The Bellwether (March 2012)
Bellwether is a research publication produced by students at Xavier University with the intention of providing the professional public with innovative and original ideas on current issues.
The Bellwether is a research publication produced by students at Xavier University with the intention of providing the professional public with innovative and original ideas on current issues. March 2012 Williams College of Business Mission Statement: We educate students of business, enabling them to improve organizations and society, consistent with the Jesuit tradition. IN THIS ISSUE The Xavier Bellwether Staff Contributors Sean Luke, Junior, English Major Mark Van Sweringen, Senior, Economics Major Matt O'Driscoll, Junior, Finance Major THE WORLD In This Issue Contagion: Tri-state Exposure to the Euro Crisis POLITICS AND POLICY 3 Senate Bill 5: Should Public Unions Pay the Price for Budget Issues? INVESTING 7 Ricky Garcia, Junior, Philosophy, Politics and the Public Program & Economics Major Joe Simoneau, Junior, Finance & Economics Major Curtis May, Senior, Finance Major Mark Momper - MBA, Finance Concentration Xavier Alumni Spotlight: Breen Murphy Key Banc Capital Markets Xavier Student Bond Investment Fund The D'Artagnan Capital Fund ECONOMICS 9 10 12 Indicators Bellwether Cincinnati Metro Index American Dream Index Back Cover: Upcoming Events 13 14 15 The Xavier Bellwether 2 THE WORLD Contagion: Tri-state Exposure to the Euro Crisis By : Matt O'Driscoll cally prominent countries, Greece borrowed substantial sums of money with relatively low interest rates. Greece's membership in the Euro established interest rates similar to those of Germany, a strong standing member of the European Union. Consequently, investors mistakenly believed that because Greece attained membership within the European Union that they were lending money to a stable country. This was far from the truth. In order to gain membership into the European Union, all applying countries must meet a predetermined set of fiscal policy requirements known as the Maastricht criteria. This prerequisite mandated by the European Union, allows its members to appear as secure inaccess to the European Union and its currency, the Euro, must meet five requirements. These requirements were put in place in order to maintain the integrity and strength of the European Union. The first of the five criteria requires the applying country's inflation rate to be no higher than 15 percentage points above the average rate of the three European Union member states with the lowest inflation over the previous year. The second requirement states that the applicant's national budget deficit must be at, or below three percent of the applicant's GDP. The third requirement states that the national public debt of the applying country must not exceed 60 percent of its total Gross Domestic Product. However, exceptions can be made for higher levels of public debt if the public debt is falling at a steady, planned rate. The fourth criterion requires that an applicant country's long term interest rates rise no higher than two percentage points above the long term interest rates of the three European Union countries with the lowest inflation over the previous year. The fifth and final requirement states that an applicant's current national currency must enter the ERM 2 exchange rate mechanism two years prior to entry. This program ensures the applying country's currency value does not fluctuate 15 percent above or below the Euro. Considering the Maastricht criteria, investors perceived Greece's full acceptance into the European Union as a sign of economic strength; only associating moderate risk with any investment 3 any investors believe that the continued unraveling of the debt crisis situation within Europe represents the forthcoming failure of the Eurozone as a whole, while others view it as a speed bump in its development. Speculation aside, it is evident that the problem will come to a definitive head in the coming year as controversy continues to surround the steps necessary to address an imminent Greek default. However, in order to foster a better understanding of the path ahead, it is important to grasp what led Greece into this bed of thorns. M Ten years ago, upon its entry into the European Union, Greece demonstrated strong economic growth as a result of newly acquired access to use of the Euro. In accordance with the actions of other economi- vestments. However, in this particular instance, the Maastricht criteria influenced investors to assume a certain level of Greek stability, and therefore resulted in lower bond rates. According to the Maastricht criteria, a country vying for The Xavier Bellwether THE WORLD in Greek debt. However, investors were essentially buying high risk bonds without the increased rate of return. In actuality, the Greek government had falsely reported and mismanaged their government expenditures, thereby misguiding the European Union into allowing a financially unstable country into their economic confederation. To further compound the inevitably combustible problem, investors