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Is college education worth the cost? Politics at the pump Form-based code: zoning for the future

Will water be the next tradable commodity?


The Bellwether Staff

Pictured left to right: Rosalynd Erney, Sean Cahill, Will Coughlin, Matt O’Driscoll, Rick Garcia, Mark Momper

Letter from the Editor — Rick Garcia Creating a mission statement is never an easy task; however, the object of a mission statement is fairly simple. While it should be something purposeful and significant, it most importantly must project organizational ideals and vision. Our objective as an organization is to produce a multi-faceted student publication for the public. In order to fulfill that vision we draw our staff from a variety of different disciplines. A publication like The Bellwether provides students the opportunity to couple education with practical experience. Utilizing a more holistic view of the global marketplace allows us to embody the interdisciplinary ideals of a Jesuit education. Over the course of our first year of operation, we came to understand the necessity of implementing structure, but also establishing a foundation that allows for future growth. While our staff will undoubtedly change in upcoming years, the underlying principles behind this organization will not. In each subsequent issue we will continue to personify this statement and project the ideals that we adopted as we created this new publication.

The Bellwether Mission Statement The Bellwether’s mission is to provide original interdisciplinary financial, economic, and political analysis to the public in a publication that grants students the opportunity to enhance their understanding of the global marketplace through active research and participation.

The Xavier Bellwether

Staff Writers Sean Cahill Will Coughlin Rosalynd Erney Rick Garcia Matt O’Driscoll Mark Momper, MBA

Contributors Jenna Haverkos, MBA Mark Hoeck Curtis May Joe Simoneau

Editors Rick Garcia Matt O’Driscoll Mark Momper

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In This Issue The World The Value of College Education

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Markets

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Thirsty? A Market for Water

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Is Hedge Fund Regulation Enough?

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Insider Trading: Playing Devil’s Advocate

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Politics and Policy Politics at the Pump

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Creating Urban Form in the Queen City: Zoning for the future

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Book Review The Forgotten Man: A New History of the Great Depression

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Alumni Spotlight Interview with Paul Tomich

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Investments Xavier Student Bond Investment Fund

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D’Artagnan Capital Fund

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Bellwether Cincinnati Metro Index

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The American Dream Composite Index

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Economic Indicators

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Volume 1 Issue 2

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The World

The Value of a College Education Rick Garcia

In

today’s increasingly globalized marketplace many financial experts have noted an unprecedented level of economic interconnectedness between European countries and the United States. Similarly, both the United States and Europe have exhibited dramatic increases in enrollment in institutions of higher education causing a more fervent examination of the differing effects higher education has upon the general levels of employment within Europe and the United States. In light of recent political and economic discussions, many people question the inherent value of post-secondary education, commonly perceived as a necessity for success. The Mileuristas, a demographic of recent college graduates equipped with various degrees and quality work experience, have been unable to earn more than ₏1,000 a month. Found in all parts of Europe, but specifically Spain, these Mileuristas have created great unrest. With the onset of the most recent recession many people

assumed that the United States was following down the same path as the Europeans. An increasing number of students attending college and pursuing their education even beyond undergraduate degrees, in conjunction with perceptions of an extremely volatile job market, seemed to parallel the Spanish situation. Many experts argue against emphasizing postsecondary education. This parallel also raised questions regarding the value of a college education in the United States. Does a college education really provide the same benefits it did shortly after the conclusion of World War II, when the education boom first took flight? Are people better served pursuing a trade or skilled labor positions rather than investing massive amounts of time and money into their education? With outstanding student debt recently surpassing the trillion dollar mark for the first time in history, what outlook is there for recent college graduates? More specifically, how are the students at schools like Xavier University and the University of Cincinnati affected, and what is the outlook for their future employment status? With the conclusion of World War I, Europeans found themselves avidly searching for a source of stability. With the defeat of the Third Reich, much of Europe experienced economic destabilization. This ultimately forced the new governments The Xavier Bellwether

within Europe to quickly find ways to provide stability. Although stabilizing the economy and political system posed a daunting task, with the assistance of Western countries such as the United States, the effects of reinvigorated economic development soon spread to other facets of life, namely postsecondary education. As American consumer lifestyle grew in popularity, European citizens realized that education could grant them the opportunities to obtain employment in fields paying higher salaries and providing greater economic achievement. Many post-war European governments saw the potential economic benefit associated with increased investment in education as well as its ability to establish a sense of stability to society. Shortly after the conclusion of World War II, the United States expanded the public education system, recognizing the benefits that an increasingly educated public could provide to a population that still had the Great Depression in its memory. The expansion of the higher education system would help create better trained managers and other business leaders, and in turn would propel economic development beyond previous levels. Not only would more qualified individuals receive better paying positions, but as a result of 4


The World the increased importance of education, there would also be a greater level of social mobility within society. This assumed correlation between additional post-secondary education and elevated salaries provided an appealing proposition for many individuals who had the opportunity to enroll in universities. During this time of amplified emphasis on higher education many countries altered their educational policies in order to capitalize on a newfound investment opportunity. For example, many countries modified the number of years of compulsory education, which translated into a general increase in the continuation of education. A study conducted by Giorgio Brunello, Margherita Fort and Guglielmo Weber, found that “one additional year of compulsory education is estimated to translate into 0.30 to 0.40 years of additional education or higher” beyond the mandated number of years. (Brunello, Fort, Weber 537). The United States increased spending on post-secondary education and encouraged additional enrollment within the university system. In response to a dramatic uptick in the number of enrollees at universities, the National Center for Education reported that post-secondary institutions’ spending increased from slightly over $19 billion in 1950 (in 2006-2007 dollars), to over $370 billion in 2007. Although each country altered education policies independently, the majority of these changes all occurred within

the 30 years following the conclusion of World War II, thereby centralizing the effects on the up and coming generation: “The baby-boomer generation was the group most greatly affected by these reforms in schooling: The first cohorts potentially affected by the reforms were born between 1941 and 1969, with a relative concentration between the late 1940s and the late 1950s.” (Brunello, Fort, Weber 525) As people became more highly trained due to additional post-secondary education, it became a common assumption that additional education would merit increased wages, thus granting them higher purchasing power. This established the postwar expectation that advanced education provides an everprogressing lifestyle, with a possibility of unlimited social and economic benefits. While this continues to be the perception within today’s modern society, differences in the rigidity of economies and the ability to adapt to markets have The Xavier Bellwether

contributed to vast differences between the United States and many European countries. According to Anthony P. Carnevale, the Director of the Georgetown Center for Education and the Workforce, more European students attend universities each year with hopes of following in their parents’ footsteps; however, the outlook for recent graduates is much more dim than it is in the United States. He contends that “European economies are just different than the United States. They have an insider-outsider problem within their workforce. As an established member of the workforce you are pretty well protected in a lot of the European systems, but this also reduces opportunities for newcomers (i.e. college graduates), which in turn generates the problem many recent graduates within Europe experience.” Carnevale also addresses the relationship between markets and education systems, in terms of the comparison between the European educational system and that in the United States: “Their systems are generally more rigid than ours, 5


The World and that is why they have not adapted as well as we have to the increasing value of human capital, by means of additional education. The general dialogue is that the United States could be a lot more regulated than it is, but we do not want to be anywhere close to the extent of regulation within Europe.”

less skilled and therefore lower paid workers in order to compete with less-developed countries and the United States and Britain. (Wegs and Ladrech 195)

