BBR 2014

BALTIMORE
2014
A M a R Y L a N D
BUSINESS R E V I E W
J O U R N a L
Message from the Dean Message from the President Screening Asset Managers for Ethical Behavior
Clement K. Miller, CFA, President of the CFA Society Baltimore
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Marylands Housing Recovery and a Nobel Perspective

Matthew Chambers, Ph.D., Associate Professor of Economics, College of Business and Economics at Towson University
Put the Investor First by Advocating for Shareholder Rights

Erica D. Niemann, CFA, Analyst at Lane Five Capital Management, a long-biased, concentrated valuation-driven hedge fund based in Towson, MD
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Distance in Small Business Lending in Maryland

Michal Dewally, Ph.D., Assistant Professor, Department of Finance in the College of Business and Economics at Towson University Yingying Shao, Ph.D., CFA, Assistant Professor, Department of Finance in the College of Business and Economics at Towson University
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Reversal of Fortune - Competitive Advantages Redening Industrial Investment in the U.S.

Niall H. OMalley, Portfolio Manager, Managing Director, Blue Point Investment Management, LLC
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Credit Default Swaps of Maryland Based Firms

Lijing Du, Ph.D., Assistant Professor, Department of Finance in the College of Business and Economics at Towson University
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Baltimore Business Review A Maryland Journal 2014

Produced jointly by the CFA Society Baltimore and the Towson University College of Business and Economics Edited by Michal Dewally, Ph.D., Yingying Shao, Ph.D., CFA, Assistant Professors, Towson University, Department of Finance and Farhan S Mustafa, CFA, Membership Chair and Board Member CFA Society Baltimore and Niall H. OMalley, Program Committee and Board Member, CFA Society Baltimore Designed by Towson University Creative Services, Rick S. Pallansch, Director, Chris Komisar, Senior Graphic Designer For more information about the contents of this publication, contact the Towson University College of Business and Economics press contact, Michal Dewally, 410-704-4902, or CFA Society Baltimore press contact, Niall H. OMalley, 443-600-8050. This publication is available online at www.baltimorebusinessreview.org
All opinions expressed by the contributors quoted here are solely their opinions and do not reect the opinions of CFA Society Baltimore, Towson University, Towson University College of Business and Economics or afliates, and may have been previously disseminated by them on television, radio, Internet or another medium. You should not treat any opinion expressed in this journal as a specic inducement to make a particular investment or follow a particular strategy, but only as an expression of an opinion. Such opinions are based upon information the contributors consider reliable, but neither CFA Society Baltimore, Towson University, Towson University College of Business and Economics nor their afliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. The contributors, CFA Society Baltimore, Towson University, Towson University College of Business and Economics, its afliates and/or subsidiaries are not under any obligation to update or correct any information available in this journal. Also, the opinions expressed by the contributors may be short-term in nature and are subject to change without notice. The contributors, and CFA Society Baltimore, Towson University, Towson University College of Business and Economics or afliates do not guarantee any specic outcome or prot. You should be aware of the real risk of loss in following any strategy or investment discussed on this Web site. Strategies or investments discussed may uctuate in price or value. You must make an independent decision regarding investments or strategies mentioned in this journal. Before acting on information in this journal, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own nancial or investment adviser. 1013.092
Whats an Investor To Do?

Dave Stepherson, CFA, Chief Investment Ofcer, Portfolio Manager and Partner at Hardesty Capital Management
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Baltimore Poised to Prot in New-Panamax Economy

Tobin E. Portereld, Ph.D., Associate Professor, Department of eBusiness & Technology Management, College of Business and Economics at Towson University Chaodong Han, Ph.D., Assistant Professor, Department of eBusiness & Technology Management, College of Business and Economics at Towson University Jacobo Brandel, Graduate Student, MS-Supply Chain
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Differences in US States Unemployment over the Last 36 Years

David J. Merkel, CFA, Principal of the equity and bond asset management rm Aleph Investments, LLC
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Towson University IndexTowson University Investment Group

Travis Crouse, Portfolio Manager, Towson University Investment Group William Mason, Junior Portfolio Manager, Towson University Investment Group
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Contributors 52 TU / BCFAS Prole 56
2 0 1 4 B A LT I M O R E B U S I N E S S R E V I E W
Message from the Dean

Towson University College of Business and Economics
Message from the President

www.baltimorecfasociety.org
Dear Colleagues and Friends, I am delighted to share with you the fth issue of the Baltimore Business Review A Maryland Journal. As a joint effort between the CFA Society Baltimore and the faculty of the College of Business and Economics (CBE) at Towson University, this innovative publication is dedicated to providing timely and informative articles from faculty and local business practitioners to the Baltimore business community and beyond. The feedback we have received over the past several years solidies that the Baltimore Business Review has established itself as an active forum for discussions about opportunities and challenges in Baltimore and Maryland, and has been successful in providing genuine added value to the community. More importantly, the Baltimore Business Review has become an additional avenue for CBE students to gain professional development and capitalize on our strategic partnerships with the business community. Several students who have contributed to the journal through the Towson University Investment Group have gone on to intern for other contributors and partners. Providing these types of hands-on business opportunities combined with rigorous academic preparation was applauded in 2013 by the AACSB InternationalThe Association to Advance Collegiate Schools of Business. In 2013, the college maintained its accreditation from this organization for both its business and accounting programs, sealing the colleges place in the top 1 percent of business schools worldwide. This issue covers a variety of topics including supply chain management, real estate, nancial markets, and small businesses in Maryland, and I sincerely hope that each article is thoughtprovoking and provides some signicant stimulation to our community of readers. I cant thank this issues contributors enough for their hard work, time and intellectual efforts. It is their generous contributions that made this issue possible. As always, we welcome your feedback and impressions of this publication as well as ideas for contributions. Also, if you wish to help sponsor future issues, please contact me at any time. Best regards,
Dear Colleagues and Friends, We at the CFA Society Baltimore are excited and proud to launch this fth edition of the Baltimore Business Review, our collaborative publication with the Towson University College of Business and 90/0/65/3 80/30/0/0 70/50/0/0 10/10/5/55 Economics. The designation of Chartered Financial Analyst (CFA) is widely recognized in the investment industry, PMS 202 - TowsonU CBE Red - 0/100/61/43 and by sophisticated investors, as a paragon of investment excellence. CFA charterholders pursue a rigorous course of three exams, covering ethics, economics, accounting, bonds, equities, derivatives, portfolio analysis, and other investment subjects. The study of ethics is particularly important in an era when some investment practitioners have engaged in unsavory practices. Even if a candidate passes every other section of the exams by a wide margin, he or she will fail the exams without passing the ethics portion. The CFA Society Baltimore was founded in 1948 as the Baltimore Society of Security Analysts. Membership of the society is approaching 700, drawn from a diverse cross section of local investment rms, commercial banks, educational institutions, and government agencies. The Society provides a variety of services to its members. Foremost is a program of luncheons featuring renowned speakers on a variety of investment topics. We offer scholarships and study group opportunities for those who wish to pursue the CFA Charter. Additionally, we participate in the Global Investment Research Challenge. Teams from local universities prepare competing equity analyses of a particular company and defend them to a panel of experienced equity analysts. This year the company is U.S. Silica. In this publication you will nd a variety of articles written by both Society members and Towson University students. Two articles are written in the spirit of the CFA Institutes ethics agenda, called the Future of Finance. One article addresses shareholder rights and activism. The second article details the screening of asset managers for ethical behavior. Another article describes todays central asset allocation conundrum: where to invest when bond prices are threatened by rising rates, stocks may be reaching overvalued levels, and cash yields next to nothing. Two articles address key trends in the U.S. economy: the impact of the U.S. energy revolution on domestic industrial investment and variation in local unemployment rates across the country. Further articles address the likely impact of Panama Canal expansion on the Port of Baltimore; the issuance and trading of Credit Default Swaps (CDS) on Maryland companies; and the performance of a custom index of Maryland-oriented index constructed by Towson students. Credit for this publication goes to Farhan Mustafa and Niall OMalley of the CFA Society Baltimore, as well as Rick Pallansch and Chris Komisar of Towson University Creative Services for their generous support. Please enjoy this great publication. We look forward to hearing any feedback you might have. We wish you the best of luck in your investing.
Shohreh A. Kaynama, Ph.D., The George Washington University, 1991, is the Dean of the College of Business and Economics and Professor of Marketing at Towson University. Her research interests include services marketing, e-Commerce/e-Business solutions, marketing research, international marketing, and decision support systems in marketing. Her work has been published extensively in many credible journals (nationally and internationally). She was named one of the 2005 Top 100 Women in Maryland by The Daily Record and is an honored member of Empire Whos Who of Women in Education. In addition, she is a member of Network 2000 and serves on the boards of SBRC, the Academy of Finance (NAF), Baltimore County Chamber of Commerce, Better Business Bureau of Greater Maryland, Maryland Council on Economic Education, and the Towson University Foundation.
Top 10 Employers CFA Charterholders

