. If you do not have a financial plan, please contact Mitlin Financial for assistance.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Research Flaws

Recently, a major investment firm (let us call the organization XYZ) has had their research called into question. XYZ specializes in long term investing, proprietary research, creating efficient portfolios based upon asset allocation as opposed to market timing, and low cost funds. Mitlin Financial agrees that asset allocation and time horizon are two major components in making sure that a client’s portfolio matches his/her goals, however the research used in selecting individual securities for their mutual funds is arguably outdated and unrealistic for current financial markets.

 This firm distributed and implemented proprietary research utilizing the theory of the discount model which can be used to value the future price of a security. In their first quarter review, they discussed their belief that as the expected income stream of a company increases, so will the expected returns of the stock. This belief is evaluated assuming the security price is constant.

Unfortunately, the components of this theory are not fully applicable in today’s financial markets. Equity prices and expected future earnings change on a frequent basis, thus making some long term assumptions inaccurate. When making an educated decision on the future value of securities, the discount model may guide you, however it is important to understand that the assumptions in the theory must be taken in the context of other market conditions as well. The firm has used this model for analyzing securities for nearly 40 years. By not updating their research methods, they are providing information that simply may not be relevant by today’s standards.

As stated earlier, Mitlin Financial firmly agrees with XYZ that allocating assets properly and long term investing is key for financial success, however a constant update of research methods is necessary in order to keep up with current financial times. We believe that a review of how research is conducted is needed on a quarterly basis. If you feel that your portfolio is being managed by outdated methods, please contact Mitlin Financial for a consultation.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Asset Allocation vs. Market Timing

When it comes to investing one’s assets, there are many schools of thought. Two of the most prominent practices utilized are asset allocation and market timing. Asset allocation is a long term investment strategy that builds a portfolio based upon asset classes while market timing refers to the practice of buying and selling securities based on future market movements. Many investment studies have shown that the allocation of assets will have a greater impact on performance than market timing.

The asset allocation strategy builds a portfolio based upon a variety of investment categories, such as large cap stocks, small cap stocks, long term bonds, utilities, etc. How the assets are ultimately allocated is based upon the investor’s risk tolerance, time horizon and goals for the portfolio.  This strategy has been proven to be the most efficient way in managing one’s assets. Studies have shown that between 91% and 97% of an investor’s performance is dependent upon how the assets are allocated. This strategy also helps an investor avoid losses from timing the market incorrectly and removes some of the emotion involved with portfolio decisions.

Investors who utilize the practice of market timing take on considerably more risk in their portfolio. This strategy is based upon buying and selling securities in a short time period in order to profit from price movements. The problem with market timing is that it is difficult to determine future market prices, especially during periods of high volatility.  Since it has been proven that the vast majority of performance is based upon asset allocation, it does not appear efficient to take on the risk of timing the market, especially since there is always a level of uncertainty.

At Mitlin Financial, we believe a long term investment strategy based upon asset allocation can alleviate the pressures that come about when trading securities on a short term basis. If you have had negative experiences with market timing, please contact Mitlin Financial for a free consultation.


Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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