bought bonds on the false pretense that any involvement with the European Union translated into economic stability and prominence. Today, the repercussions of this series of events are becoming evident. Investors now realize the risk associated with investing in Greek bonds, and have begun to panic as probability of a default looms in the near future. he prospects of a clear and simple solution are slim at best. The Greek government has publically owned up to their mistakes, which in turn allowed the rest of the world to recognize their own faults in their loan practices. Greece, as well as the rest of the world, has realized they were using their loans in irresponsible, unchecked ways. As a result, Greece has accepted loans from the IMF/ECB in the ballpark of 750 billion in hopes of righting the ship. As the interest rates on previous bonds continue to escalate along with the negative market sentiment, Greece has begun to take on new loans in order to pay off those previous bonds, further exacerbating the present problem. The Greek government recently implemented austerity measures that cull government spending in an attempt to curb the effects of previous fiscal irresponsibility. P.I.I.G.S Sovereign CDS Rate 10000 9000 8000 6000 5000 4000 3000 2000 1000 0 7000 8-2011 2-2011 5-2011 12-2010 Portugal Italy Ireland 11-2011 Greece T However, many investors believe that this may be too little too late. Greece now carries a junk bond rating, CCC (S&P), the lowest of any rated country, and Greek bond rates have reached unprecedented low levels. With each day, the possibility of a Greek default transitions to a question of when, rather than if. Needless to say, confidence is a now a word seldom heard in the same sentence as Greece. As the credit crisis continues its plague-like circulation to other Eurozone countries, namely Ireland, Portugal, Spain, and Italy, Greek citizens rampantly participate in numerous protests and riots over the recently passed austerity measures; exacerbating an international crisis. After recognizing that the Greek debt crisis is not something restricted by geographical borders, other Eurozone countries proposed and implemented austerity measures of their own. Investors have come to realize that haircuts are going to happen, but the debate is over who will get them. The road forward is anything but clear, comparable to an oncoming winter storm, encompassing the entire The Xavier Bellwether world, forecasted to dump anywhere from 1 to 17 inches of snow. Risk aversion is the top priority of many investors during this crisis, and with the only certainty being an eventual Greek default, many investors have cut their losses and pulled their investments. Although many people feel this problem will remain overseas, the United States has been, and will continue to be affected by the external ramifications of the Greek sovereign debt crisis, as seen in the recent volatility of the United States' equity markets. The equity markets traditionally function through the natural ebb and flow of price fluctuation dependent upon all known public information. However, recent history has proven this historically accurate pricing model to be insufficient. The markets generally function in correlation with European news; an entire day of positive market action can be erased by one piece of bad news regarding the European crisis. In a sense, European news now serves as the foremost indicator of overall market sentiment, not the analysis of 4 1-2012 Spain Rate (bps) THE WORLD public information. This interdependence between the European Union and the United States significantly affects the wallets of investors, further solidifying the realization of a truly international marketplace. Considering the dire situation in Europe, this intertwined economic relationship does not necessarily set up investors for a bull-market run. In fact, while the United States citizens experience declines in the values of their portfolios, so too do our European counterparts, and until a solution arises, this trend will likely continue. In response to the devaluation of equity holdings, typical American citizens will perceive themselves to be less wealthy. Although the actual value of an equity holding is not realized until its liquidation, the owners of those 401k's, money market accounts, and mutual funds perceive their own wealth to be less when the annual report is in the red. This is known to economists as the wealth effect. Unfortunately, the perception of less personal wealth contributes to more financially conservative practices during uncertain times, practices such as: decreased consumer spending and decreased housing starts, which could ultimately contribute to the possibility of a double -dip recession as the trickle-down effects take hold. The manifestation of the self-imposed fiscal constraints upon personal spending and economic putridity further reiterates the argument that the European financial crisis significantly affects the spending habits of Americans. This series of events would undoubtedly increase the unemployment rate in America as employers scale back