1. T. Rowe Price 2. Stifel Nicolaus 3. Legg Mason 4. PNC Financial 5. Brown Advisory 6. Aegon 7. Wilmington Trust Company 8. Wells Fargo 9. Morgan Stanley 10. Johns Hopkins University 163 30 23 18 22 16 15 14 12 8
Shohreh A. Kaynama, Ph.D. Dean, College of Business and Economics
Clement K. Miller, CFA President, CFA Society Baltimore
Clement K. Miller is an Investment Strategist serving with Wilmington Trust Investment Advisors (WTIA), the investment advisory subsidiary of M&T Bank. He is a member of the Investment Research Team, which fashions investment policy. He is co-Portfolio Manager for the Wilmington Trust Multi-Manager International Fund, and manages relationships with third-party international equity and xedincome managers. He earned a Bachelors Degree in International Finance from Georgetown Universitys School of Foreign Service, an MBA in Finance from George Washington University, and the designation of Chartered Financial Analyst (CFA).
Members of CFA Society Baltimore work for many investment rms, large and small, well-known and less well-known, around the Baltimore region. The Baltimore society is the local chapter of the global CFA Institute. Among other things, the Institute administers exams for those seeking the designation of Chartered Financial Analyst (CFA). The CFA Institute has always placed ethics at the core of its agenda. For example, any candidate who fails the ethics section of the exam will fail the entire exam, even if he excels in the other sections. The Institute also investigates allegations of ethical misconduct and issues disciplinary sanctions against those CFA charter holders and candidates found to have engaged in such misconduct. In recent years, a string of highly publicized incidents of unethical behavior have adversely impacted the publics trust in the investment industry. While the government has stepped up its regulation of nancial services, there are increasing worries about the benets and costs of well-intentioned regulation, such as those embodied in the Dodd-Frank Act. Earlier this year, the Institute commissioned a survey of investor attitudes toward the investment industry. The survey was conducted by the market survey rm Edelman. The survey found that only about half of investors had trust in the investment management industry. The industry scored a signicantly lower level of trust than non-nancial industries. In an effort to proactively address the trust issue, the Institute has amplied its focus on ethics by issuing an Asset Manager Code of Professional Conduct as well as an Investor Bill of Rights.
Investment Company Act of 1940 ensure that covered mutual funds offer daily pricing and liquidity, as well as quarterly reporting of performance and holdings, among other things. Of course, hedge funds report less information, less frequently, and liquidity is often constrained. However, whether an asset managers strategy is embodied in a mutual fund or a hedge fund, an investor cannot simply assume trustworthiness on the basis of adherence to minimal regulatory requirements. An investor must dig deeper in order to validate sufcient trust. Institutional investors, by virtue of the actual and potential size of their investments, often have direct access to a funds portfolio specialists and even portfolio managers. Retail investors can gain indirect access by working with an investment advisor who selects and monitors asset managers. So, what screens should investors use for evaluating the ethical behavior of asset managers? A key screen for ethical behavior is whether a portfolio manager is eating his own cooking. Is the portfolio manager investing a substantial portion of their liquid personal wealth, alongside other investors, in the strategy they manage? If that is not the case, then the portfolio managers personal nancial interests may not be aligned with the funds investors. A related screen is whether a signicant portion of the portfolio managers compensation, as well as of the analysts working on the strategy, is tied to his strategys performance. Ideally, the marker should be several years of trailing performance. The asset manager and his analysts should reap signicant bonuses only if investors reap signicant returns. Another screen is whether the asset managers investment team has been stable. Staff turnover may be explained by a number of professional and personal factors, but issues bearing on ethics may be one consideration. Under pressure to engage in ethically questionable conduct, some professionals may choose to leave a rm. Likewise, employees may be asked to leave a rm after having been discovered to be engaging in ethically questionable conduct. It is important to get a sense of the reasons for key personnel departures. Turning to performance measurement, a key question is whether performance is measured in accordance with common Global Investment Performance Standards (GIPS). Before GIPS, there was lack of commonality
Screening Asset Managers for Ethical Behavior

Clement K. Miller, CFA
President of the CFA Society Baltimore, Investment Strategist, Wilmington Trust Investment Advisors
Of course, any principles-based professional code of conduct is, at least in part, aspirational. An asset managers adoption of the code does not guarantee ethical behavior, just as non-adoption does not imply unethical behavior. A critical question for investors in the Baltimore region, as well as elsewhere, is how best to evaluate asset managers for ethical behavior, or possible indications of unethical behavior. One is reminded of what President Reagan said of nuclear arms control agreements with the Soviet Union: Trust but Verify. Fortunately, there is a good base already for verication. SEC regulations enacted pursuant to the
in reporting, frustrating investors ability to compare asset managers. Lack of compliance with GIPS should be a red ag. Another performance-related screen is whether the strategys benchmark is an index commonly used by asset managers in the same space, and is available on-line, free, and updated daily. Application of a unique or rarely used benchmark, available only through subscription, should be treated with caution if not skepticism. A third performance-related screen may seem counterintuitive: whether the strategys performance has been very consistently superior to that of the respective benchmark. Strategies typically outperform benchmarks in some parts of the business cycle, and underperform in others. They aim to generate excess returns, or alpha, over the course of a business cycle. Reported outperformance during all parts of a business cycle could indicate undue risk-taking, or, in extreme cases, even outright manipulation of the performance data. This is a critical red ag requiring investigation. Turning to a strategys investment process, a key screen is whether an asset manager provides adequate description of their investment process. Of course, for competitive reasons, one cannot expect an asset manager to disclose all ingredients of, and exact recipe, for his secret sauce. However, investors must be able to comprehend, in a general way, the reasons why the process can be expected to generate consistent alpha, returns in excess of the strategys benchmark. Some strategies are dened as opportunistic, idiosyncratic, or eclectic. The challenge faced by investors is that asset managers pursuing such loosely dened strategies may not be able to adequately communicate their investment process to potential investors. Investors need to demand much greater clarity from such asset managers, perhaps by asking the asset managers to provide examples of investment activity to outline the practical application of their approaches. An investor who feels that a strategy is too vague or exible probably should not invest with that asset manager. It is important to ascertain whether the asset managers holdings are aligned with their stated investment strategy. The typical rule for a mutual fund is 80-20: no less than 80% of the market value of holdings must be
consistent with the rms stated strategy. For example, an international manager whose strategy is to invest in developed countries should limit his emerging market exposure to less than 20% of market value. A red ag should be raised when an asset manager invests signicantly more than 20% outside of a stated strategy. Some asset managers investment strategies include the use of leverage, currency hedges, and other derivatives, sometimes in so-called overlay strategies. An asset manager using such tools should not only disclose their use, but also provide information on their impact on relative performance. Another question occurs when the asset manager is part of a larger nancial services rm which also includes an investment banking arm. Does the asset managers portfolio hold securities placed by the investment banking arm, for example, during the pre-IPO period. If so, how does the rm avoid conicts of interest? If an asset manager operates in the international space, particularly in emerging markets, it may be important to determine whether they consider corporate governance, namely protection of shareholders rights, in their selection of the securities for the portfolio. Some international asset managers prefer to avoid some countries altogether, because they consider local laws protecting shareholder rights to be too weak. This is not a question of advancing a noble cause, but rather one of avoiding negative performance due to poor securities selection. Finally, it may be useful to require a list of institutions, for example, retirement plans and endowments, which have invested with the asset manager. One can take some comfort from the fact that reputable institutions have performed due diligence. However, that cannot substitute for your own. In conclusion, it is important to validate ethical behavior when investing with asset managers. CFA Society Baltimore, together with the CFA Institute, is committed to the pursuit of the highest standards of ethical behavior.
Are the right investment professionals working for you?