This contradicts the basic theory behind the emphasis on post-secondary education. In its nature, an increasingly educated workforce would facilitate However, despite the production and lead to more apparent differences between both dramatic economic gains. Europe and the United States, the However, Carnevale argues that recent economic crisis has stripped the “European system has not numerous recent college graduates, adequately adapted to the market on a global scale, of the same in the way that the American opportunities their parents and system did, and the recession has grandparents had after only exacerbated problems within graduation. Contrary to the Europe. [Additionally] the employment environment American system is much more following the conclusion of the occupational in its focus than the Second World War, many recent European system.” A recent graduates find themselves either study conducted by Carnevale, unemployed, or severely Cheah, and Strohl, at Georgetown underemployed. Many scholars University, affirms that a college associate the problem of education still maintains a unemployed and underemployed significant value over a high educated youth, with the school diploma, but the declared problems in the education system major contributes greatly to the in many countries. Due to the eventual employment and wage emphasis on higher education in recent years, university populations have increased, further saturating the job market and making it more difficult for qualified students to be employed in jobs in their respective fields; creating uncertainty about the true value of a college education:

outlook. While the basic idea of economics refers back to the inevitable phenomenon of scarcity within our society, now more than ever, there is an extremely large number of highly trained graduates in comparison to a fairly small number of well-paid jobs. The scarcity of high-paying employment opportunities only further emphasizes the importance of a college education, and the additional value for those who obtain college degrees in comparison to those lacking such an education. While the unemployment rate of graduates earning a Bachelor’s degree or above are significantly lower than those of the people who do not attend college, recent trends indicate approximately 19% decrease in the real wages of college graduates now as compared to wages in the early 2000s. However, this decrease has not devalued the “college premium,” the value of attending college over ceasing education after high school. In fact, according to

According to The Economist (November 21, 1992)—some Germans fear that Germany’s highly skilled labor force will be jeopardized. The educational system has been producing too many highly skilled workers at a time when German industry wants The Xavier Bellwether

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The World Tyler Cowen, an Economics professor at George Mason University, the gap between the wages of someone with a Bachelor’s degree or higher and someone with only a high school diploma or equivalent has grown from 40% thirty years ago, to 83% today. Additionally, as of March 31, 2012, the unemployment rate for people holding a Bachelor’s degree or higher was 4.2%, while the unemployment rate for people who obtained a high school diploma but do not hold any college education was nearly 8.0%. Contrary to recent public opinion, research asserts that college education still holds significant value over the previous educational norm of a high school diploma. A college degree affords students an advantage when it comes to employment and wages, and this advantage increases with post graduate education.

is starting to go.” Accordingly, in order to better prepare oneself for the evolving marketplace, experts like Carnevale, Cheah, and Strohl emphasize the importance of general, transferable skills, such as interpersonal communication and problem solving, in conjunction with a specialized knowledge base within fields such as Business (e.g. Accounting, Economics, Finance), Engineering, Computers and Mathematics, and Health Sciences. (To read more on the study conducted by Carnevale, Cheah and Strohl check out Hard Times). While some experts adamantly oppose the idea of increased specialization, the reality is that these fields have continued to grow. and in order to find more secure employment with adequate wages, the potential workers must recognize this growth and take subsequent action.

between the European and American education systems. The focus of United States education is geared to occupations and has been better able to adapt to recessionary employment conditions, while inefficiencies in European countries have intensified during this recession. With regard to Cincinnati, for example students at Xavier and the University of Cincinnati, the job outlook for graduates is highly dependent upon a few key factors, according to Carnevale: decided major, completion of degree program, and selectivity of the school. While not an exhaustive list, these factors may explain the difference in wages and employment rates among college graduates. Different disciplines command a different wage, similar those associated with more advanced educational degrees. “It is no longer about just going to college,” as it was when the The reality in our modern The separating factor education boom originally started, economic society is that: “College between the employment outlook “it’s about what’s going on in the is the way you learn a trade in for recent graduates in Europe and labor market, and what is in America, and since college is how recent graduates in the United demand.” you get a job in America, everyone States is the primary difference

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Markets

Thirsty? A Market for Water Matt O’Driscoll

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wenty years ago the price of a barrel of sweet crude oil was approximately $20. Today, that same barrel of oil is approximately $100, depending on the news. On one hand, the average consumer has adapted habits and spending to changes in gasoline prices. On the other hand, some speculators have profited from oil price fluctuations throughout the years. The idea of speculation is not new. Investors have speculated in real estate, precious metals, technology and other commodities. Although not currently publicly traded, fresh water may become a tradable commodity in the near future. Its scarcity may have intrinsic value. According to the United Nations, about 2.5% of all water reserves on the planet are fresh water, and of that 2.5%, roughly 70% is in the form of ice. These reserves are located at the tips of mountains and at both poles of the planet, perhaps the most difficult locations for water extraction. The majority of the remaining 30% is located underground in naturally existing basins; other locations include above ground streams and lakes (but account for roughly .03% of

all fresh water reserves). The amount of potable freshwater for human consumption is about 1% of all fresh water resources, which is .0025% of all the water on Earth. The dispersion of fresh water in different countries could create a potential market similar to the current oil market. Like water reserves, accessible oil reserves are located in a small number of countries According to the CIA, the five countries with the largest proven oil reserves in the world make up 61% of the world’s total proven oil reserves. Saudi Arabia and Venezuela possess the largest proven oil reserves by country and have profited from fluctuations in worldwide petroleum demand. Last year the Saudi Arabian petroleum industry contributed 45% to GDP, while the Venezuelan industry contributed 12%. In comparison, the ten countries with the largest

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renewable fresh water reserves have slightly less than 58% of global fresh water supply. It is possible that fresh water may contribute in greater proportion to GDP for those countries in the near future. Countries possessing large amounts of fresh water could create a similar structure to OPEC in order to export water globally as demand increases. Lesser developed countries (LDC’s) with large fresh water surpluses have the potential for economic growth, should demand for fresh water increase globally. The Democratic Republic of the Congo (DROC), with the 115th largest GDP in the world, may be such an example. The DROC has 2.33% of the world’s proven fresh water reserves. In the coming decades, exports of fresh water from DROC may drive increased development of the country’s infrastructure and in turn economic development and GDP. Global population growth

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Markets may be a driving factor behind the commoditization of fresh water. The current world population is just over seven billion and is growing at 1.096% annually. The more problematic issue with increasing levels of population growth in LDC’s is the lack of infrastructure, specifically fresh water infrastructure. One example is Ethiopia. The population of Ethiopia is 94 million and is projected to grow 3% annually. Ethiopia may experience fresh water shortages in the near future due to lack of local reserves. Ethiopia is growing at an unsustainable rate relative to its fresh water reserves. Water pollution contributes to the scarcity of fresh, potable water. The majority of fresh water pollution is a direct result of poor sanitation infrastructure and poor industrial waste disposal practices in LDCs as they modernize. For example, in the past, Chinese businesses dumped industrial waste into the most convenient river; much like the United States did during the Industrial Revolution. China is beginning to realize the ramifications of these practices. It is estimated over 70% of China’s rivers and lakes are polluted to the extent that they are unusable for human consumption. The World Health Organization estimates over 100,000 people die annually in China from water-pollution related illnesses. Problems associated with local fresh water pollution are occurring at increasing rates worldwide. If these practices continue, pollution will remain a major factor affecting global water supply and

demand. Continued pollution of above-ground fresh water may force producers to look for other fresh water sources. Above ground fresh water reserves, such as rivers and lakes, only account for .03% of all fresh water reserves. These reserves are the easiest and lowest cost to extract. As potable water become more scarce, it may become necessary to extract water from less accessible sources, driving up the cost for consumers. Around the globe, bottled water consumption per capita has increased dramatically. In the United States, for instance, the average annual growth rate of bottled water consumption per capita was 8.32% from 1999 through 2007. This growth trend will likely continue in the coming decade. The scarcity of fresh water may increase demand globally. This may present an opportunity to profit from trading water as a commodity within the next ten to twenty years. So, how do you get invested? One option is to invest in companies that purify drinking water for both industrial and residential use. A second option is to invest in ETFs that have exposure to fresh water exploration, which may offer significant reward in the future. A third possibility is to purchase land with proven fresh water reserves.

newly created water ETFs. Some ETF have a substantial exposure (90% or more) to water through investment in securities related to the conservation and purification of water for homes, businesses, and industries. Ryan Detrick (Xavier University Class of 2001), of Schaeffer’s Investment Research in Cincinnati, says “PHO is the largest water ETF and the best way for the average investor to have exposure to the water boom. This ETF is it is very liquid and easy to trade. Much like with gold before the advent of the GLD (the gold ETF), in the past it would have been difficult for the average investor to invest in water, but now it is only a few clicks away on the computer.” The market is somewhat skeptical about water ETFs, as indicated by activity in the options market. There is a significant volume of bearish puts in near-term options. Ryan Detrick also says, “A good deal of skepticism can act as potential buying pressure as the bearish bets are eventually unwound.” It seems the framework has been built for fresh water as a publicly traded commodity.