operations due to the decrease in consumer spending. Families would also suffer greatly, in all cities, including Cincinnati, as a result of the present correlation between United States equities and European wellbeing. n addition to the devaluation of equities, the United States may also see a reduction in their exports to countries of the European Union. Currently, the EU imports approximately 170 billion Euro, or roughly 221 billion dollars worth of goods, from the United States. Although it is not a large portion of the United States' GDP, this reduction in exports may impact manufacturing across the country. Although minute in comparison to the GDP of the United States, Cincinnati's GDP, which currently rests at slightly over 100 billion dollars, ranked 173rd out of 366 MSA's in 2011. However, while the scale of its economy is smaller than the United States, Cincinnati has not remained immune to the reduction in exports to European Union countries. As demand continues to fall, manufacturing plants are forced to scale back their production and corporate offices are rightsized. One of Cincinnati's major players, Proctor and Gamble, I serves as a prime example. While their market share of Western European countries has grown significantly in the past five years, the wallets of their Western European customers have not. Proctor and Gamble could see decreases in sales from that market. Eventually, this decrease in sales will result in declines in manufacturing and corporate cut-backs, further resulting in a reduction of local jobs and buying power. Similar to the national-scale implications the European debt crisis imposes upon the United States, a small economy like Cincinnati's will experience proportional reductions in consumer spending, housing, and other sectors. These transitively distributed crises effects could effectively squeeze the liveliness out of Cincinnati's competitiveness. Perhaps the most foreboding of all possible situations is the transfer of financial ailing from Europe to the United States. The United States, in the near future, may have to help in the bailout of European Union countries through loans to the European Central Bank (ECB). In the event of a European fallout, surely all countries will 10-year Sovereign Bond Yields 30 25 20 15 10 5 0 9-2008 4-2009 3-2010 11-2010 10-2011 2-2008 5-2008 1-2009 8-2009 12-2009 7-2010 2-2011 6-2011 1-2012 Portugal Source: Bloomberg LLC. Italy Greece Ireland* Spain USA The Xavier Bellwether Bond Yield (percent) 5 35 THE WORLD have to help. However, it is possible that our future loans to the ECB would never be fully reimbursed. With respect to current bond yields, investment in EU bonds are considered a "high-risk" investment. Not surprisingly, many American financial institutions have already dumped the EU bonds from their balance sheets understanding the inherent risk involved. A European default on bonds purchased by the United States and United States companies could prove to be debilitating to the American economy. Due to necessity, the investment in risky European bonds could be enough to warrant a downgrade by the ratings agencies. If Moody's were to downgrade United States bonds, United States' bond rates would increase. In effect, the United States would take a turn down a road similar to that of the EU. This snowball effect could lead the federal government and both privately and publically held companies towards higher borrowing rates in the United States, which would inevitably cripple our already capricious economy and likely increase the volatility expressed before in regards to the equity market. The spread of financial distress from the EU to America like the contagion of flu during the winter months. A son has the flu, then four days later the mother caring for him becomes infected with the same virus. However, the scenario of global economic uncertainty does not radiate the same level of innocence as the flu example. Imagine what happens when European problems become U.S. problems. How far down the line does the virus spread? Will China or India be affected farther out on the time horizon? The truth remains to be seen. The fear of the debt crisis spreading beyond the borders of Europe is substantial and well founded, and the overall market volatility is the response to that uncertainty. Franklin D. Roosevelt found himself immersed in a similar situation during the United States' last great economic slump. He supplied the American people with something they seem to have lost, hope. "The only thing we have to fear is fear itself - nameless, unreasoning, unjustified, terror which paralyzes needed efforts to convert retreat into advance." Proctor and Gamble Sales by Geographic Region Asia 16% Latin America 9% North America 41% Central and Eastern Europe/Middle East/Africa 14% Western Europe 20% Source: http://annualreport.pg.com/annualreport2011/financials/ The Xavier Bellwether 6 POLITICS AND POLICY Senate Bill 5: Should Public Unions Pay the Price for Budget Issues? By : Ricky Garcia common feature of many recent government interactions is the almost certain disagreement between Democrats