For investment advice you can trust, look no further than the Chartered Financial Analyst designation.
ETHICS. Charterholders adhere to the highest standards of ethical
CFA
For more information about the society please visit www.BaltimoreCFASociety.org
2010 CFA Institute. CFA and CFA Institute are registered trademarks of CFA Institute in many countries around the world.
CFA Institutes peerless system is one of integrity-based professional
behavior, which prevents conicts of interest and fosters trust. The
conduct, supported by a signed annual statement of ethical behavior.
EXPERTISE. CFA Charterholders have successfully completed a

an expansive Body of Knowledge. minimum of three years of rigorous academic study and testing covering
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KNOWLEDGE. . In addition, comprehensive continuing education
Since February 2013, we have seen a sizeable uptick in home prices. Over the last three months, the S&P Case-Shiller seasonally adjusted 20-City Home Price Index has reported price increases in May(2.48%), June (2.18%), and July (1.85%). Over the same time horizon, the Federal Housing Finance Agencys (FHFA) seasonally-adjusted purchase-only House Price Index (HPI) showed similar price appreciation with changes in May (0.7%), June (0.7%), and July (1.0%). This trend shows the potential of substantial house price recovery.
Figure 1: Housing price changes in the Baltimore-Towson MSA, Maryland, and the U.S.
Year-to-Year Change
20% 15% 10% 5% 0% -5% -10% -15% Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
SOURCE: FHFA
U.S. BaltimoreTowson Maryland
Baltimor
Maryland
U.S.
Residential Housing Prices Comparison

National Comparison Given the MSA level indexes available through the FHFA, we can study how home prices in the Baltimore market are behaving during this housing recovery. From the peak of the housing bubble in the 1st quarter of 2007 to the 2nd quarter of 2013, average housing prices in Baltimore have dropped 16.4% from their peak and have risen 5.5% over the last year. This is worse than the national reading that shows only an 11.7% drop from the peak with a 7.2% rise over the last 12 months. Baltimore has also fared worse than Washington DC where house prices are rising faster than the national average. Prices in DC have actually reached new all-time highs and grew at a 12.9% rate over the last 12 months. Figure 1 compares housing price changes in the Baltimore-Towson MSA, Maryland, and the U.S. The gure shows two distinct trends for Baltimore and Maryland versus the U.S. Between 1992 and 1997 house prices were mildly appreciating nationally, but were pretty much flat in Baltimore and Maryland as a whole. This indicates that Maryland was a late entry in the housing bubble. After 2001, the Baltimore area entered a period of price ination that exceeded national levels. In early 2005, the annualized percentage change in home prices peaked out at over 20%, more than double the national rate. As of the 2nd quarter of 2013 home prices were increasing at the city, state, and national levels. Though increasing the Maryland and Baltimore region appear to be lagging slightly behind the national numbers
Comparison with other MSAs The simplest way to gauge the speed of the Baltimore housing recovery is by comparing the data at the MSA level. There are four indexes which cover parts of Maryland, the Baltimore-Towson index, the Silver Spring-Frederick-Rockville index, the HagerstownMartinsburg index, and the Salisbury index. The Silver Spring index captures more of the DC effect in Maryland home prices. These MSAs cover the majority of the urban areas in Maryland. To help shed some light on potential differences between urban and rural home price movements we would need to compare the MSA level data with the state level data. If the MSAs are growing faster than the state average, then one could argue that rural areas are lagging behind in the housing recovery. The empirical evidence suggests that the cities have experienced very similar price movements during most of the housing bubble. However, over the last year or so we have seen a marked difference between the Hagerstown and Salisbury areas and the more urban areas. Prices appear to be inating much faster in the areas of Maryland closer to Washington DC. The FHFA tracks 12 month price changes for 297 MSAs in the U.S. The majority of these areas, led by Stockton, CA
Marylands Housing Recovery and a Nobel Perspective

Matthew Chambers, Ph.D.
Associate professor in the Department of Economics, College of Business and Economics at Towson University
Table 1: Ranking of Maryland MSAs

Area Stockton, CA Silver Spring-Rockville-Frederick, MD California- Lexington Park, MD Baltimore-Towson, MD Hagerstown-Martinsburg, MD Salisbury, MD-DE Norwich-New London, CT Rank 1 85 100 146 165 280 297 12 Month Percent Price Change 19.40 4.32 3.39 2.17 1.74 -0.59 -3.36
at +19.40%, displayed positive price changes between Q2 2012 and Q2 2013. The preceding table shows the ranking of Maryland MSAs. The above table (Page 9) has changed substantially in the last 12 months. The areas experiencing price appreciation has spread across many MSAs. Salisbury is one of only 35 areas in the nation to experience falling house prices over the last 12 months.
Is the Housing Recovery Sustainable?

There are many uncertainties surrounding the current turnaround in the housing market. The main question is whether or not these rising home prices will persist. The macroeconomic evidence is generally not supportive to this pace of home price growth. Income Growth Given that a mortgage payment is typically the largest bill facing a household, it would make sense that income should have a high correlation with homeownership and home prices. Affordability of housing primarily depends on home prices, income level, and mortgage rates. Holding everything else constant, any growth in income should increase the affordability of houses. According to the Bureau of Labor Statistics (BLS), over the last 12 months, weekly earnings have risen 2.1%. This number looks decent until we notice that over the last 6 months weekly earnings have only risen 0.8%. Earnings growth is slowing and is much lower than the pace of home price appreciation. Unemployment and Government Policy Not only is the level of income an important component to the housing market, but also is the riskiness of income. Thinking of housing as an investment good, low risks makes investing more attractive. Persistent higher than average unemployment increases the probability of negative income shocks which lowers the incentive to commit to a long term mortgage arrangement. Additionally, the behavior of the federal government has only increased the risks in the economy. Shutdowns generate income uctuations and threats of default only serve to increase interest rates. These increased interest rates would pull at mortgage rates thus reducing the affordability of housing. Speculative Buying Another theory behind the turnaround in home prices is that there has been an injection of speculative buying by landlords and ippers. This money generates an increase in the demand for housing which should be identied by increases in home sales and increased home prices. The difculty is in measuring the amount of speculative buying. It is not easy to come up with data on how much speculative buying is occurring, but looking at state level data we may be able to tease out where it is occurring. The states with the fastest rates
Are we on the verge of another round of irrational exuberance? One quick check is to see how home prices are comparing against basic fundamentals. One belief is that home price increases cannot consistently outpace the sum of income growth and ination.
of home price appreciation over the last 12 months are Nevada (22.8%), California (19.1%), and Arizona (18.3%). These three states were hit particularly hard during the housing bubble so it stands to reason that house prices in these states were exceptionally low and ripe for speculative buying. The main question is how long will the speculative money stay in these states? The fear is that these double digit price increases will shut down the ow of speculative money. Without the support of speculators, these markets could dry up and home price could stall or even decline. All we can do is watch the data to get a sense on this. Mortgage Finance We have been experiencing an extremely long period of record or near record low mortgage interest rates. In recent months, the combination of slightly improved economic numbers and risk premiums brought on by government action have led to an increase in bond rates which has ltered into higher mortgage rates. According to the FHFA in December 2012 the average mortgage interest rate was 3.28%. Over the next few months, rates oated up to around 3.50%. By August 2013 the average mortgage had increased to 4.25%. Although low against historical norms, further increases in mortgage rates will only serve to slow the demand for purchasing housing.
mentals. In his 2005 book, Shiller could see a pattern of irrational exuberance occurring and warned of the potential collapse of the U.S. housing market. Are we on the verge of another round of irrational exuberance? One quick check is to see how home prices are comparing against basic fundamentals. One belief is that home price increases cannot consistently outpace the sum of income growth and ination. Over the past 12 month home prices have increased by 7.2%. At the same time income growth is 2.1% and ination is around 1.8%. This would put the fundamental level of home price growth at around 4% which is over 3% lower than the current reading. This pattern of home price growth would be unsustainable over the long run and would either need to return to fundamentals or we could be seeing the beginning of another asset bubble. Time will only tell.
A Nobel Perspective: The Return of Irrational Exuberance