Individuals who do not have the time to research individual companies and want exposure to water could invest in The Xavier Bellwether

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Markets

Is Hedge Fund Regulation Enough? Mark Momper

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he hedge fund industry has grown so large and interwoven within the overall economy that it poses a major threat to the overall economy if left unregulated. Regulatory shortfalls have increased the prevalence of fraud and loss associated with the underreporting of investment risks. The new hedge fund rules under the Wall Street Reform and Consumer Protection Act are intended to fill large regulatory gaps and loopholes that have enabled hedge funds to operate almost completely outside the purview of financial regulatory bodies.

which greatly increases risk. Hedge funds typically utilize a mix of long and short positions in debt and equity securities, leverage, options, futures, foreign currencies and over-the-counter derivatives. While hedge funds are often criticized for their role in the 2008 financial crisis, they can be credited for providing the market several benefits: mitigating price downturns, providing liquidity, eliminating market inefficiencies, and bearing risks that counterparties do not wish to bear. A major criticism of the hedge fund industry is the lack of transparency afforded to creditors, investors and regulators. Hedge fund managers claim that their positions in equities, bonds, and derivatives are trade secrets; they fear the disclosure of their positions will expose their strategies to competitors, who can easily replicate them, obstruct them, or otherwise decrease their profitability. Without the disclosure of positions, risk profile, and investment strategies, institutions, creditors and investors are unable to assess and manage the risks of lending to or investing with hedge funds.

therefore a hedge fund manager owed fiduciary duties to the funds, not the investor. Additionally hedge funds could avoid regulation by marketing and selling shares of the fund only to “accredited investors� or up to 35 other investors. The SEC defines an accredited investor as a financial institution, charitable organization, corporation, partnership, employee benefit plan or trust with assets exceeding $5 million or an individual net worth or joint net worth exceeding $ 1 million, or has either earned over $200,000 in income for each of the last two years, or a joint income over $ 300,000 for each of the last two years.

Changes made to the Investment Adviser Act of 1940 now require registered investment advisers of private funds to maintain and disclose records and reports to the SEC and CFTC. These reports will include information such as the amount and types of assets held, methods of valuation, degree of leverage, trading and investment positions, counter-party risk exposure, and Generally speaking, a hedge other information that is fund is a private pool of invested necessary to assess systemic risk or money structured as a limited to protect investors. The rule Historically, hedge funds have liability company or private states that disclosures made to been able to intentionally avoid limited partnership. The term regulatory agencies will remain regulation by taking advantage of confidential, allaying the some of hedge fund was coined from the exemptions in the Securities Act of the concerns of hedge fund strategy of hedging, or reducing 1933, the Investment Company risk of one investment by managers. Act of 1940, and the Investment investing in another dissimilar The Wall Street Reform and security. The goal of many modern Adviser's Act of 1940. A hedge fund manager could claim their Consumer Protection Act modified day hedge fund managers is to clients were the funds managed; eliminated exemptions based on maximize return on investment, The Xavier Bellwether

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Markets number of clients and created a new exemption for “mid-sized� private funds, or funds managing less than $150 million of assets. These exempted private funds are still required to disclose reports to the commissions, which will take into account the size, governance, and investment strategy of such funds to determine whether they pose systemic risk that would require regulation. The act delegates the regulation of small private funds with less than $100 million assets managed. As part of its mission, The Securities and Exchange Commission has a duty to ensure the integrity of investments and to protect the investing public from fraud. Exemptions that hedge funds have enjoyed to circumvent regulations have made it significantly more difficult for the SEC to perform their duties. While The Wall Street Reform and Consumer Protection Act should closes a number of these loopholes and place most hedge funds under the regulatory arm of the SEC, CFTC, or state regulatory agencies, regulation doesn't necessarily prevent fraud. Notably, in 2008 the biggest Ponzi scheme was uncovered as Bernie L. Madoff Investment Securities defrauded 4,800 clients out of approximately $64.8 billion. Bernie Madoff ’s firm was registered with the SEC and was routinely under investigation for years before the fraud was detected. During a time where the government is trimming the budgets of regulatory bodies, the SEC and CFTC are expected to

take on the additional duties of writing and enforcing new rules resulting from the Wall Street Reform and Consumer Protection Act. While the registration and disclosure provisions have the potential to better protect investors, regulatory agencies are arguably stretched too thin. Furthermore, delegating regulation of funds with less than $100 million in assets managed to states creates another interesting problem: states with budget shortfalls may not have the resources to fully dedicate themselves to regulating these funds. It is also difficult to ensure that these regulations will be implemented consistently from state to state. The restriction that prohibits the marketing and sale of hedge funds to non-accredited investors is intended to protect investors who do not have sufficient knowledge or experience to effectively assess risks associated with these investments. This exemption presumes that wealthy or experienced investors do not need the protection of the government; however, wealth does not guarantee the knowledge and experience to understand some of the more complex investment vehicles such as over-the-counter derivatives. Investors are unable to educate themselves about the potential risk of investments when hedge funds are not required to disclose to them regular information about leverage, trading positions, current value, and risk. Additionally, the average, non-accredited investor is increasingly exposed indirectly to hedge funds through pension funds The Xavier Bellwether

and exchange traded fund. Effective risk management becomes significantly more difficult when the creativity of fund managers often outpaces regulators, lawmakers, and creditors. Additionally, the complexity of derivatives often used by hedge funds make it difficult for legislators to pass laws and regulators to provide effective oversight. There is currently no standard method of valuation of derivatives; therefore the verification of reported figures can be difficult at best. History has shown that gaps in regulations are often exploited for legitimate and illegitimate financial gain. While the Wall Street Reform and Consumer Protection Act should improve regulatory oversight, it is still unclear whether the reform will improve the ability of regulatory bodies to protect investors, creditors, and institutions from fraud and systemic risk, and the ability of banks and financial institutions to manage risk. Only time will determine the effectiveness these new regulations.