and Republicans, and as we move closer to the upcoming Presidential Election, we can only expect this increasing trend of discrepancy to continue. By nature, both Democrats and Republicans differ in their ideologies and values not because both sides are wrong in their opinions, but rather because they maintain different visions for future direction. This difference of opinion and the utilization of rational-critical discourse as a means of striving for a more successful future is what modern democratic society was founded upon. As a result, debate over the effectiveness and proper implementation of legislations has become a fixture of political life. Senate Bill 5 proved to be no different. In the months preceding this most recent election, Senate Bill 5 and the debate regarding its enactment, claimed the attention of numerous Ohioans. However, with its repeal on November 8th, 2011 as a result of the rejection of Issue 2, this extremely polarizing topic seemed to reach a solution. In an attempt to address the issues of Ohio's state budget, Governor John Kasich and the Ohio Legislature passed Senate Bill 5 in March of 2011. By reducing the collective bargaining power of union workers and eliminating some of the costs incurred by the state government (i.e. automatic pay raises due to seniority, payment of full insurance premiums, increasing paid leave, etc...) A the proponents of the bill believed its passage would relieve the state government of some of its fiscal burdens. With hopes of either legitimizing its previous codification or justifying a possible repeal, Republicans and Democrats repeatedly participated in heated arguments in attempts to validate their particular viewpoint on this piece of legislation. The bill, which was often depicted as a Republican attempt to disband unions en route to making them illegal altogether, outraged Democrats. Issue 2, a referendum that sought to overturn Senate Bill 5, ultimately delayed the implementation of SB 5 until it was voted on this past Election Day, November 8th, 2011. On Election Day, despite the efforts of governor Kasich and many members of the Republican Party, the growing outrage directed towards Senate Bill 5 culminated in the rejection of Issue 2 by a margin of 61.3% to 38.7%. This thereby permanently overturned the previous decision from March of 2011. With the repeal of Issue 2, discussion now turns to a variety of other questions regarding the action Governor Kasich and supporters plan to take in order to address the problems the repealed legislation intended to fix. Also, as popular support within the political system seems to continue its perpetual flip-flopping, questions also arise regarding implications upon this year's coming election. Questions such as: What effect does this revocation have upon Governor Kasich's plan to handle the state budget? What sort of contingency plan might the GOP utilize in order to target many of the areas that Senate Bill 5 addressed? What sort of implications does the repeal of this bill have upon the Republican Party moving forward into 2012? How might the Democratic Party (the primary opposition to Senate Bill 5) address some of the issues that Senate Bill 5 intended to fix? If Senate Bill 5 had remained in place with the passing of Issue 2, the bill would have affected roughly 359,000 Ohio government workers in a variety of ways, namely; increases in personal payment of insurance premiums, diminished number of automatic pay raises due to seniority, and limitations upon increasing paid leave. According to Kasich and other Senate Bill 7 The Xavier Bellwether POLITICS AND POLICY 5 supporters, the budget issues within Ohio are partially exacerbated by these fiscal obligations, and by implementing Senate Bill 5, the state government hoped to alleviate some overbearing government expenditures and thereby generate a budget surplus in hopes of paying off the deficit. However, despite the numerous assumed benefits associated with Senate Bill 5, many members of the Democratic Party, including President Barack Obama, greatly opposed its implementation citing support for the middle class and a desire to maintain the benefits earned by many unionized employees. The question now is not whether the bill will remain in place as voters responded to that question with an astounding "no." Rather, the question necessitating the most immediate response addresses the course of action to be taken by the Ohio state government in order to provide solutions to the budget problems within Ohio; problems Senate Bill 5 intended to resolve. With the overturning of one of the central pieces of legislation to between opposing political parties, another proposal will likely maneuver its way into the topic of discussion. But will next year's election simply be more of the same "flip-flopping" of popular support that we have seen in the past few years? Or will one party rise to prominence and present a plan that both parties can agree upon? As we move closer to the upcoming Presidential Election the focus will undoubtedly shift toward issues of national importance and various global