Community Bank of San Joaquin Trust and Investment Telegram July 31, 2002 Special Edition: Food for Thought from Feldman Securities Group Feldman Securities Group, LLC has compiled a list of frequently asked questions about the current economy. You may find these of interest. 1. What is the outlook for the Market? 2. Why is the Market going down? 3. Where's the bottom? 4. Can we avoid riding the Market to the bottom? 5. What does Market timing require? 6. What should investors do? 7. What are some concerns? Here are some thoughts with regard to recent Market weakness and volatility: 1. What is the outlook for the Market? The environment for stocks has been favorable. Factors include the economy, interest rates and valuations. The Economy: The economy is mixed, but is showing some improvement. Manufacturing has posted gains in activity every month of this year, and inflation remains low. Interest Rates: Interest rates have trended lower since the early 1980's. Corporations and individuals have been able to refinance their debt to lower levels and have been able to borrow to make purchases and investments. Valuations: Valuations have returned to more normal levels from "bubble" premiums. Comparing the earnings yield on stocks to the yield on "safe" Treasury's, stocks appear to be 15-35% undervalued compared to bonds. Also, stocks have returned to levels last seen in the late 1990's when we were worried about the Asian financial crisis, Russian and South American defaults, and the liquidation of Long Term Capital Management (hedge fund). 2. Why is the Market going down? Crisis of Confidence: There is a crisis in confidence in the market. The bursting of the market bubble in 2000, followed by the 9/11 tragedy, accounting scandals, and the bankruptcies of some high-profile companies have shaken investors' confidence in the system. This may take time to heal, but could be presenting investors with opportunities we haven't seen in years. Congress is acting to improve the transparency of accounting numbers and will be forcing CEO's to sign-off on their annual reports. Other Contributors: Other contributors to the market decline include a rise in short selling, and mutual fund redemptions. But when the market turns around and rises, the short sellers will have to cover their sales with a purchase, so we could see a jump as we did on July 24th. 3. Where's the bottom? We don't know. 4. Can we avoid riding the Market to the bottom? Only if we are willing to miss some of the growth that will likely follow. In other words, long term investors are faced with riding out the bad times to reap the rewards of the good times. 5. What does market timing require? Market timing requires 20/20 hindsight. Years from now, we may look back at this time and wonder why we didn't take advantage of our opportunities. Without that knowledge of the future, we are faced with the risk of the unknown. So we must use what we do know and go back to the fundamentals of investing: Risk versus reward. Risk can be managed with asset allocation and diversification. But history has shown us that the more reward we want, the more risk that comes with it. 6. What should investors do? Review investment objectives and risk tolerance: Everyone should review their investment objectives and risk tolerance. None of us are comfortable losing money or watching our retirement savings shrink. But an investor's investment objective shouldn't change depending upon what the market does each day. Should investors find they are "in too deep", then they should review their objectives and risk tolerance with their Trust and Investment Officer. Remember time horizon: Remember time horizon, too. While stocks are more volatile, they are still projected to give superior long-term returns relative to cash/debt products. Those who can stomach the volatility and have time to weather market swings could benefit from stock investment. Watch the economy: As long as the economy is growing, earnings should improve and prices should eventually follow. Some important statistics to watch for in the news: GDP, housing numbers, employment (this is a lagging indicator), retail sales and inflation. 7. What are some concerns? Recent data showed existing-home sales fell 11.7% in June. Home sales are coming off of a record-setting year. But should the housing market weaken significantly, it could be a setback for the economy and consumer demand. The Fed is running low on ammo. The Federal Reserve has been pumping liquidity into the system for the past few years at a fast rate. Money supply growth and interest rate reductions seem to be nearing their conclusion. Further economic stimulation could be difficult to produce, but could come from fiscal policy (i.e., tax cuts or additional government spending). -------------------------------------------------------------- Legal Disclaimer Community Bank of San Joaquin Trust and Investment Telegram contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific securities does not constitute an offer to buy or sell securities. The past performance of a mutual fund, stock, or investment strategy cannot guarantee its future performance. This email newsletter is offered on a subscription-only basis. Because of the complexity of this service and its dependence on other systems, we cannot be responsible for delays or failures in forwarding or transmission. 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