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Markets

Insider Trading: Playing Devil’s Advocate Mark Hoeck Reserve, where he used his position to make speculative bets on the Revolutionary debt. Using his FED connections, he borrowed large amounts of money to make speculative investments in banks. After a series of bad bets, he declared bankruptcy. Duer’s failure is credited for causing the Panic of 1792. Duer was incarcerated, not for insider trading, but for being unable to pay off his debts. Another example of preregulation insider trading involved Jay Gould, a corrupt railroad executive. He made bets on and manipulated his own company’s ractically everyone in the stock. He also attempted to field of finance has heard manipulate the supply of gold by of the character Gordon buying up all the available gold in Gekko from the 1987 movie Wall the U.S, which caused the price Street. “Greed is good” is the oft skyrocket. The U.S. Treasury quoted line, but a more relevant quote in today’s financial markets: intervened, releasing gold into the market to suppress prices and the “If you’re not inside, you’re gold bubble popped. Like Duer, outside.” The easy way to Gould also caused major damage outperform in the market is to to the economy. trade on inside information; however, it is illegal to do so. It These events along with has not always been that way many other financial improprieties though. Prior to 1934 it was not preceding Black Tuesday are only legal, but also considered considered the major forces logical to trade on inside spurring regulation. In 1934, information. Why has this Congress passed The Securities perception changed? and Exchange Act. The Act added new regulations to financial The main driver for regulation was Black Tuesday, but markets and made insider trading illegal. Section 21A specifically also multiple other occasions of financial misdeeds in the America’s states that anyone who trades on “material, nonpublic information” financial history. William Duer is can be charged within a five year considered the first major case of insider trading the U.S. In 1789, he window of the violation with penalties up to “three times the was appointed Assistant Treasury amount of the profit gained or loss Secretary with the Federal

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avoided.” Additional regulations and clarifications have since been added. Rule 12b-5 was added to clarify insider trading as trading by an individual with fiduciary duty to the company of which they trade securities. This rule also added liability for an outsider, known as a tippee, who trades on inside information if they should reasonably know the tipper has breached his fiduciary duty with the company. The new regulation enabled the government to prosecute people who used their position or nonpublic information to profit. By itself, insider trading regulation could not prevent another Duer or Gould from negatively impacting the economy again. Market manipulation and cornering the market put the economy in dire straits, not insider trading. Market manipulation, also legal before the SEC Act of 1934, was a much bigger elephant in the room compared to insider trading, but the latter seems to get more press and be more vilified. By itself, insider trading is just making investment decisions based on all the information one holds. Market manipulation involves the actual “attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency.” It therefore has a larger potential negative impact on the economy while insider trading may not. 12


Markets One can argue that insider trading isn’t bad or unfair at all. John Carney, a senior editor at CNBC.com, controversially argues insider trading should not be illegal in his article “Why AntiInsider Trading Laws Are Insane.” Supporters of regulation argue that sellers ultimately sell “too low because they don’t have the inside scoop.” Carney disagrees, asserting that sellers would have sold at even lower prices if the insiders did not offer to buy at the price they were requesting in the first place. As a result, the insiders make the market for those that want to sell. Others argue that trading on inside information leaves regular investors at a disadvantage. Carney counters that ordinary investors are inherently disadvantaged because professional investors trade daily for a living. Ordinary investors cannot possibly devote the same amount time analyzing the market and securities. Ordinary investors tend to underperform when they attempt to time the market. Therefore, ordinary investors should diversify their investments, rather than to attempt day-trading. Mosaic theory is a commonly used defense against indictments on insider trading. The theory states that while a piece of information may be nonpublic and nonmaterial, but when combined with many other nonmaterial pieces, the information may be material. This aggregated nonmaterial nonpublic information can be considered material nonpublic information. If indicted, guilt or

innocence is often determined by the argument of whether information is material or not. Materiality depends on whether the information would likely change a normal investor’s perception on the value of a security. Analyst research may increase market transparency through the dissemination of information to the public. As insider trading regulations draw ever closer to the legality of mosaic theory, they could hurt a major industry which offers major economic benefits. Despite regulation, legal insider trading occurs every single day. Companies often offer share plans to their employees where they can buy and sell company stock. While there are usually restrictions on how much and when employees can buy and sell, they are still technically insiders. Furthermore, a corporate insider may decides not to sell shares due to information they possess on how well the company will do in the short or long term. Though they are making an investment decision by choosing not to sell, the law only regulates executed trades. Legal insider trading speaks to another major issue in business today: agency costs. They occur when executives act in their own interest as opposed to the shareholders because they have little of their own equity at stake. The implications include management taking excessive risks for performance incentives or possibly even not enough risk because of job security. An The Xavier Bellwether

increasingly popular way to account for this disparity is tying executive compensation with equity. It does the job, but is it fair for the executives? They may then have large portions of their investment portfolio with one company which presents a major diversification problem. Additionally, what if an executive discovers information that will adversely affect the share price? Should they then be forced to keep a “loser” due to knowledge of private information? Society has become increasingly focused on fairness. It may not seem fair that some hold more information than others in financial markets, but it is unavoidable. Someone will always possess more financial information than the average investor just as NFL players possess more football prowess than fans. Shouldn’t they both be compensated for it? While there is much ballyhoo about insider trading, it shouldn’t be the worry of ordinary investors or the focus of SEC regulation and manpower. The SEC makes examples out of people like Martha Stewart (who was actually not convicted of insider trading) in an attempt to appear that they are cleaning up the financial markets. Sometimes it is important to play devil’s advocate and discover what really is or is not the cause of problems in today’s financial markets.

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Politics and Policy

Politics at the Pump Sean Cahill Recognizing this, political advisors have used the gas price issue either to demonize a political opponent or to build up their own candidate. Some citizens may view the President as having either raised or lowered their financial burden at the pump. This issue has created a perceived bond or barrier between the nation’s chief executive and his constituents.

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ince the suburban boom of the 1950s and 1960s, “gas prices” has become a buzzphrase inextricably linked with electoral politics. In decades following World War II there was a massive boom in highway construction in the United States. Many people, specifically earlymiddle aged professionals, began an exodus to the suburbs. Because many workers no longer lived near their place of work, they began to rely more heavily on highways and private automobiles to commute. As a result, the demand for gasoline spiked, and as demand rose, so did the price of gas. National news sources have spotlighted gas prices during nearly every presidential race since Jimmy Carter’s bid for reelection in 1980. Energy bills accounts for a growing portion of the average household after-tax income. The American public, influenced by politicians and the media, began to focus political attention on domestic gas prices.

While this strategy can be considered manipulation of facts and figures; others believe it a viable tactic of political gaming. When analyzed solely as the barometer of a presidential effectiveness, do gas prices actually tell us the story that politicians claim they convey?

fault. Nonetheless, his handling of both the former and the latter affected gas prices nationwide. According to the U.S. Energy Information Administration, the U.S. produced 3,121,310,000 barrels of oil in 1979, far exceeding the 2,065,366,000 produced in 2011. Nonetheless, Iran still supplied a significant amount of total U.S. oil consumption. When President Carter embargoed Iranian oil in the fall of 1979, gas prices increased dramatically and essentially create a panic.

Indeed, the story is quite complex. Numerous economic factors impact the final price we pay at the gas station; domestic policy, OPEC-controlled supply, global demand, and speculators create a complex spider web difficult for the average American to untangle. In recent decades, however, political advisors have crafted a relationship between gas prices and the President’s foreign policy in the Middle East. President Jimmy Carter was perhaps the most widely criticized president for his Middle East actions. A peek may shed light on this complex relationship.

Historians and economists alike attribute the spike in gas prices during the end of President Carter’s administration to many factors, one in particular American behavior. Consumers worrying about shortages, began hoarding gas. Who or what actually bears the burden of blame for the crisis, the world may never know. And, in the face of the crisis in the Middle East, the American public placed the blame squarely on the shoulders of the President. As far the public was concerned, Carter may as well have posted the numbers on gas station signs with his own two hands. According to a Gallup poll taken between June 27th and June 30th of 1980, a paltry 31% of the country approved of President Carter’s job, while 58% disapproved.