crises. However, it is imperative that we do not ignore the state and municipal issues at hand. This new year will prove to be pivotal in the future developments of the nation's economy and political outlook, but the change conducted on the state level is something that citizens could experience in the immediate future. While this year's election will surely boast a variety of issues that must be addressed, the issues of Kasich's plan will continue to be a focal point of discussion throughout Ohio. Any future legislation will ultimately depend upon the support of the public come Election Day, and if past elections serve as any indicator, your guess is as good as mine. "The object in business is not to make others comfortable, but to make them successful." - Laurel Cutler Governor Kasich's platform, many are beginning to question whether or not this repeal foreshadows events in next year's election. (i.e. yet another shift of support from one party to another takes place; something that has been the norm in past elections). Despite the debate regarding the different ideologies of each party, and the questions of support for one party or another, the issue at hand is obvious: The Ohio state budget deficit must be corrected. The concern voters showed by going to the polls in droves this November to dismiss Issue 2 demonstrates their concern. However, the problem will remain unsolved unless a plan with support from both political parties comes to the forefront. While the Republican Party took step back, the moral victory for the Democratic Party has not yielded any solutions thus far. In the upcoming year, as tensions begin to mount The Xavier Bellwether (American businesswoman) 8 INVESTING Xavier Alumni Spotlight Breen Murphy - Associate at KeyBanc Capital Markets By Sean Luke Breen Murphy graduated in December 2007 and joined KeyBanc Capital Markets in 2008 as member of the Debt Capital Markets team and Leveraged Finance group. He went on to join the High Yield trading desk in New York where he is responsible for credit analysis to facilitate trading on the desk. how to use them. Ultimately, I always find myself learning on the job and I continually find myself trying to move up the learning curve as all young professionals do. Xavier does a wonderful job of challenging students to think critically and develop the skills necessary to be an effective and positive force in the business community. Could you discuss how your involvement in organizations like the Student Investment Fund impacted you? My involvement in the Xavier Student Investment Fund provided me with an edge, plain and simple. When I was at Xavier, the undergraduate XSIF was the Fixed Income portfolio that is currently managed by the MBAs. The opportunities that I was afforded as a member of the Investment Fund helped to set me apart from my peers in the search for a job, particularly amid a tumultuous job market. This experience gave me a leg up in the earliest days of my career and I feel my fixed income experience was something unique relative to other undergraduates. Was there a particular class, professor, or experience at Xavier that you feel is responsible for having a substantial impact on your career? Dr. Staff Johnson did a remarkable job educating our group on the fundamentals of fixed income and we were always presented with exciting opportunities to apply our budding skills. The chance to interface with the team at Fort Washington and the ability to develop skills on the Bloomberg terminal was invaluable to enhancing my marketability. What advice would you give to students weathering the storm that is the job market? The best advice I can give is to build and leverage your network and be aggressive in your job search. Xavier sets its students up to succeed, but it is incumbent on each student to meet and network with as many people as possible to provide yourself with opportunity. It's also important to be aggressive in your job search, i.e. don't be afraid to pick up the phone or meet people for coffee or lunch. 9 What was the most challenging aspect of your Xavier career and how do you feel that has prepared you for your present career? Xavier challenged me to set "stretch goals." I found Xavier to be a great place to learn, interact and develop because it provided the framework to reach beyond an average college experience. Because Xavier provides students with so much opportunity, it rests on the student to exercise the options available and make the most of one's college career. In doing so, I learned to treat my career similarly by setting stretch goals which makes achievement that much more gratifying. Do you feel that your career path would be different if you had attended another university? In other words, Xavier prides itself on its Jesuit identity. Do you find yourself equally focused upon your personal and professional growth? I am very proud that I went to a Jesuit university. The philosophical and theological ideals of the Jesuit tradition are the underpinnings of my education and therefore are crucial to my makeup as a young adult. I feel that as I continue to learn and grow