On October 14th 2013it was announced that Robert Shiller had become a co-recipient of the 2013Nobel Prize in Economics with Eugene Fama and Peter Hansen for his work on the analysis of asset prices. In 1996 Alan Greenspan was credited with rst using the phrase Irrational Exuberance when speaking about some of the effects of a low ination environment. This environment brings about lower risk which generated smaller risk premiums and in general higher rates of market returns. The general denition is that Irrational Exuberance is an unusually high level of investor optimism which generates higher market returns that over time disconnect market prices from their underlying fundamentals. Shiller used this phrase as a title of his 2000 book. In the second edition in 2005, he expanded the theories of irrational exuberance from stock markets to real estate markets. He argued that, with exception of areas with restricted supplies of land, the growth of home prices should follow macroeconomic funda-
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The CFA Institute and Edelman, one of the worlds largest public relations rms, conducted an Investor Trust study this past June. The study surveyed over 2,100 retail and institutional investors in the United States, United Kingdom, Hong Kong, Australia and Canada, and the results are alarming. Of those surveyed, only 52% of investors trust the nancial services industry. In the U.S., only 45% of investors trust the nancial services industry to do what is right when making ethical decisions. Relationships based on trust are the foundation of the entire capital markets structure. If half of investment professionals dont even trust each other, then how do we expect the general public, regulators, and future clients to trust us? Participants in the Investor Trust Study were also asked what mattered most to them in hiring a new investment manager. Overwhelmingly, trust to act in my best interest was the biggest factor. CFA charterholders, the majority of whom are investors, can be integral in bringing trust back to our profession with demonstrated efforts such as Actvism and shareholder engagement that clearly put the investor rst. Our strong commitment as CFA charterholders to ethics makes this an imperative.
by Alon Brav, Wei Jiang, Frank Partnoy, and Randall Thomas, entitled The Returns to Hedge Fund Activism1, concluded that abnormal returns in excess of the market are not just tied to announcement of shareholder activism but persist the entire holding period, which averages over 20 months. Further, empirical evidence shows that in the ve-year period following an activist intervention companies experience improved operating performance (measured by operating prot) and return on assets.2 This is not corporate raiding. When an investment manager takes a more active role on a companys board or engages constructively with the management team to encourage best practices, it can have a tremendous impact. Not only does it put the best interests of the investment managers clients rst, it improves trust in the industry. It builds awareness of duciary responsibilities at all levels. Activist hedge funds had less than $12 billion in assets under management just ten years ago, and today that number is over $65.5 billion according to the Wall Street Journal3. The growth in the number of activist investment managers is indicative of the success of the strategy.
The Evolution of Activism

Over the past decade, weve witnessed the growth in: (i) the number of active investment managers engaging company boards, (ii) Directors participating in dialog on best practices in governance and (iii) compensation of CEOs and managements tied more thoroughly to company and investor success. Furthermore, the nancial crisis has highlighted the need for Corporate Governance reform. Well-governed companies recover and adapt more readily than poorly governed companies with entrenched managements and unengaged Boards. Historically, activist investors have been perceived very negatively being called corporate raiders and generally given stereotypes denoting greed and shortterm thinking. Those stereotypes emboldened many publicly-traded companies to create defensive policies such as staggered Boards and poison pills in the name of protecting shareholders, but which have served to entrench Boards and lower shareholder rights. Over the past decade, activists have been more clearly focusing on creating long-term value by throwing out underperforming managers and Boards, pushing for smart spin-offs and share repurchases and other value-creating efforts. Evidence is strong that these efforts have paid off for shareholders. For example, a study in 2008
The Cost of Activism

If activist investors improve the operating performance of the company and the stock performance relative to the market, then the basis for limiting the rights or involvement of shareholders is false. Companies use the excuse of the costs involved in activism to establish classied boards, limit the ability of shareholders to call special meetings, and install golden parachutes and poison pills tactics used to entrench the current management team and directors. In Delaware, where a majority of U.S. public companies are domiciled, Boards have the right to install a poison pill or golden parachute at any time. So what are the costs so often alluded to? The fees are usually large fees to lawyers, proxy solicitors, PR rms, and potentially the cost of replacing management. But, all of these costs are voluntary. Directors have a choice. If they view activists as adversaries, and choose to ght through expensive PR campaigns and proxy ghts, costs will be high. But, if they choose to engage, examine corporate practices and cooperate to the mutual goal of optimizing longterm returns of the company, costs will be minimal and justiable. Removing a Classied Board or Poison Pill requires a simple resolution by the Board. It costs nothing
Put the Investor First by Advocating for Shareholder Rights

Erica D. Niemann, CFA
Analyst at Lane Five Capital Management, a long-biased, concentrated valuation-driven hedge fund based in Towson, MD
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Shareholders can easily attach a resolution to the annual proxy, also very inexpensive. Requesting these changes in the proxy is often a starting point for activists today. Once a shareholder resolution addressing one these issues is included in a proxy it regularly passes by a large majority, because it is universally accepted as good corporate governance. Still, Boards are not required to make the changes shareholders vote in favor of, and often ignore the shareholder vote entirely. Rarely do Boards voluntarily make these changes. If we all agree these are clear best practices in corporate governance, why does it even take an activist investor to force them to be addressed? Perhaps weve applied the corporate raiders nickname to the wrong constituency. The next level of changes, including separating the chairman and CEO roles, optimizing capital allocation, nominating engaged directors, and facilitating change in management and/or management incentives are more challenging and require careful consideration. However, even the engagement by activist investors in thoughtful, productive discussions, can facilitate positive changes without a full-blown proxy battle. Ultimately, the entire investment community benets from the diligence with which activists promote best practices in governance.
(iii) leading activist shareholders to target rms with weak pay-performance links and those with higher than expected executive compensation4.
Pay for Performance and Share Ownership