To be clear, no one can say with certainty how much of the Iranian hostage crisis or the 1970’s gas crisis was President Carter’s

President Carter’s approval rating is one of the lowest in American Presidential history. As with most political metrics, this

The Xavier Bellwether

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Politics and Policy statistic should be considered in conjunction with other political factors and social conditions. Nevertheless, his handling of the Iran and Energy crises of 1979 provides the most direct causal connection available between the individual actions and policies of a president and domestic gas prices. President Carter’s term in office was the first time the relationship between gas prices and Middle East policy was cited as a factor in presidential approval. Since the 1980 election, analysts, commentators, and the public alike have relied on this metric as a significant measure of presidential approval. But does the Carter model apply to every president? The U.S. relationship with the Middle East is a sensitive issue; few presidents have satisfactorily managed domestic or foreign interests in the arid political hotbed. Since President Carter left office, the political landscape in the Middle East has become ever more complicated, particularly following the attacks on September 11, 2001. In the years following one of the defining tragedies in our nation’s history, President George W. Bush was required to navigate the increasingly complex issues of Middle-East policy.

increased to nearly $4.00. This increase may be due to rising levels of instability in the Middle Eastern and global markets due to the conflict. After the conflict began, the supply of oil from the Middle East to the world was disrupted and could be inferred that presidential action influenced gas prices. While the conflict in the Middle East likely impacted prices, there have been other events that have influenced gas prices. In 2008, oil prices spiked to $4.16, up from approximately $3.00 per gallon at the end of 2007. Most analysts agree that this spike resulted from a combination of increased demand over the summer driving, issues with refineries, and complications resulting from Hurricane Ike. In contrast, in the final month of the Bush Presidency when his approval rating sunk to 31%, the average national price per gallon to approximately $1.84. So what does this mean? It means that we must first refine our understanding of the implications of natural, economic, and political factors on gas price fluctuation before laying the blame on the president.

upcoming presidential election. The question is why? The answer may be in the U.S. energy policy or lack thereof. A proposed oil transport network running from Alberta, Canada to the refineries on the Gulf Coast of Texas. In response to uncertainty in the Middle East, the oil group TransCanada proposed a massive pipeline, which sources its oil from a buildup of tar sand in Alberta. The proposed Keystone XL Pipeline would transport oil from Alberta, Canada to refineries on the Gulf Coast of Texas in an effort to reduce dependency on foreign oil, create jobs, and help ease the domestic price at the pump. The Obama Administration opposed the Keystone Pipeline, citing environmental issues in Nebraska as his rationale. Political pundits have used this opportunity to hold President Obama accountable for rising gas prices. A Bloomberg study suggests that up to 23% of Americans hold Obama responsible for the increase in gas prices.

Perhaps the most fair conclusion to draw about the role In the months leading up to of gas prices in presidential electoral politics is that the metric the 2012 Presidential Election, cannot be properly analyzed solely domestic gas prices have again As is the case when most moved to the forefront of political by the actions of one individual, presidents enter military conflicts rhetoric. During his term in office, namely the president. Domestic or declare war, President Bush’s President Obama has withdrawn a energy policy, as well as foreign approval ratings skyrocketed to significant number of troops from policy are influenced by a number of factors. Increased global 89% after sending U.S. troops into the Middle-East and is credited demand influenced by the Afghanistan in October of 2001. with the elimination Osama bin At that time, the average domestic Laden. Despite these events in the developing world and oil speculation, among many other price per gallon of gas was $1.39. Middle East, high gas prices external factors, contribute to the During the Iraq and Afghan continue to permeate the price at the pump. conflicts, gas prices have gradually discussion surrounding the The Xavier Bellwether

15


Politics and Policy

Creating Urban Form in the Queen City: Zoning for the Future Rosalynd Erney

It

is impossible to turn on my TV without hearing some mention of the current state of the economy. The recession of 2008 seems everpresent in American life. In addition to its enormous effect on daily economic activity, it continues to loom ominously over political discussion. Among its 11 peer metropolitan regions, Cincinnati was one of the hardest hit by the sudden economic downturn in 2008. According to the 2010 Regional Indicators Report for Cincinnati and Northern Kentucky, the region was lagging behind national averages on a number of indicators of economic growth long before the recession began. The study tracked two main indicators for future economic growth potential: people indicators—the cost of living, net migration, adult work-force population, and educational attainment and jobs indicators— the metropolitan GDP, venture capital, the number of creative and knowledge jobs, the average annual wage, per capita income and the unemployment rate. Cincinnati fared well against its competitors in many areas—its

percentage of the population whose income was at or below 200% of the federal poverty level was among the lowest of the region. It also emerged as one of the top three most affordable cities, holding cost-of-living competitive advantage over its regional competitors as well as affordable housing across all income levels. These are crucial indicators for economic growth because they are important factors when families and companies are deciding where to locate. Cincinnati falls behind the pack when it comes to the size of the adult labor force, educational attainment, and net migration from the city. According to the 2010 US census, about 63% of Cincinnati’s population falls between the ages of 20 and 64. This number has increased from 60.2% in 2008 but is still lower than the regional average. When searching for relocation or expansion opportunities, businesses look for a skilled labor force that has the capacity and education to fill long-term posts. As the economy evolves, higher education has become an increasing necessity for young workers. Adults in Cincinnati over the age of 25 have a college graduation rate of less that 30%. Lack of work force size, readiness and educational attainment is a huge detriment to Cincinnati’s economic growth potential, a fact made worse by the increasing amount of migration from the city. According to the US Census The Xavier Bellwether

Bureau, Cincinnati lost 10.4% of its population over the past decade. While city migration has gradually curbed since the study was initially published, Cincinnati must find a way to not only retain families and members of the adult population, but also attract recent college graduates from Cincinnati institutions. The future economic success of the region relies on the emergence of a skilled and educated workforce. These people indicators have a huge impact on Cincinnati’s ranking and performance on jobs indicators. The first of these investigated by 2010 Regional Indicators Report was the total number of jobs in the region. While all of its regional competitors were hit by major job losses, Cincinnati alone lost 48,300 jobs between 2008 and 2009. The city has been losing jobs in two major areas: knowledge jobs, like professional and managerial positions, and creative jobs, such as those held by young professionals who bring innovative ideas and technologies to the table. These two areas contribute most to the area’s GDP and per capita income. In 2008 and 2009, the region saw its first decline in per capita income in 40 years. While Cincinnati’s March 2012 unemployment rate, at 8.3% according to the Bureau of Labor Statistics, falls below the national average, the region’s GDP growth rate consistently lags behind its regional counterparts. The city also trailed its competitors when it 16


Politics and Policy came to venture capital. More focused commitment to local startups helps to bring new ideas and investment into the city, fueling job creation and economic growth. To remain competitive among its regional peers, Cincinnati must develop a comprehensive plan that not only encourages residents and recent graduates to remain in the city, but also encourages new types of economic development and growth. The city has been taking steps to help make Cincinnati more livable in order to attract new businesses and improve life for its residents. In 2010, Cincinnati received a $2.4 million grant from the U.S. Department of Housing and Urban Development (HUD) to update the city’s unified development code. The city department of Planning and Buildings used the Community Challenge Planning grant to create the new Land Development Code. This is one of the central pillars of Plan Cincinnati—the city’s first comprehensive plan since 1948. Plan Cincinnati intends to revitalize the city through economic development, land use regulation, and the strengthening of the city’s neighborhoods.

sidewalks and roads—rather than their use. Under traditional zoning regulations, commercial and residential areas remain distinct and segregated. Zoning based on form, however, calls for mixed-use development and the merging of commercial and residential areas. For example, a three-story development might house a retail store, a commercial business and a residential component. Stores and businesses, then, become much closer to the people they serve.