I try to reflect on becoming a more engaging and compassionate person in addition to striving to be successful. Did you feel that Xavier presented you with an adequate reflection of the demands of the business world or do you find yourself learning as you go? Xavier gave me the tools to succeed and showed me The Xavier Bellwether INVESTING Position Corporation TARGET CORP APACHE CORP WELLS FARGO CAP XI FEDERAL NATL MTG ASSN DUKE ENERGY CAROLINAS LLC GENERAL ELECTRIC CO DU PONT E I DE NEMOURS & CO FEDERAL HOME LN BKS NEW YORK LIFE GBL FDG M 144A US BK NATL ASSN MINN SUB MTN CBS CORP NEW CAPITAL ONE FINL CORP INTL PAPER CO FEDERAL HOME LN MTG CORP CITIGROUP INC FEDERAL NATL MTG ASSN VERIZON GLOBAL FDG CORP FNMA POOL - AH2711 SBC COMMUNICATIONS INC FNMA POOL - AH0524 CENTERPOINT ENERGY INC FWIA HY LLC(U) TEVA PHARMACEUTICAL FIN CO B CVS CAREMARK CORPORATION KRAFT FOODS INC UNITED STATES TREAS BDS GOLDMAN SACHS GRP INC MTN BE FEDERAL HOME LN MTG CORP UNITED STATES TREAS NTS BANK AMER CORP UNITED STATES TREAS NTS CONOCOPHILLIPS FEDERAL HOME LN MTG CORP DOMINION RES INC VA NEW CANADIAN NAT RES LTD UNITED STATES TREAS BDS Coupon 5.875 6.250 6.250 5.250 5.625 5.000 5.000 4.000 5.375 6.300 8.200 7.375 7.400 3.000 5.500 5.000 4.900 4.000 5.625 4.000 5.950 7.990 2.400 5.750 6.125 9.125 7.500 3.750 2.750 5.000 3.125 5.900 6.250 5.950 6.250 4.375 Maturity 03/01/2012 04/15/2012 06/15/2067 08/01/2012 11/30/2012 02/01/2013 07/15/2013 09/06/2013 09/15/2013 02/04/2014 05/15/2014 05/23/2014 06/15/2014 07/28/2014 10/15/2014 04/15/2015 09/15/2015 01/01/2041 06/15/2016 12/01/2040 02/01/2017 06/29/2014 11/10/2016 06/01/2017 02/01/2018 05/15/2018 02/15/2019 03/27/2019 02/15/2019 05/13/2021 05/15/2021 10/15/2032 07/15/2032 06/15/2035 03/15/2038 05/15/2041 Xavier Student Bond Investment Fund 20 40 1,200 20 20 15 25 20 25 20 40 40 20 50 Pictured: Fund Professor: Mary Beth Shagena, Student Mangers: Rank Dawson, Robert Kuhnhein, Hamir Mahajan, Chris Robbins, Mike Deye. avier Student Bond Investment Fund manages a portion of the Xavier University Endowment as a fixed-income fund. The Fund seeks total return benchmarked against the Barclays U.S. Government/Credit Index. The primary investments of the fund are investment grade corporate credits, U.S. Treasuries and agencies. The secondary investments are Treasury Inflation Protected Securities (TIPS), taxable municipals, dollardenominated sovereign credits, agency pass throughs, floating rate notes, preferred stock and the Fort Washington High Yield Fund, LLC. The primary objective of the Fund is to provide preservation of capital with an emphasis on long-term growth of capital, without undue exposure to risk. Strategy The strategy is to lower the overall credit quality of the portfolio by selecting corporate credits that have higher yields than current holdings and greater potential for narrowing spreads. In August, the fund managers had no strong conviction on the direction and magnitude of changes in interest rates, and therefore decided to remain duration neutral. The fund managers agreed upon the following strategy (for the fall): 1.Purchase corporate credits that would result in a portfolio credit rating of Moody's A2. 2.Execute trades in corporate issues that are lower quality and higher yield than current holdings. 3.Select credits with improving fundamentals and high potential for upgrade by ratings agencies. Currently The portfolio has a higher exposure to corporate credits and a lower exposure to U.S Treasuries than the benchmark. The portfolio has direct exposure to the mortgage backed security marked, and the benchmark does not. The portfolio rating is A1 compared to benchmark Aa2. Portfolio duration is slightly longer and coupon rate is slightly higher than the benchmark. 25 15 20 47 15 47 25 135 50 15 30 20 30 20 65 20 35 25 15 20 25 120 X XSBIF August Credit Rating (Moody's) Coupon Rate Average Life Market Value Yield to Worst Modified Duration Effective Duration AA3 5.3 8.104 2.72 6.08 5.78 November A1 5.424 9.048 3.101 6.509 6.154 Barclays August Aa1 3.79 8.12 N/A 1.95 5.75 5.94 November Aa2 3.689 8.262 N/A 2.02 5.853 5.967 10 $1,350,000 $1,339,000 The Xavier Bellwether INVESTING Xavier Student Bond Investment Fund Investment Fund Cont. XSBIF Benchmark Performance 1.96 1.38 58 The Xavier Bellwether 11 INVESTING Portfolio Allocation Cash Financials 0.51% 11.77% Health Care 9.44% Consumer Staples 8.42% Consumer Discretionary 7.67% Industrials 12.56% Energy 12.85% Utilities 2.85% Telecom 2.99% Materials 3.18% Information Technology 27.77% T he D'Artagnan Capital Fund is an opportunities fund which seeks to position itself in undervalued stocks in the marketplace utilizing a bottom-up approach. Our analysts extensively research company financials, management, and industry competitors in formulating financial valuation models which lead to investment decisions. Our goal as a fund is to continuously outperform our benchmark � the S&P 500 � on a risk-adjusted return basis while remaining compliant in accordance with our prospectus. Portfolio Weight 9.44 8.42 7.67 3.18 27.77 2.99 2.85 12.85 12.56 11.77 Benchmark Weight 11.51 