Third Quarter 2001

Market Review & Outlook

The September 11 attack against the World Trade Center, the Pentagon, and the American Public is a tragedy of the highest proportion. We pray that you and your loved ones were not directly affected by these events.

The third quarter of 2001 proved to be one of the most hostile quarters that equity investors ever had to face. The S&P 500 declined 14.7%, the Russell 2000 dropped 21.1%, and the Nasdaq Composite plunged another 30.6%. The quarter also forced the Dow 30 Industrials into bear market territory for the first time since 1990. While it is sometimes difficult to appreciate the merits of an active investment strategy during a roaring bull market, the benefits have been much clearer the past six quarters. Many of our aggressive strategies had fractional gains this past quarter, and those that didn't were able to hold their losses to a fraction of those experienced by their benchmarks.

Although our short-term results are much better than the market's, it is our long-term results that truly demonstrate the power of our active approach. As you review the enclosed performance reports, we ask that you pay special attention to the Market Indexes listed at the bottom of the page. We all know that the market has been having a rough time the past 18 months, but you may not be aware of the fact that the major equity benchmarks are all showing losses for the two-year period, and many of them have a three-year loss. When going back five full years, we see that most equity benchmarks have failed to outperform money market funds. Our performance figures stand in stark contrast, all showing significant gains for the three-year and five-year periods.

Bear markets generate fear and create tremendous investment opportunities for those that are prepared. The 1987 crash generated enormous fear in the investing public. With the power of hindsight, we know now that the ensuing Tuesday proved to be the bottom. In fact, it may have been the most incredible buying opportunity in the history of the stock market. The next 13 years went on to become a stampeding bull market, which saw the Dow alone increase more than six-fold. And the sell-off of 1987 isn't the only example we have to prove our point. There's 1974, 1962, 1946, and so on. The U.S. markets have bounced back every time after a collapse; they will again.

It is a relatively easy to take a historical look at the market and determine where the bear-market bottoms occurred. It is a much more difficult task in real-time. However, we are starting to find increasing amounts of evidence that the market established a panic low on September 21. Only after the passage of time will we be able to look back at this period to determine if a short-term, intermediate-term, or long-term low was established that day.

Does that mean that the equity markets are now a risk-free environment? Definitely not, there is always a risk with any investment. As we start the fourth quarter of 2001, the two largest risks we see are 1) an economic recession that is deeper or longer than what investors have anticipated, and 2) the market's reaction to the next attack on America. In the short-term, the economy will in all likelihood get much worse. Corporate earnings for the third quarter, fourth quarter, and the first quarter of next year will be lower. However, due to the events of September, the government is injecting massive amounts of stimulus into the economy, in addition to all of the Fed rate cuts, which occurred earlier this year. Although September induced a negative shock into the economic system, that same shock may have accelerated the process of creating a bottom for the economy. This acceleration to the downside, coupled with massive government stimulus suggests that the possibility of a stronger and earlier recovery now exists. Therefore, we believe that it is now prudent to start establishing new positions. As always, we will monitor the market for new information and we will not hesitate to sell should the situation turn negative again.

Investing for Income

In the 1990s, "investing for income" became a phrase that many investors were afraid to utter, and even more afraid to do. Today, money market funds and CDs are yielding in the neighborhood of only 3%. Ten-year treasury notes are yielding 4.5%, for those willing to hold them for ten years. Of course, these numbers have to be adjusted downward for inflation. Income investors are now forced to accept either lower returns or higher risks. CCAM's Flexible Income program is an alternative. We started this program in 1994, and now have more than seven years of investment history. For the past five years, it has had an annualized return of +8.2%, outperforming the Russell 2000, the Nasdaq Composite, the IBD Mutual Fund Index, and its Vanguard Total Bond Index benchmark. In general, we would not recommend reallocating any of your CCAM equity investments into this program, but if you have income investments that are not meeting your needs, you should consider CCAM's Flexible Income program.

401(k) Plans

Have you changed employers and your 401(k) plan is still at your old employer? Now may be the time to roll the account over to Fidelity and have CCAM advise on the account.

Did you know some employers allow you to rollover your 401(k) while you are currently employed? Check your plan document to see if it allows for a third party to manage your assets or simply mail the document to your Account Representative to review. This may be what you are looking for if your investment selections are limited. Call your Account Representative for more details.

CCAM Employees

Also during the third quarter we hired Peter Lynch as an Account Executive. Peter has over seven years experience as an investment advisor for companies such as Merrill Lynch and Prudential Securities, and much like his namesake, has an avid interest in helping his clients grow their wealth through prudent investing. With a finance degree from Southern Methodist University in Dallas, he's happy to be back in Texas and looks forward to helping clients with their investment needs.

Binders

We have received overwhelming response regarding the binders. We are happy you are enjoying them and putting them to good use.

Charitable Gift Fund

CCAM also wants to bring to your attention another service offered by Fidelity with which we can assist. It is a smart way to make charitable donations of cash or stock - even most restricted stock - while benefiting from a double tax break. The Fidelity Charitable Gift Fund accepts donations of financial assets, some which may have appreciated in value and carry large capital gains. By making an irrevocable donation to the fund, you can deduct the full value of the asset today and erase any potential capital gain taxes. Fidelity will then allow you to continue to grow the money in the fund by choosing from four investment pools. Along the way, you can make grants to any IRS-approved public charity anywhere in the U.S. whenever you choose. The fund handles all the account maintenance and tax reporting while you can oversee everything online, including making grants and researching charities. This makes a nice alternative to private foundations and gives you the option to donate anonymously or be recognized for your gift. We have more information available if you are interested and will be happy to assist you if you would like to set up an account.

E-mail Address

On September 12th we sent a short message to all clients regarding the attack on the World Trade Center. The purpose of this message was to convey our heart-felt sympathy to anyone who was directly affected by this event and to let you know that our operations and those of your account custodians were not impaired. Since we did not know when the stock market would re-open, we also wanted to inform you that the vast majority of all client assets were in money market and short-term bond funds. The relatively few equity positions we had were concentrated in value and health care funds. Therefore, your portfolios were expected to be sheltered from significant negative impact once the markets re-opened. If you did not receive this email, it is because we either have no email address for you or the wrong one. In order for us to communicate with you efficiently in the future, please send your preferred email address to ccam@ccam.com if you did not receive the September 12th email.