Cities like Nashville have already implemented this new type of zoning with tremendous results. The way in which different businesses and organizations can occupy a single building optimizes space, creating convenience for residents and a draw for those living outside of the area to take advantage of the diversity of services in one location. In addition to being high density and mixed-use, these developments have clear building, architectural and landscaping standards. Unlike traditional zoning, which relies much more on a “one size fits all” mentality, the Cincinnati Plan caters more toward individual neighborhood characteristics. These zoning codes might have regulations regarding external features or architectural One of the central facets of configurations of buildings as well the Cincinnati Plan is the as landscape design and plant renovation of the city zoning code. material as they affect public While this might not seem spaces. These developments also immediately relevant to the emphasize the use of public spaces professional community, the way like sidewalks, travel lanes, onin which the city is zoned has large street parking, street trees, and implications on its daily life. This street furniture. Because of the new type of zoning focuses more proximity of diverse entities and on form—the structure and the efficient use of space, these orientation of existing buildings, neighborhoods are extremely The Xavier Bellwether

walkable. Their uniformity and emphasis on the pedestrian create a community-centered atmosphere. People want to live in these types of neighborhoods in proximity to retail and commercial centers. This does much more than simply attract more residents and homebuyers; studies have shown that residents are willing to pay much more to live in a safe, walkable community. Cincinnati earned a “walk score” of 59 out of 100 according to a new tool used to help residents asses the walkability of a neighborhood or metropolitan region. Improving Cincinnati’s can help to improve its appeal to new residents. While there are many foreseeable benefits to this new type of zoning, there are some costs. Because it calls for redevelopment, this type of zoning requires a significant investment of time and resources. To help offset some of these costs, the city has developed a strategy for the implementation of the Cincinnati Plan. Currently, multiple agencies oversee economic development, including the City, the County, the Regional Chamber of Commerce, and the Port of Greater Cincinnati Development Authority. Often, developers and employers bounce around between these different entities, resulting in wasted time and the perception of disorganization and inefficiency. The city plans to establish and maintain clear roles for these different entities and create a transparent and accountable process for development. In the next three years, the city plans to review and revise its current codes 17


Politics and Policy and development processes into one single unified land development code. This includes converting to a paperless permitting process to streamline the review time and jumpstart the approval process for new developments. In addition to continuing development of existing growth opportunity areas, such as the Casino and the Basin neighborhoods of the Central Business District, the city plans to focus development on the existing centers of activity. By developing a form-based code as a zoning tool for increasing pedestrian-friendly development and connecting these centers to residential areas the city hopes to strengthen these existing assets. In the next 4-7 years, the city plans to fully implement all of the recommendations of the Land Development Code process. In select locations of existing centers of activity, the city will begin to implement form-based codes to create compact walkable development. One of the key elements of the Land Development Code process is community engagement. These new zoning codes are a tool; they provide the structure and regulations around which development may occur. The success of the development that will emerge depends largely on the quality of the community plan that the code will implement. For the Cincinnati Plan to succeed, it will require the involvement of residents, developers and business leaders. One of the ways that the city will do this is through neighborhood Charrettes, where

community members may come to an open forum to voice their opinions and play a direct role in the formation of these new FormBased Codes. In order to optimize community input in the evolution of the plan, the Planning and Building Department created Plan Build Live Cincinnati, an online resource where community members can learn more about the interactive plan, track its progress and provide feedback.

might serve as a local stimulus package—revitalizing the city and encouraging growth. As the largest metropolitan area to be taking on such an endeavor, many eyes will be watching the Cincinnati that emerges from these recent developments in whatever form that may be.

Both online and on paper, the Cincinnati Plan sounds like it could be the key to the revitalization of the city. Making the city more livable through zoning based on form seems to answer the growing need for population retention and economic development. Factors like the current job market, housing costs and the availability of transportation will play a large role in an individual’s decision to remain in the city. The availability of a trained, educated workforce is crucial to a corporation’s decision to expand or relocate. Investing in livability

The Xavier Bellwether

18


Book Review

The Forgotten Man: A New History of the Great Depression Jenna Haverkos Amity Shlaes is the director of the 4% Growth Project at the George W. Bush Institute, a syndicated columnist at Bloomberg, and the author of the New York Times best-selling book The Forgotten Man: A New History of the Great Depression, which The Wall Street Journal calls one of the best books to read during a financial crisis. Shlaes has written for The Financial Times and The Wall Street Journal, where she was an editorial board member, as well as the New Yorker, Fortune, National Review, The New Republic and Foreign Affairs. Prior to joining the Bush Institute she was a senior fellow in economic history at the Council on Foreign Relations.

The timing of Amity Shlaes’ The Forgotten Man is a fortuitous and welcome portrayal of the Great Depression and New Deal in light of the slow recovery from the Great Recession in The United States. Shlaes takes her readers beyond the traditional history book observations of the difficulties from Black Tuesday through the start of World War II, and provides lessons learned and a framework for maneuvering economic down turns that today’s leaders would be mindful to hear. For today’s younger labor force, who came to age during relatively healthy (maybe too healthy) economic times, Shlaes chips away at general teachings on the Great Depression and their “highlight reel” treatment of government efforts to engineer a recovery with commissioned public works projects and spending. Similarly, Shlaes calls out conventional memory on the stock market crash as an unpreventable panic by greedy businessmen and the fairy tale

recovery orchestrated by strategic, well intentioned and worthy heroes who were saving America from itself. Rather than feeding the historical political drama of Hoover versus Roosevelt, Shlaes clarifies that both faltered and the cause for such a lengthy recovery is more accurately attributed to the economic principal of deflation. She clarifies that, “Hoover never understood and Roosevelt understood incompletely,” the realities of deflation and neither side of history nor the political argument truly captures the realities of the Great Depression.

assistance given to the bottom, but is required to pay for the assistance deemed appropriate by their policy makers. For this reader, Shlaes’ forgotten man of the Great Depression mirrors closely those whom the Great Recession has left unemployed. Those individuals who, like their predecessors, are part of a growing mass in the middle of an academic debate between policy elites.

Ultimately, the forgotten man’s identity takes shape as Shlaes corrects the notion that he is simply a poor, down trodden individual that needs nothing more than a helping hand and serves notice that government assistance to the neediest masks his true identity – the one in the middle who does not make the decision of how much to help the bottom, does not also receive the The Xavier Bellwether

19


Alumni Spotlight

Alumni Spotlight: Paul Tomich Rick Garcia Paul Tomich is an Assistant Portfolio Manager for Investment Grade Credit focused on investment grade corporate bonds. This role encompasses both total return and asset-liability strategies. Paul joined the firm in 2005. Paul received a BSBA in Finance from Xavier University in 2005. He is a CFA charterholder.

Could you talk about some of the challenges of working with the first Student Investment Fund in 2004, and how those experiences have translated into your career? The biggest challenges were forming procedures for the investment decision making process and developing reports for the board. At the beginning, we shared one Bloomberg and were crammed in a storage room in Hailstones Hall. We spent a lot of time trying to figure out how to divide responsibilities. In spite of these challenges, it was a very enlightening experience to debate the economy and individual credit reports. Fort Washington Investment Advisors has a considerably dynamic client list. Do you believe the intimate class size at Xavier, combined with a large scope of different perspectives, prepared you more effectively for working with such a firm? Yes, small classes and the opportunities to network with professionals as an undergrad were very helpful in preparation to work for an investment firm. What was the biggest challenge during your first couple years at Fort Washington? What would you advise current students to prepare themselves? My biggest challenge was learning the vocabulary and mechanics of the market. My finance degree and the CFA curriculum gave me a good analytical base to start with but developing skills to process the myriad of market information and interact with colleagues and other market participants is a challenge that I am always working on. My advice to students is to keep current on market news and read

any investment research that is available to learn how information is presented outside of the classroom. How does the Jesuit Tradition affect your working life? Ethics and community involvement are of paramount importance at Fort Washington and Western Southern. My education at Xavier made it easy to fit into a firm like this. Can you share with us some of the changes you have had to make when managing portfolios over the past 4 years given the economic environment? Any particular challenges? It has been a very volatile time. Days where the market rallies hard can be as unsettling as days it falls because there is still so much uncertainty. This daily volatility has made it a very difficult environment to make long term investment decisions. Do you think having access to Bloomberg in the Fifth Third Trading Center at Xavier provides students with an advantage when entering the workforce? I think the trading center is an excellent resource for students and definitely gives them a leg up in their career search. In an environment where companies are reluctant to hire, any experience that shows you will get up the learning curve quicker is very valuable.