Two practices that have grown in acceptance over the past couple of years are performance based restricted stock units in long-term equity compensation plans and share ownership guidelines for directors and executives. Performance based restricted stock units (PSUs) capture the benet of tying management compensation to longterm stock performance and remove many of the aws of options grants. Options grants vest based only on time passing, while PSUs only vest when certain operating metrics are met over a specic time period (typically three years). Additionally, PSU grants are not as dilutive as options grants, because dollar value based option grants are typically based on a Black-Scholes model. Thus with options, the number of shares granted actually increases dramatically if the stock price declines. This is a perverse incentive. Share ownership guidelines require individuals, either directors or executive ofcers, to maintain a certain ownership level. Typically, these ownership levels are designated as a multiple of an individuals base salary. As an example, a CEO may be required to hold shares worth ve or ten times their base salary. Guidelines often exclude any unvested stock or options grants and exceptional plans require individuals to reach the designated amount in a limited time frame. Combined with a proper PSU grant, ownership guidelines magnify the importance of driving operational performance of the company. Retaining talented executives while also maintaining a reasonable level of dilution and emphasizing long-term performance is not easy. PSUs and ownership guidelines are great examples of safeguarding investor interests whilst incentivizing executives to maximize the businesss performance.
An activist starts from a signicant disadvantage when building shareholder support. First, its generally understood that20% of shareholder votes for any given year are not cast. Second, a significant number of large investors vote as recommended by the company. As an example, the Vanguard funds, owners of over $1 trillion in common stock and a large shareholder for many companies, have adopted guidelines that govern proxy voting decisions. Those guidelines have led the company to vote with management nominations 81% of the when dissident shareholders have sought board seats over the past year. 5 Lastly, many investment managers rely on a third party services for advice on proxy voting such as Glass Lewis or ISS. These proxy advisors reportedly affect 38% of votes cast at US public companies thats an enormous amount of inuence without having any stake in the results. So, its common for 50% to 60% of a companys shares to be passively voted or not voted at all, and the position of proxy advisory rms are large enough to swing a vote. But, how did they proxy advisors grow to wield so much inuence? In 2003, theSEC required investment advisers who exercise voting authority over client proxies to adopt various policies and procedures designed to ensure their proxy votes coincide with the best interests of their clients. For many advisors concerned about their legal liability to fulll a duciary obligation to vote the safe and more cost-efcient solution was to rely on a professional consultant. The ensuing run to safety from potential litigation created the unintended consequence of reliance on ISS and Glass Lewis, with the thought that no one can be negligent for following professional advice. The notion that the incentive to provide thorough advice is low when the two rms operate as a duopoly was not considered. The duopoly has not gone unnoticed. Lawmakers are increasingly investigating proxy advisors and the heightened level of scrutiny and increased activist activities has caused the rms to make improvements. However, Glass Lewis and ISS remain a critical cog in shareholder voting until more large money management rms choose to make themselves less reliant.
All Investors Have a Say

While the average investor doesnt have the ability to take a stake in a company large enough to apply pressure for change, every share has a vote. A companys proxy contains valuable information about the structure of its board of directors, the backgrounds of those directors, compensation practices, long-term incentive goals, and if it exists any defensive posturing by the management team and the board. Given all of the information in a companys proxy, it is important to understand your investment managers process and procedures for voting proxies. Many small investment managers read and vote their own proxies regularly. Large investment managers typically have documented procedures for proxy voting that are available upon request. Some large, historically passive, investment management companies like Fidelity have taken a more active approach to proxy voting as of late, which is a positive turn of events for the whole industry. Voting on shareholder matters is one of the most important responsibilities of investment managers, and rebuilding trust starts with embracing those responsibilities. References
Brav, Alon; Jiang, Wei; Partnoy, Frank; and Thomas, Randall, The Returns to Hedge Fun Activism, European Corporate Governance Institute, March 2008
1 2 Brav, Alon; Jiang, Wei. Bebchuk, Lucian; The Long-Term Effects of Hedge Fund Activism, July 2013. 3 Das, Anupreeta and Terlep, Sharon, Activist Fights Draw More Attention, The Wall Street Journal, March 2013, available online at< http://online.wsj.com/news/articles/SB10001424127887324392 804578360370704215446> 4 Hirst, Scott, Protecting Shareholders and Enhancing Public Condence through Corporate Governance, The Harvard Law School Forum on Corporate Governance and Financial Regulation, July 2009, available online at <http://blogs.law.harvard.edu/ corpgov/2009/07/30/protecting-shareholders-and-enhancing-public-condence-through-corporate-governance/>
Say-On-Pay
Say-on-Pay, a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, is a positive development in corporate governance. Though it is only an advisory vote, investors have increased transparency into compensation practices and have the opportunity for a simple up or down vote on the plans. Companies receiving low approval ratings on their pay practices are showing an increased tendency to make changes, including more shareholder return oriented performance pay, inclusion of returns-based metrics in compensation plans and other efforts that ultimately could lead to improved accountability and performance. Say-on-pay was originally adopted in the UK in 2002. This market has served as a case study that helped create widespread support for the provision. Research reports based on companies in the U.K. have concluded say-onpay has had positive effects including: (i) improving the link between executive pay and company performance, (ii) prompting rms to adopt better pay practices, and
Update on proxy voting-June 30, 2013, The Vanguard Group, Inc., June 2013, available online at < https://investor.vanguard. com/about/update-on-proxy-voting>
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Its Still an Uphill Battle

When an activist investor engages a company, the rst question asked is whether current shareholder base will support the effort. Despite the evidence that activists have driven solid long-term results, winning a vote on a shareholder resolution, or even a proxy ght, is never certain.
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On July 9th, 2013, Eileen Ambrose1 from The Baltimore Sun, reported that Maryland institutions have increased their lending to small business by $337.7 million since the low point of the recession. This is welcome news following last years state government initiative that saw the enactment of The Lend Local Act: community banks were set to receive millions of dollars in state deposits so long as they issued local small business loans. Senate Majority Leader Robert J. Garagiola, D-Montgomery, was quoted saying: We know that community banks are more likely to provide capital and enable debt nancing for small business in a very tight economy.2 In the following, we take a long view of small business lending in Maryland over the past 30 years.
Year-to-Year1: Change Figure Historical Small Business Loan Issuances in Maryland - 1980 to 2009
$180 $150 $120 $90 $60 $30 $0 In State Out of State
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Figure 2: Historical Distribution of In State versus Out of State Loan Supply

100%
Historical small business loans supply in Maryland

Total small business loans issuance to Maryland companies was $37 million in 1980 and $163 million in 2008; the peak was $231 million in 2006. In Figure 1, we show the 30-year path of small business loans issuance in Maryland as supplied by in-state institutions versus out-of-state institutions. Two patterns of interest emerge from the gure. First, small business lending took off dramatically in the 1990s, increasing 21% annually on average. The favorable economic climate, characterized by relatively low interest rates and large productivity gains, boosted GDP growth and fueled this fast expansion in small business lending. We note that, during that period, in-state institutions remained the primary source of nancing for Maryland small businesses. The second discernible pattern sees out-ofstate institutions overtake state lenders as the primary source of funding to Maryland small businesses. As seen in Figure 1, out-of-state lenders rst overtook in-state lenders in 2002 and have continued to be the dominating player in small business lending. In Figure 2, we explore this trend in more detail by charting the relative percentage of small business loan supply across the state line divide. Two rounds of deregulation helped propel the shift in the roles played by in-state institutions and out-of-state institutions. First, in 1994, the passage of the Riegle-Neal Interstate Banking and Branching Efciency Act3 spurred consolidation in the banking industry, a process that continues to this day and one that has changed the landscape of Maryland institutions. According to the Maryland Department of Labor, Licensing, and Regulation, there are currently
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Distance in Small Business Lending in Maryland

Michal Dewally, Ph.D.
Assistant professor in the Department of Finance, College of Business and Economics at Towson University
Yingying Shao, Ph.D., CFA