11.83 10.92 3.67 18.81 2.97 3.24 11.62 11.06 12.15 Portfolio Return 0.51 1 -4.94 -3.75 -1.4 -1.13 -3.84 -1.32 -4.11 -1.29 Benchmark Return 1.27 3.68 -1.55 0.42 -1.7 0.71 1.15 1.65 1.42 -4.35 Contribution Portfolio 0.06 0.1 -0.39 -0.12 -0.42 -0.03 -0.11 -0.16 -0.53 -0.15 Contribution Benchmark 0.16 0.45 -0.18 0.02 -0.36 0.02 0.04 0.19 0.16 -0.56 Sector Health Care Consumer Staples Consumer Discretionary Materials Information Technology Telecommunication Services Utilities Energy Industrials Financials Allocation Underweight Underweight Underweight Overweight Overweight Underweight Overweight Underweight Overweight Overweight Top 5 Performers PHILIP MORRIS INTERNATIONAL IN QUALCOMM INCORPORATED Weight 1.95% Return 9.12% Contribution 0.15% Worst 5 Performers GENERAL MOTORS COMPANY JPMORGAN CHASE & CO CHESAPEAKE ENERGY CORP PG&E CORPORATION PEABODY ENERGY CORPORATION Weight 2.82% Return -17.64% Contribution -0.58% 2.45% 6.62% 0.14% 1.83% -10.90% -0.22% MCDONALD'S CORPORATION CATERPILLAR INC. EXXON MOBIL CORP 4.85% 2.25% 1.73% 3.65% 3.62% 3.62% 0.19% 0.08% 0.06% 1.41% 1.25% 0.71% -9.89% -9.46% -9.35% -0.15% -0.12% -0.08% The Xavier Bellwether 12 ECONOMICS Employment Statistics Unemployment Rate Latest Previous Cincinnati Ohio Midwest National 7.7 8.1 7.9 8.5 7.8 8.5 8.2 8.7 % Change YoY -1.40% -1.40% -0.80% -0.80% Mass Layoff Events Latest -107 743 2,433 Previous -87 565 1,931 % Change YoY -23.00% 31.50% 26.00% 11.6K 78.1K 263.7K 7.8K 58.6K 184.1K 1.40% 33.32% 43.20% Latest Initial Claimants Previous % Change YoY Unemployment: Since October, Cincinnati's unemployment rate decreased. Ohio recorded the fifth highest number of layoffs in December and was among twenty-nine other states that experienced an increase in initial unemployment claims. In December, Ohio recorded 11,550 initial claims, an increase of 1.4% YoY, well below the national average. Are we at a housing bottom yet? After post recession lows in July, Latest reports indicate existing home sales have shown signs of improvement in the last few months. U.S. total sales rebounded from post-recession low of 3.3 million. Ohio total sales of existing homes have rebounded from their postrecession low of 190 thousand and appear to be relatively stable. Purchasing Manager Index: The Purchasing Manager's Index is a composite of 5 survey indices: New orders(30%), Output(25%), Employment(20%), Supplier's delivery times (15%), and Inventory(10%). Comparing Cincinnati PMI to the national PMI indicates that purchasing managers in Cincinnati are relatively more confident about the economy: Cincinnati Purchasing Managers grow less optimistic as PMI trends down toward the national average. Housing Statistics Existing Home Sales SAAR (Units/Millions) Latest Previous Midwest National 1.04 4.61 0.94 4.39 % Change YoY 9.47% 3.60% New One-family Home Sales SAAR (Volume/Thousands) Latest 52 307 Previous 54 314 % Change YoY 36.84% 7.82% New Housing Starts SAAR (Volume/Thousands) Latest 144 657 Previous 93 685 % Change YoY 121.54% 56.06% Cincinnati PMI vs US PMI National PMI 80 Cincinnati PMI 50 20 Source: Institute for Supply Management Price Statistics Latest Previous % Change CPI - Urban Non-SA Midwest B/C Size, 1996=100 National, 1982-84 = 100 138.186 225.67 138.453 226.23 2.92% 2.96% Prices: Consumer prices increased approximately 2.92% YoY in Cincinnati, compared to the national average of 2.96%. Prices have been relatively flat since October. CPI less food and energy increased by 2.2%. Largest 1-year change in prices by category: Food and Beverages +4.5% Apparel +4.6% Transportation +5.2% Medical Care +3.5% Commodities +2.7% Single largest YoY price changes were recorded in Fuel oil and other fuels (+14.3, Gasoline (+9.9%), and Personal Computers and peripheral equipment (-12.5%) May-07 May-08 May-06 May-09 May-10 May-11 Feb-07 Feb-08 Feb-06 Feb-09 Feb-10 Aug-06 Nov-06 Aug-07 Nov-07 Aug-08 Nov-08 Aug-09 Nov-09 Aug-10 Nov-10 Feb-11 The Xavier Bellwether Aug-11 13 ECONOMICS Bellwether Cincinnati Metro Index Xavier Bellwether Cincinnati Metro Index is an index comprised of publicly traded companies headquartered in Cincinnati as of. January 3, 2011 = 1000. Since January 3rd, the Bellwether index gained 3.7% to end at 1037. Zoo Entertainment was delisted by NASDAQ in early December for failure to maintain a minimum of $2.5 million in shareholder's equity, The company rebounded back 37%. The company experienced problems transitioning to an all-digital business model. Chemed Corporation posted a 15% YTD gain amidst concerns of pending litigation against a Texas subsidiary. P&G decreased 5.1%. The company recently announced intentions to lay off approximately 1,600 employees globally, primarily in marketing. This comes as P&G continues transition from traditional advertising into the digital arena. P&G CFO John Moeller indicated reduced EPS expectations reflect unfavorable currency trends and cost inflation. Company American Financial Group Inc/OH AK Steel Holding Corp Ashland Inc Air Transport Services Group Inc General Cable Corp Bank of Kentucky Financial Corp Cincinnati Bell Inc Ceco Environmental Corp Chemed Corp Cheviot