The Xavier Bellwether

20


Investments

Xavier Student Bond Investment Fund The Xavier Student Bond Investment Fund manages a portion of the Xavier University Endowment as a fixedincome 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 TIPS, taxable municipals, dollar-denominated sovereign credits, agency pass-throughs, floating rate notes, preferred stock and shares of the Fort Washington High Yield Fund. 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 to Moody’s A2 by selecting corporate credits that have lower quality and higher yields than current holdings and greater potential for narrowing spreads; credits with improving fundamentals and high potential for upgrade by ratings agencies. The XSBIF portfolio is duration neutral compared to the benchmark. Convexity is lower, thus the portfolio is slightly more sensitive to interest rate increases compared to the benchmark and slightly less sensitive to interest rate decreases. It has a lower credit

Issuer Name

Quality

Coupon

Maturity

% Held

FEDERAL NATL MTG ASSN

Aa3

5.250

08/01/2012

1.49

DUKE ENERGY CAROLINAS LLC

A3

5.625

11/30/2012

1.54

GENERAL ELECTRIC CO

Aa3

5.000

02/01/2013

1.14

DU PONT E I DE NEMOURS & CO

A2

5.000

07/15/2013

1.95

FEDERAL HOME LOAN BANKS

Aaa

4.000

09/06/2013

1.54

NEW YORK LIFE GBL FDG M 144A

Aaa

5.375

09/15/2013

1.95

US BK NATL ASSN MINN SUB MTN

A1

6.300

02/04/2014

1.61

CBS CORP NEW

FWIA HY LLC(U)

Baa2 Baa1 Baa3 B1

8.200 7.375 7.400 8.020

05/15/2014 05/23/2014 06/15/2014 06/29/2014

3.42 3.32 1.67 11.18

FEDERAL HOME LN MTG CORP

Aaa

3.000

07/28/2014

3.89

CITIGROUP INC

SBC COMMUNICATIONS INC

A3 Aaa Aaa A3 A2

5.500 0.250 5.000 4.900 5.625

10/15/2014 02/15/2015 04/15/2015 09/15/2015 06/15/2016

1.95 0.73 1.24 1.65 1.30

TEVA PHARMACEUTICAL FIN CO B

A3

2.400

11/10/2016

3.80

CENTERPOINT ENERGY INC

Baa3

5.950

02/01/2017

2.11

CVS CAREMARK CORPORATION

Baa1

5.750

06/01/2017

1.32

KRAFT FOODS INC UNITED STATES TREAS BDS

Baa3 Aaa

6.125 9.125

02/01/2018 05/15/2018

2.66 2.21

GOLDMAN SACHS GRP INC MTN BE

A2

7.500

02/15/2019

2.53

UNITED STATES TREAS NTS

Aaa

2.750

02/15/2019

5.22

FEDERAL HOME LN MTG CORP

Aaa

3.750

03/27/2019

1.67

PETROBRAS INTL FIN CO UNITED STATES TREAS NTS

Baa2 A3 Aaa

5.375 5.000 3.125

01/27/2021 05/13/2021 05/15/2021

2.00 1.46 2.87

FEDERAL HOME LN MTG CORP

Aaa

6.250

07/15/2032

1.57

CONOCOPHILLIPS

UNITED STATES TREAS BDS

A2 Baa1 Baa1 Aaa Aaa Aaa

5.900 5.950 6.250 4.000 4.000 4.375

10/15/2032 06/15/2035 03/15/2038 12/01/2040 01/01/2041 05/15/2041

2.29 1.82 2.27 3.48 3.40 9.74

WELLS FARGO CAP XI

Baa1

6.250

06/15/2067

2.22

CAPITAL ONE FINL CORP INTL PAPER CO

UNITED STATES TREAS NTS FEDERAL NATL MTG ASSN VERIZON GLOBAL FDG CORP

BANK AMER CORP

DOMINION RES INC VA NEW CANADIAN NAT RES LTD FNMA POOL - AH0524 FNMA POOL - AH2711

rating, higher coupon, and is more heavily weighted in corporate and high-yield. The Xavier Bellwether

21


Investments

The Xavier Bellwether

22


Investments

D’Artagnan Capital Fund Symbol

The D’Artagnan Capital Fund manages a portion of the Xavier endowment in equity securities. The fund seeks to outperform the S&P 500 by utilizing a bottom-up approach to identify undervalued stocks. Its objective is to provide students with hands-on experience with equity investments, enhance career opportunities for students, and develop ties between Xavier and the community.

Statistics

DCF

S&P 500

Total Return

8.64% 8.54%

Beta

0.934

Sharpe Ratio

5.49

M2 Treynor Ratio Alpha

5.81

-46bps 0.09 65bps

0.083

Statistics

DCF

S&P 500

Price/Earnings T12M

14.91

14.56

EV/EBITDA T12M

8.91

9.66

Dividend Yield

2.19%

1.95%

Expense Ratio Turnover Tracking Error

0.47% 0.452 2.99%

The Xavier Bellwether

Company

% Portfolio

AA

Alcoa Inc

1.37%

AAPL

Apple Inc

5.39%

ABT

Abbott Laboratories

2.17%

BMY

Bristol-Myers Squibb Co

1.56%

BTU

Peabody Energy Corp

1.39%

CAT

Caterpillar Inc

2.76%

CB

The Chubb Corp

2.49%

CHK

Chesapeake Energy Corp

0.71%

CPB

Campbell Soup Company

1.49%

CSX

2.85%

CVX

CSX Corp Cognizant Technology Solutions Corp Chevron Corp

DOW

The Dow Chemical Co

1.49%

ESRX

Express Scripts Holding Co

1.44%

GE

General Electric Co

1.92%

GM

General Motors Co

2.58%

GOOG

Google Inc

2.62%

HAL

Halliburton Co

1.33%

INTC

Intel Corp

2.75%

ITW

Illinois Tool Works Inc

2.81%

JNJ

Johnson & Johnson

1.77%

JPM

JPMorgan Chase & Co

1.86%

K

Kellogg Co

1.77%

M

Macy's Inc

1.50%

MCD

McDonald's Corp

2.66%

MMM

3M Co

1.12%

MSFT

Microsoft Corp

4.38%

MUR

Murphy Oil Corp

2.12%

NRG

NRG Energy Inc

1.47%

PEP

PepsiCo Inc

2.88%

PG

The Procter & Gamble Co

2.23%

PGN

Progress Energy Inc

1.14%

PM

Philip Morris International Inc

1.77%

PNC

PNC Financial Services Group Inc

4.76%

QCOM

QUALCOMM Inc

2.37%

RRD

RR Donnelley & Sons Co

1.91%

CTSH

3.54% 3.09%

T

AT&T Inc

3.26%

TOT

Total SA

1.84%

TWC

Time Warner Cable Inc

1.65%

UNH

UnitedHealth Group Inc

2.88%

USB

US Bancorp

1.62%

V

Visa Inc

6.17%

WPI

Watson Pharmaceuticals Inc

0.98%

23


Investments

Bellwether Cincinnati Metro Index The Bellwether Cincinnati Metro Index is an index of publicly traded companies with headquarters in the area surrounding Cincinnati. The index is intended to measure the economy of Cincinnati against the overall economy. As of May 24, 2012 the index is at 1009. Base Year 2011 = 1000 AK Steel shares have fallen 15.6% YTD primarily due to a decline in sales and shipping volume. Steel prices, currently around $665 are continuing to trend down due to overcapacity. AK Steel recently tried to increase their price by $40, a price that was not met by industry support or matched by competitors. Multi-Color Corp shares are down nearly 21% YTD. LABL has missed earnings estimates for the past two quarters. The company has recently completed two acquisitions totaling $25 million. General Cable reported better than expected Q1 earnings, after three quarters of missing estimates. BCG recently announced that it will acquire Alcan Cable for $185 million in cash. General Cable anticipates Alcan Cable will add approximately $650—$700 million in revenues in the near term. Frish’s Restaurants Inc. shares are up 36.5% YTD. Reported quarterly earnings were up 52% YoY primarily due to increased sales and higher margins. Recently the company completed the sale of all of its Golden Corral restaurants to Golden Corral Corp for nearly $50 million. Macy’s recently announced a joint venture with Chinese e-commerce site Omei. Macy’s invested $15 million in Omei’s parent company, VIPStore Co. and will sell goods on the Chinese website.