45 Chartered banks in Maryland4. Historically, the number was higher before the passage of the Riegle-Neal Interstate Banking and Branching Efciency Act. It was as high as 106 in 19895 and dwindled via mergers over the past three decades with 9 mergers in the 1980s, 44 mergers in the 1990s, and 42 mergers in the 2000s particularly with a high point of 10 mergers in 2007 alone before the nancial crisis. Another reason for the attrition of local institutions is recent failures during the nancial crisis. Eight Maryland banks failed from 2009 to 2012, the largest failure that of K Bank of Randallstown, whose deposits were assumed by M&T Bank under the auspices of the Federal Deposit Insurance Corporation (FDIC)6. As a result of mergers and acquisitions, total assets held by institutions located in Maryland drew down from a peak of $87 billion in 1994 to $26 billion at 2012 year end. However, one should note that the reduction in institutions did not diminish the number of branches as these have shot to almost 1,600 in 2012, up from as few as 1,000 in 1980, indicating that institutions have strived to make themselves more accessible to local clients. 17
A second round of deregulation helped cement the switch in the source of small business loan supply, which was observed to decline from 75% of loan supply sourced locally in 1993 to 75% sourced across state lines in 2007. The Gramm-Leach-Bliley Act, also known as the Financial Modernization Act of 1999, permits the combination of banking, securities and insurance operations, an act that ushered the age of mega-banks. Interestingly, mega-banks are not necessarily interested in servicing hard to evaluate small business loans small business loans are banker-time intensive, more difcult to automate, bear higher underwriting and servicing costs and are more difcult to securitize7 but sheer size allowed them to dominate the Maryland market. These large entities heavy reliance on interbank funding and securitization immediately impacted banks lending negatively during the economic downturn when funding evaporated and liquidity was constrained. As a result, we see the balance reestablished itself with local lenders reclaiming close to 50% of the local lending market share.
The case for local lenders

Traditionally, small business lending has largely relied upon the model of relationship lending. Bankers, through repeated interactions and multiple transactions with the same customer over time, obtain customerspecic proprietary information about the borrowers
and their ability to repay. Boot and Thakor8 (2000) further claim that these ongoing relationships facilitate lenders information acquisition and hence should benet borrowers with more credit availability and reduced lending costs. Indeed, these relationships are symbiotic in that they allow the borrowers greater funding availability and they afford lenders to have an informational advantage. The information can be used in multiple interactions with the same customer, creating an opportunity to benet from inter-temporal information reusability. Moreover, lending relationships typically induce lenders to extend non protable loans to client with the long view in mind. Lending to a borrower today will increase the likelihood the borrower continues its relationship with the bank in later periods and the overall value of the relationship allows for this temporary loss. On the ip side, once the borrower is held up in the relation, it may receive loans at non-competitive rates in exchange for continued credit access. Yet, overall, the relationship benets the borrower in many ways such as bundled services from the lender and continuity in receiving loans in the long run. Obviously, a close relationship is more easily achievable locally than from a great distance. Local lenders have an advantage in collecting soft information about the borrowers and applying it in their loan decisions. This is particularly important in the current environment in which lending institutions tightened their lending criteria in the aftermath of the nancial crisis7. For long-distance lenders, although progresses in technol1000 ogy have virtually eliminated some of the issues in communicating, it remains that they will have to rely 800 more on hard information rather than soft information. Whereas improved credit scoring techniques have helped 600 large distant institutions make better lending decision, local lenders should still maintain an advantage in this 400 market as soft information is costly to acquire, a cost 200 that mega-banks are not willing to expand on lower protability loans.
1985distance between 1990 1995and In Figure1980 3, we track the lenders small business borrowers over time. We observe the signicant impact that advanced lending techniques and deregulation have had on the distance landscape for Maryland borrowers. In the 1980s, small business lending was truly a local affair with an average distance between lender and borrower in Maryland of 130 miles9. Over time, this distance slowly increases 0 2000
as lenders merge with distant parent bank holding companies and nally, once mega-banks appear in the market, the distance explodes to be as far as 900 miles away from the borrower. Ironically, the trend in default rate is sharply in contrast to the increase in distance. From as high as an average of 15% default in the 1980s, improved lending practices and better economic conditions have reduced these defaults to about 5% in the 1990s and as low as 2% in the 2000s during the pre-crisis period. On the surface, it appears that the increase in distance did not hurt the performance of small business loans, even though longer distances might create difculties for banks to monitor their loans. We take a deeper look at the default rates for in-state lenders versus out-of-state lenders in Figure 4. Figure 4 reveals the differences in default rates for loans issued from within or from outside the state lines. Whereas the long-term trends in performance of both categories of loans are similar, we note that 1) default rates for out-of-state originated loans are more volatile, and 2) in the recent period, in-state originated loans experience lower default rates. There are two potential sources for these differences. First, as discussed above, local lenders should have superior information and therefore be more astute in their lending practices. Another reason might stem from the fact that locally established lending relationship are more informed about local conditions and are more willing to renegotiate terms or extend timelines to borrowers rather than to force default. As such, local lending relationships provide stability to the state economy and in fact will Distance further benet the local economy by providing stable and effective allocation of funds to successful enterprises. This is critical in times of tumult as resources scarce up. In all, it appears that, while distant lenders did provide valuable capital during the expansion period, these lenders are more ckle and are less informed compared to local lenders. Local lenders play a nontrivial role in providing nancing support to small business owners, 2005 which help further strengthen and stabilize the states economy. In this light, the current initiatives are a step in the right direction.
Figure 4: Historical Small Business Loan Default Rate

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References
Lending increases to Maryland small businesses under federal program. Eileen Ambrose, The Baltimore Sun, July 9, 2013.
1 2 OMalley: New laws to spur Maryland innovation. Alexander Pyles,The Daily Record (Baltimore, MD), May 22, 2012.
See Matthew Shermans 2009 A Short History of Financial Deregulation in the United States for more details. http://www.cepr. net/documents/publications/dereg-timeline-2009-07.pdf
3 4 5
http://www.dllr.state.md.us/nance/banks/mdbanks.shtml http://fdic.gov/news/news/press/2010/pr10242.html
http://www2.fdic.gov/hsob/index.asp
6 7
Wiersch, Ann Mary and Scott Shane. Why small business lending isnt what it used to be. Economic Commentary, Federal Reserve Bank of Cleveland, August 14, 2013.
8 Boot, A.W.A. and Thakor, A.V., 2000. Can relationship banking survive competition? Journal of Finance, 55, 679-713. 9 Readers should note that we measure distance as the distance between counties in which the lenders and borrowers are located so that our measures might inate those numbers when lenders and borrowers are both locally situated. Nevertheless, the method works well to illustrate long-term trends.
Figure 3: Historical Distance and Loan Default Rate

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Imports
As an investment manager, I seek investments with sustainable growth. I have the freedom to look anywhere in the world. Quietly, the U.S. has developed a competitive advantage in energy costs that is rewriting the history books, see Chart 1. For the rst time in generations an abundant energy supply has the potential to improve the air we breathe while creating hundreds of thousands of new jobs. It is creating opportunities where just ve years ago energy intensive industrial production was being shuttered in the U.S.
Figure 1: The U.S. Shale Gas Competitive Advantage

25
$Million/BTU
20 Oil* 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: www.eia.gov
Competitive Advantage Natural Gas
Reversal of Fortune
Forty years ago the crippling oil dependency of the U.S. was brought home with gasoline rationing during the 1973 Oil Embargo that caused crude oil prices to quadruple By 1980 the price of crude was 10 times what it had been in 1973. Presidential Commissions looked for alternatives while recommending higher energy efciency standards. The trending outlook was alarming and U.S. companies in industry were deeply challenged by the rising cost of energy. Higher U.S. energy costs have been a contributing factor to the steady erosion of the U.S. industrial base. By 2005, the U.S. dependency on imports of petroleum products had grown to 60%. The trend line was going up and the outlook was increasingly dire. Quietly, drillers were implementing new directional drill technology that allowed horizontal drilling through oil-bearing deposits. New seismic sounding and visualization technologies created underground pathways that optimized the horizontal drilling to deep narrow banded shaledeposits. High pressure hydraulic fracturing is not new. It was used on thousands of gas wells during the 1970s to increase production yields. The fracturing techniques used in shale deposits have been pioneered in the last decade. The rock-like shale formations require proppants and lubricants to keep the fractured channels in the shale rock open. Due to the rocklike characteristics of shale, creating facture channels and keeping them open with proppants and lubricants is key development that allowed enabled the fracking of shale. To keep the channels open, proppants silica or ceramic spheres are injected at enormous pressure into the fracture channels. A combination of water, proppants and lubricants are injected at enormous pressures that range from a staggering 10,000 to 20,000 pounds per square inch. A typical well in the Bakkens is 5,000 to 20,000 feet below the surface. There are
*Barrel of Oil Equivalent = 5.5514 MM BTU
One million (MM) British Thermal Units (BTU) is the measurement standard for natural gas. A 42 gallon barrel of oil contains 5.55 MM BTU which is referred to as the Barrel Oil Equivalent (BOE).
9,000 wells in the Bakkens. A signicant production well will require 2 million gallons of water, 4 million pounds of proppants and approximately 350 barrels of chemical lubricants. In 2009, domestic U.S. petroleum production increased for the first time in 17 years. U.S. consumption is running at 18.7 million barrels a day, which is down 10% from 2005. There are a number of factors behind this change, the biggest one was the 2008 nancial crisis. Other contributing factors are higher fuel efciency in vehicles, alternative energy sources, lower electrical demand from LED lights, and lower car ownership among young people. Since 2008 U.S. domestic crude oil production has increased 50%. In June 2013, the U.S. trade decit fell more than expected and the biggest contributing factor was that net petroleum imports fell 24% yearover-year. Crude oil imports are the single biggest source of the U.S. trade decit. From 2003 to 2013 the U.S. paid $2.4 trillion dollars to import crude oil to meet its import dependency. In the fourth quarter of 2012 the U.S. became a net petroleum exporter for the rst time since 1949, (Figure 2).
Reversal of Fortune - Competitive Advantages Redening Industrial Investment in the U.S.