Financial Corp Cincinnati Financial Corp Cintas Corp Convergys Corp First Financial Bancorp Fifth Third Bancorp Frisch's Restaurants Inc HealthWarehouse.com Inc Hillenbrand Inc Hill-Rom Holdings Inc Kroger Co/The Multi-Color Corp LCA-Vision Inc LCNB Corp LSI Industries Inc Macy's Inc NB&T Financial Group Inc Omnicare Inc Procter & Gamble Co/The EW Scripps Co Streamline Health Solutions Inc United Community Bancorp Meridian Bioscience Inc Bank of Kentucky, First Financial Bancorp and Fifth Third Bancorp post gains of 19.9%, 7.7% and 4% respectively after posting strong Q4 earnings. Bank of Kentucky Q4 profits increased 37%. LCA-Vision Inc. shares increased 81.4% in January after announced 30% increase in Q4 earnings. Lawrenceburg KY company General Cable posted gains after disappointing Q2 and Q3 earnings. Valley Forge Composite Technologies Inc Zoo Entertainment Inc Last Price $37.90 $9.57 $64.13 $6.34 $32.62 $24.15 $3.53 $6.35 $57.28 $8.15 $33.21 $37.82 $13.39 $17.89 $13.14 $21.01 $6.05 $23.90 $33.91 $23.83 $22.88 $5.11 $12.70 $7.23 $33.99 $20.90 $33.11 $63.21 $8.75 $1.65 $5.91 $17.75 $0.60 $0.67 Market Cap 52 Week High % Change YTD 3,697,366,455 $38.00 1.5% 996,879,822 5,045,238,281 408,761,200 1,675,246,094 178,614,868 724,411,621 91,888,290 1,158,892,456 62,674,393 5,356,700,684 4,842,924,805 1,610,152,832 1,044,110,474 12,168,668,945 105,645,355 61,103,153 1,465,639,038 2,106,663,574 13,777,214,844 362,164,154 99,148,514 85,064,369 171,366,501 14,790,371,094 70,484,756 3,737,817,383 174,408,562,50 0 503,817,139 17,297,773 44,767,796 740,624,451 34,757,481 8,024,438 $17.88 $69.46 $8.65 $49.32 $26.00 $3.72 $8.05 $72.25 $11.09 $34.33 $38.22 $15.00 $18.25 $15.75 $24.39 $6.90 $24.20 $48.80 $25.85 $28.00 $7.79 $14.22 $8.91 $35.92 $24.00 $35.87 $67.72 $10.20 $2.19 $8.13 $27.37 $1.75 $5.52 Raw BETA ALPHA(Intercept) R^2(Correlation^2) R(Correlation) Std Dev of Error Std Error of ALPHA Std Error of BETA t-Test Significance Last T-Value Last P-Value Number of Points 9.4% 12.7% 35.2% 28.3% 19.9% 22.1% 14.4% 13.8% -5.0% 8.5% 7.2% 4.9% 7.7% 4.0% 10.3% 4.2% 5.1% 1.0% -1.0% -12.7% 81.4% -1.9% 18.8% 9.5% 4.6% -5.1% -5.1% 9.7% 0.1% 3.3% -4.7% -24.8% 37.0% 1.041 -0.011 0.915 0.957 0.448 0.027 0.019 53.994 0 -0.049 0.481 273 The Xavier Bellwether 14 ECONOMICS Bellwether Cincinnati Metro Index continued Bellwether Cincinnati Metro Index Asset Allocation Utilities Energy Telecommunication Services Materials Information Technology Industrials Health Care Financials Consumer Staples Consumer Discretionary 10.78% 3.46% 12.07% 2.70% 0.54% 3.61% 10.72% 19.96% 10.85% 11.40% 14.31% 2.10% 16.39% 21.89% 21.74% 12.74% 13.87% 10.85% 0% 5% 20% 10% 15% S&P 500 Bellwether Xavier American Dream Index Xavier American Dream Index (January 2012) Latest Previous % Change American Dream Composite Economic Index Well-Being Index Societal Index Diversity Index Environmental Index 64 62 69.5 52.8 73.5 67.9 63.04 60.87 68.29 51.92 73.32 69.56 1.46% 1.86% 1.74% 1.77% 0.29% -2.33% T he American Dream Composite IndexTM (ADCI) is a monthly quantitative index that measures how we, as a nation, are doing in terms of our American Dream. It is the most robust measure of American sentiment that captures the essence of Americans' aspirations. The ADCI predicts behavior and attitudes of Americans in multiple arenas including the workplace and the economic marketplace. Every month, in addition to collecting our standard specific Index data, the American Dream Composite IndexTM probes further, with several follow-up snapshot questions to add to the Center's ongoing research. These "eye-opening" snapshots provide a unique look at a particular current aspect of the American Dream. http://www.xavier.edu/americandream/programs/composite-index.cfm The Xavier Bellwether 25% 15 Upcoming Events William Wagner: Tuesday, February 28, 2012; two lectures. "The Devolution of Tolerance: Stages in American Constitutional Law," 3:00 pm in CLC 412. "Diversity: Justice's Root, Branch, or Flower?" at 7:00 pm in the James and Caroline Duff Banquet Center at the Cintas Center February 29, 2012 MBA students compete on behalf of Xavier University Williams College of Business in the 2012 Cincinnati Association for Corporate Growth (ACG) Cup. March 1, 2012 MBA students compete on behalf of Xavier University Williams College of Business in the 2012 CFA Research Challenge. Waheed Hussain: Monday, March 12, 2012; The Schiff Family Conference Room in the Cintas Center, 7:00 pm. Professor Hussain teaches legal studies and business ethics at the Wharton School of Business. He writes on the intersection of morality and public life. He will lecture on Islam and modernity. Williams College of Business Distinguished Speaker Series, Ms. Amity Shlaes: "Tricked Again: How Financial Crises Provide the Pretext for Preposterous Government Expansion," March 13, 2012 at noon in the Duff Banquet Center at the Cintas Center Peter Huff, Ethics/Religion & Society Besl Chair, Monday, March 19, 2012: 7:00 pm in 412 CLC. Professor Huff will speak on "Atheism and the Unfinished Business of Vatican II." 3800 Victory Parkway Cincinnati, Ohio 45207 513.745.3000 ph