Money Talk is a show about the world of financial and investment planning and includes listener phone call with real issues and questions. Perhaps you are considering a real estate purchase, participating in your employer sponsored retirement plan, or starting to save and invest for a future college education… Whatever the concern or questions, Carl strives to answer in plain everyday English and treat every caller with respect.

Carl Stuart is a Certified Financial Planner and a Registered Investment Advisor. He owns his own firm where he manages approximately $280 million of clients' assets.  In 2002 he was selected by Registered Representative magazine as one of the top 10 advisers in the United States. He is a Trustee and Chair of the Investment Committee of Pine Manor College in Boston, a Trustee and Chair of the Investment Committee of the Texas Presbyterian Foundation in Dallas and a board member and past Chair of the YMCA of Austin.  He has also served as the President of Big Brothers Big Sisters of Austin, and is a board member of the Peoples Community Clinic of Austin. He and his wife Claire have been married for 36 years.

KLBJ Newsletter June 2008

According to the June 2, 2008 issue of Barron’s magazine, home prices fell 14% in April from one year ago. Also mortgage default rates surged 27% in April from the previous month. I have read articles by economists who suggest that home prices were over valued by 30% at their peak 2 ½ years ago.

Since mortgage rates have not come down, and since many adjustable rate mortgages are scheduled to adjust upward this year, it seems unlikely we are finished with the bursting of the residential real estate bubble.

Several commentators have called for governmental action. In fact, there is a proposal currently in the U.S. Senate. It seems a very complex problem to identify and separate the real estate speculators from homeowners, and those who were duped from those who bought too much of a house.

Recently I was talking with a good friend from Minneapolis. Several months ago he was on an airplane seated next to a bankruptcy lawyer. They got to talking about the excesses that developed, because of the availability of mortgage credit. The lawyer had a client who was a flight attendant who made $35,000 to $40,000 a year. In one month, he had purchased five homes and received 110% financing. His plan was to use the 10% extra cash over and above the purchase price to pay the mortgages for a few months, and then sell the homes. When the market turned and market values declined, the flight attendant was broke.

While I do not know how widespread these types of shenanigans were, I am guessing this was not the only person in America who did this.

It will take time to work through all this mess. In the meantime, keep owning diversified portfolios of financial assets.

Oil prices rose 12% in May and truck and SUV sales have plummeted. I think this is the silver lining of high fuel prices. Americans are changing their behavior in a way that reduces energy consumption.

You have probably seen or heard about the poor consumer confidence numbers. According to the Conference Board, confidence fell to a 16 year low in May. In the University of Michigan survey, consumer confidence fell to a 28 year low.

There may be another silver lining in these numbers. Frequently, consumer confidence results are a lagging indicator. Stock markets often bottom and begin to rise when people feel the worst.

Stocks were mixed in May. The Dow Industrials fell 1.4%. The S&P 500 gained 1.1%, its second consecutive monthly gain. The big surprise was the NASDAQ which rose 4.6% for the month, its best May since 2005. This is pretty darn good, given all the negative items I have been describing.

- The Dow Jones is an index of 30 stocks that is considered representative of the overall market.
- The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market.
- The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.

Bond prices declined and yields rose last month. The 10 year Treasury finished the period yielding 4%. This is where it started 2008. A similar rise in yield happened in May last year. However, that rise was to 5%.

Fed Chairman Ben Bernanke and others began to talk about inflation at the end of May and the bond market began to act as if fixed income investors believed the Federal Reserve is finished lowering short term interest rates.