Name

Last Price

Market Cap

52 Wk High

Change YTD

$38.45

$

3,870,796,631

$ 40.54

7.2%

$6.26

$

770,623,535

$ 16.75

-15.6%

$64.52

$

5,218,077,148

$ 69.46

16.3%

$5.00

$

330,972,412

$ 8.02

9.1%

$29.05

$

1,582,604,492

$ 45.72

27.1%

$24.03

$

186,173,141

$ 28.50

24.4%

$3.43

$

778,136,047

$ 4.20

30.4%

$7.11

$

113,539,810

$ 8.65

39.8%

$55.75

$

1,149,488,892

$ 72.25

16.7%

$8.50

$

65,637,184

$ 11.09

-0.5%

Cincinnati Financial Corp

$35.39

$

5,854,848,145

$ 36.55

18.4%

Cintas Corp

$37.56

$

5,102,259,277

$ 40.61

12.9%

Convergys Corp

$13.78

$

1,508,921,143

$ 14.23

2.0%

First Financial Bancorp

$16.07

$

985,990,356

$ 18.39

1.7%

Fifth Third Bancorp

$13.45

$

13,239,606,445

$ 14.73

13.1%

$27.05

$

130,804,047

$ 28.47

36.5%

$7.25

$

72,032,173

$ 7.50

22.9%

$18.72

$

1,256,976,196

$ 24.20

-9.9%

$29.35

$

2,016,724,243

$ 48.80

-3.5%

$22.09

$

12,891,749,023

$ 25.85

-5.0%

Multi-Color Corp

$18.90

$

329,235,535

$ 28.00

-20.9%

LCA-Vision Inc

$4.92

$

135,271,317

$ 9.24

145.9%

LCNB Corp

$13.49

$

89,939,835

$ 14.49

3.5%

LSI Industries Inc

$6.42

$

150,936,981

$ 8.91

4.7%

Macy's Inc

$37.62

$

16,860,058,594

$ 42.17

25.2%

$31.77

$

3,879,579,102

$ 36.48

-0.3%

$62.40

$ 176,051,812,500

$ 67.95

-3.7%

$9.14

$

471,133,301

$ 10.12

7.5%

$1.91

$

18,050,331

$ 2.19

0.7%

$19.05

$

802,389,526

$ 27.37

3.2%

Valley Forge Composite Technologies Inc

$0.50

$

33,080,505

$ 1.75

-28.9%

Vantiv Inc

$22.31

$

4,762,328,125

$ 23.16

31.2%

Zoo Entertainment Inc

$0.62

$

6,133,509

$ 2.53

-15.10%

American Financial Group Inc 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

Frisch's Restaurants Inc HealthWarehouse.com Inc Hillenbrand Inc Hill-Rom Holdings Inc The Kroger Co

Omnicare Inc The Procter & Gamble Co EW Scripps Co Streamline Health Solutions Inc Meridian Bioscience Inc

The Xavier Bellwether

24


Investments CECO recently announced an increase in their quarterly dividend by 40% from $0.25 to $0.35. Gross profit increased 30% on a 2% increase in revenue. The Procter and Gamble Co. announced that it would halt its aggressive expansions into emerging markets until it’s largest and most profitable businesses are stabilized. While P&G’s sales are growing faster in emerging markets, these sales are not as profitable as those in developed markets. Bank of Kentucky posted 29% increase in net income. Robert Zapp, President & CEO cites increased loan demand and the repayment of TARP loans in late 2011 as the primary driver of their performance. The company recently opened its first branch in downtown Cincinnati and expects to continue its strategy of organic growth in the Cincinnati and Northern Kentucky region.

The American Dream Composite Index Xavier University’s Center for the American Dream publishes The American Dream Composite Index (ADCI) monthly. The ADCI is a quantitative index that measures how we, as a nation, are doing in terms of our American Dream through five sub indices: Economic, Well-being, Societal, Diversity, and Environmental. Every month, in addition to collecting index data, the ACDI 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.

Xavier American Dream Index Source: ACDI

1-Jan

1-Feb

1-Mar

1-Apr

1-May

63.9

63.7

64.2

64.1

64

Economic Index

62

61.9

62.8

62.1

61.5

Well-Being Index

69.4

68.9

69.6

69.2

69.6

Societal Index

52.8

52.6

53.1

53.9

53.6

Diversity Index

73.5

72.9

72.3

73.5

73.6

Environmental Index

67.9

69.8

69.9

65.4

65.7

American Dream Composite

For more information on the ADCI, please visit www.americandreamcompositeindex.com The Xavier Bellwether

25


Investments

Economic Indicators Unemployment: After experiencing a unemployment spike in January and February resulting from high levels of layoffs in December, Cincinnati’s unemployment rate has fallen to 7.8% in March. This rate is relatively low compared to the national rate and Midwest east, north, central region; however, it is high compared to the farm belt states of the Midwest.

Unemployment Rate - Not Seasonally Adjusted Source: Bureau of Labor Statistics

Oct-11 Nov-11 Dec-11 Jan-12

Feb-12 Mar-12 Apr-12

Cincinnati

8.6

7.8

7.7

8.5

8.3

7.8

--

Ohio

8.4

7.6

7.8

8.6

8.5

7.8

--

Midwest Total

8.5

8.2

7.9

7.7

7.5

7.4

--

Midwest (east, north central)

9.4

9.1

8.8

8.9

9.5

8.5

--

Midwest (west, north, central)

6.6

6.3

6.1

6.7

7.2

6.4

--

8.5

8.2

8.3

8.8

8.7

8.4

8.1

National

Housing: The residential real estate market has remained sluggish but stable over the past four months. Construction of new residential homes remains at depressed levels. Prices remain largely stable, but slightly below levels of the preceding twelve months. The rental market is beginning to show signs of recovery as construction of multifamily residences increases and rental rates rise with increased demand. Purchasing Manager’s Index: The Purchasing Manager’s Index is a composite of 5 survey indices: New Orders, Output, Employment, Supplier’s Delivery Times, and Inventory. Any level above 50% can be interpreted as conditions improving and the industry expanding. Although manufacturing is not as large of a portion of U.S. GDP as it once was, some believe that manufacturing is where recessions end and begin. As of the April report the overall manufacturing sector appears to be growing at a faster rate than in March. Some respondents reported concerns over increasing oil prices and the European crisis. Cincinnati’s April reading indicates that the economy is expanding, albeit at a slower pace. Input prices have fallen, led by a sharp drop in commodity prices (from 82% to 63% of respondents). Employment decreased slightly from March (from 30% to 25%). 31% of respondents indicated increased employment, while 63% indicated no change in employment.

Existing Home Sales (millions) Source: National Association of Realtors

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Midwest

0.058

0.088

0.087

0.072

0.066

National

4.26

4.18

4.28

4.38

4.48

Sep-11

Dec-11

Mar-12

New Home Sales (thousands) Source: US Census Bureau

Mar-11

Jun-11

Midwest

3.00

5.00

4.00

4.00

3.00

National

28.00

28.00

24.00

24.00

32.00

The Xavier Bellwether

26


Williams College of Business Mission Statement: We educate students of business, enabling them to improve organizations and society, consistent with the Jesuit tradition.

The Bellwether 3800 Victory Parkway Cincinnati, Ohio 45207 513.745.3987 thebellwether@xavier.edu


The Bellwether (June 2012)