Niall H. OMalley
Portfolio Manager, Managing Director, Blue Point Investment Management, LLC
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Figure 2: U.S. Petroleum Product Exports Exceed Imports in 2011 for First Time in Six Decades
4 3 2 1 0 -1 -2 -3 -4 1950 1960 1970 1980 1990 2000 2010 Imports
Million Barrels per Day
Table 1: Pounds of C02 emitted

Pounds of CO2 emitted per million Btu of energy: Coal (anthracite) 228.6 195.4% Coal (bituminous) 205.7 175.8% Coal (lignite) 215.4 184.1% Coal (subbituminous) 214.3 183.2% Net Exports Diesel fuel & heating oil 161.3 137.9% Exports Gasoline 157.2 134.4% Propane 139.0 118.8% Imports Natural gas 117.0 100.0%
Source: www.eia.gov/tools/faqs/faq.cfm?id=73&t=11
Exports Net Exports
cubic feet of wet natural gas was ared burned at the wellheads across the Bakken formation in North Dakota. The burning well ares and production lights can be seen in space. NASA Earth Observatory satellite from hundreds of miles above the earth without image enhancement can clearly capture the light emissions from the Bakken region in North Dakota where no major cities exist (Figure 4). The scale of the wasted energy from no pipeline access to end markets is equivalent to the annual heating needs of 1.3 million homes or 8.6 billion kilowatt-hours of electricity on an annualized basis per the Department of Energy. To be fair, the speed of discovery and development of shale gas and oil is astonishing and the right-of-way process for pipelines is time consuming. Given the clear example of undesirable unintended environmental consequences, environmental impact studies of new interstate pipelines need to be expedited. The North Dakota state government needs to create incentives that discourage aring. Amazingly, addressing infrastructure needs for North Dakotas 9,000 wells will only increase the supply side of the U.S.s new competitive advantages. Federal initiatives are also needed to help build and create domestic demand for the cleaner burning natural gas fuel that will help create demand for this cheaper source of energy. Ultimately, the cost advantage offered by natural gas will diminish and investments and market forces will take advantage of the arbitrage. Chemical industry alone accounted for one-quarter of foreign investment in the U.S. last year. Abundant natural gas and natural gas liquids are improving the air we breathe while creating hundreds of thousands of new jobs. Shale gas and shale oil have also created a healthier balance of payments. The U.S. is becoming a world leader in natural gas technology. While there are winners there are also losers, the dramatically lower natural gas prices have created challenges for companies that bought resource rights at higher price levels. Natural gas drilling activity associated with new wells has steadily fallen while drilling for new shale oil wells has steadily increased.
80/30/0/0 70/50/0/0 10/10/5/55
Figure 4: Bakken Shale Gas Flares Visible from Space
What is the Shale Gas Advantage?

There are many advantages inherent in shale gas -energy independence, cleaner air green energy source with less the 50% less CO 2 emissions than coal, see Table 1. The U.S. now offers energy intensive industries a clear energy cost and environmental advantage that is enhanced by their proximity to markets. The competitive advantages on a global basis are reshaping the capital investments of energy intensive industries which include chemicals, plastics, fertilizers, metal Oil* foundries and mills.
Competitive Advantage Natural Gas
25
$Million/BTU
20 15
10 Figure 3: Byproducts for Ethane a Natural Gas Liquid 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Wet natural gas is unprocessed gas that comes directly out of the well head. Wet natural gas has a number of naturally occurring by-products that must be separated from the methane or dry natural gas. A familiar wet natural gas by-product is propane. Other less familiar cousins are butane and ethane; however, once separated as liquids these valuable byproducts are referred to as natural gas liquids. Ethane has a myriad of uses (Figure 3). The by-products from ethane are really quite amazing and include pool liners, tires, to paper coatings. Dry natural gas methane - can be found heating homes Oil Price $/Million BTU* and burning on cooktops. Dry natural gas burns cleanly with half the carbon dioxide emissions of coal. Natural Gas - Price $/Million BTU
90/0/65/3
PMS 202 - TowsonU CBE Red - 0/100/61/43
Source: http://www.newscientist.com/blogs/shortsharpscience/2013/01/julia-sklar-reporter.html
The Infrastructure Challenge

The benets of the U.S.s new energy independence are not uniformly distributed. In some cases the benets have not been distributed at all. Unlike the alternative energy space where aggressive tax subsidies were established for wind, solar and bio fuels, the federal government has not offered adequate incentives for pipeline construction, and the dated use tax credits need to be overhauled. The U.S. needs a long-term national energy plan that matches the scale of the shale gas and oil revolution. The Environmental Protection Agency (EPA) wants to reduce carbon dioxide emissions but the lack of a federal energy policy that endorses the building of interstate pipelines from the geographically remote Bakken elds in North Dakota leaves producers with no access to storage, process facilities or end markets. It is creating unintended consequences which defy common sense and run completely contrary to the stated goal. During the rst seven months of 2013, 50.4 billion
Environmental Considerations
The EPA has authority under the Clean Water Act to regulate discharge water produced by hydraulic fracturing; however, the EPA does not have authority to regulate subsurface uids and proppants used for hydraulic fracturing. Each state has the authority to regulate and/or authorize hydraulic fracturing. Water table contamination is a very serious issue and is often not reversible. Well casements must be designed to stand the test of time as well as exposure to extraordinary pressure. A direct benet of horizontal drilling is that a single well head can be used to drill miles in every direction at depths that are thousands of feet deep. To reduce the amount of water required, drillers are expanding the recycling of drill waste water. A signicant concern is the chemical lubricants mixed in with the proppants and hydraulically pressurized with water. There are clearly issues with shallow wells but wells that are one to four miles beneath the surface pose a much more limited threat to the water table.
2012
2013
*Barrel of Oil Equivalent = 5.5514 MM BTU
Pool Liners Window Siding Trash Bags Sealants Carpet Backing Insulation Detergent Food Packaging Flooring Bottles Pipes Cups Housewares Crates
Adhesives Coatings Films Paper Coatings Models Instrument Lense Footware Clothes Diapers Stockings Toys Textiles Tires Sealants Paint Antifreeze
Source http://www.chicagofed.org/digital_assets/others/events/2013/detroit_energy/moore_830am_040913.pdf
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Towson University College of Business and Economics

Towson Universitys College of Business and Economics (CBE) specializes in providing high-quality, applied business education with an international perspective that prepares individuals for positions of responsibility and leadership in business and society. CBE programs are entrepreneurial, innovative and market-driven, and attract top talent from across the country. CBE is the largest undergraduate business school in Maryland and is the only institution in the University System of Maryland to offer a major in e-Business. For those that want to take their education to the next level, Towson University has enriched its graduate education opportunities by offering two graduate programs with the University of Baltimore, the UB/Towson MBA program and the Masters of Accounting and Business Advisory Services, as well as the Masters of Supply Chain Management.
One area that gets overlooked with these deep wells is the enormous pressures within the well that can create discharge from a well not properly capped. Drillers have the ability to place smart drill caps on wells to monitor and insure well integrity.
The Future is Happening Now

As a portfolio manager, I turn over a lot of rocks looking for sustainable growth. In October, the U.S. Energy Information Agency announced that it expects the U.S. to become the worlds largest producer of petroleum products in 2013. There is an enormous need for infrastructure to support this dramatic change. Selectively, there are sustainable growth opportunities for companies providing the picks and shovels that will enable the U.S. to take advantage of this dramatic reversal of fortune. The air in cities will benet from the cleaner natural gas emissions. Enormous shale deposits exist in New York and California that have not been developed. The shale deposit in California is nearly four times the Bakken deposit. The estimate of recoverable oil - not including gas - in California alone stands at 15.4 billion barrels of oil. The scale and scope of the energy independence offered by shale gas and shale oil is revitalizing the U.S.s industrial base while offering cleaner natural gas and energy security. The development of the technology associated creates a new export that goes beyond just petroleum products. Over time, as the infrastructure is built and the technology spreads, natural gas will become a global commodity rather than a regional commodity. Between now and then the U.S. has clear competitive advantages. Resources:
www.eia.gov http://www.eia.gov/tools/faqs/faq.cfm?id=73&t=11 http://ngm.nationalgeographic.com/2013/03/bakken-shale-oil/ dobb-text http://www.census.gov/foreign-trade/statistics/historical/petr.pdf http://www.eia.gov/environment/emissions/co2_vol_mass.cfm http://www.midwestenergynews.com/2011/11/14/the-bakkennorth-dakota-oil-eld-from-space/ http://nation.time.com/2013/10/16/40-years-after-the-1973-oilembargo-the-u-s-is-stronger-on-energy-but-so-is-the-middle-east/ http://aleklett.wordpress.com/2013/01/29/gas-aring-at-bakkenand-eagle-ford/ http://www.newscientist.com/blogs/shortsharpscience/2013/01/ julia-sklar-reporter.html http://www.census.gov/foreign-trade/statistics/historical/petr.pdf http://energy.gov/articles/producing-natural-gas-shale http://www.argusmedia.com/pages/NewsBody. aspx?id=862063&menu=yes http://ngm.nationalgeographic.com/2013/03/bakken-shale-oil/ dobb-text
Marylands Opt Out

The State of Maryland has opted for a three-year study. Rather than proceed with caution, the State has opted to not proceed at all. This does not mean the private sector in Maryland has not found ways to meaningfully contribute to the competitive advantages associated with developing a cleaner energy source. U.S. Silica Holdings, based in Fredrick (ticker SLCA), is a leading supplier of silica proppants to drillers. Silica is found in nature in sand or quartz and used as a proppant. It is used to make glass but silica is known for its hardness. A signicant fracking well can use 4 million pounds of proppants to keep the facture channels lines in shale deposits under enormous pressure. Colfax Corporation based in Fulton (ticker CFX), is a manufacturer of gas and uid handling equipment. Colfax serves both the oil and gas industry and the chemical industry. The systems manufactured assist with production, storage, rening and transportation. The current valuations of both companies are rich, and are dependent on continued demand. Assuming the price of oil does not collapse, it is reasonable to consider the U.S. energy cost advantage as being sustainable in the near term but the cost differential between oil and natural gas spot prices will likely close as myriad of supply and demand factors come to bear.
Towson University
Towson University is the only University System of Maryland institution with AACSB International (the Association to Advance Collegiate Schools of Business) accreditation for its business administration, e-Business and accounting programs. AACSB is the premier accrediting agency for bachelors, masters and doctoral degree programs in business administration and accounting and the highest distinction that business schools can receive worldwide.
For more information visit www.towson.edu/cbe College of Business and Economics 8000 York Road Towson, MD 21252-0001 410-704-3342
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2 0 1 4 ba Lt I more bus I ness re V I e W
Credit Default Swaps (CDS), according to the denition of the International Swaps and Derivatives Association (ISDA), are privately-negotiated contracts designed explicitly to shift credit risk between two parties.1 With CDS, a protection buyer (e.g., a bondholder) pays a periodic fee to a protection seller (e.g., an insurance company) in return for protection from a credit event by a reference entity or borrowing company. Suppose bondholders of Ciena Corporation are concerned about the companys default risk. In this case, bondholders can buy insurance from a CDS seller and pay premiums to the seller over time (typically on a quarterly basis). If Ciena does not default, bondholders lose the premiums while the CDS seller keeps the premium payments. If Ciena defaults, bondholders can exchange their bonds with the CDS seller for the principal amount of the bonds or, in some cases, payment equal to the bonds principal amount minus the current value at the time of default. The settlement method in the event of default can include physical settlement or cash settlement. In short, CDS allow bondholders to protect their investments from credit events in exchange for premium payments. A credit event may include bankruptcy ling, non-payment of debt, debt restructuring, technical default and credit-rating downgrade. Figure 1 illustrates the mechanism of Credit Default Swaps. First adopted by J.P. Morgan in 1995, the CDS market has grown exponentially, with outstanding notional value peaking at $58.2 trillion dollars in 2007. As of December 2010, the total notional amount of CDS contract outstanding was $29.9 trillion, $18.1 trillion of which was traded on single name reference entities. Of the total notional, $15.1 trillion was traded with dealers, $14.5 trillion with other nancial institutions, and $0.3 trillion with non-nancial customers.2 In other words, the CDS market is dominated by institutional investors, with banks accounting for the majority of trading. This study investigates CDS of Maryland based rms and its potential effects. Over the period of 2001 to 2010, 16 Maryland based companies have had traded CDS, as indicated by Bloomberg. Table 1 presents a list of Maryland based rms with CDS and Figure 2 plots the number of CDS rms. As indicated in Figure 2, the number of CDS rms in the U.S. increased substantially from around 200 to over 600 during the period between 2001 and 2005, while the number of CDS rms in Maryland decreased slightly over time. One possible explanation is that there was not enough
Figure 1: What is a Credit Default Swaps?
Premium
(Bond in the event of default)
CDS Buyer
Underling Company
CDS Seller
Default Protection
(Principal Value in the event of default)
Table 1: List of Maryland based rms with CDS

Name ARBITRON INC BLACK & DECKER CORP CIENA CORP CONSTELLATION ENERGY GRP INC COVENTRY HEALTH CARE INC FEDERAL REALTY INVESTMENT TR HOST HOTELS & RESORTS INC LOCKHEED MARTIN CORP MARRIOTT INTL INC MCCORMICK & CO INC MEDIMMUNE INC MERISTAR HOSPITALITY CORP NEIGHBORCARE INC OMEGA HEALTHCARE INVS INC SINCLAIR BROADCAST GP WASHINGTON REIT City Columbia Towson Hanover Baltimore Bethesda Rockville Bethesda Bethesda Bethesda Sparks Gaithersburg Bethesda Baltimore Hunt Valley Hunt Valley Rockville Year of CDS Initiation 2006 2001 2005 2001 2005 2003 2001 2001 2001 2005 2003 2003 2001 2001 2003 2001
Credit Default Swaps of Maryland Based Firms

Lijing Du, Ph.D.
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Figure 2: Number of CDS rms over time

800 700 600 500 Maryland 400 300 200 11 10 9 15 14 13 12
Impact of Credit Default Swaps

Prior work highlights potential inefciencies from CDS 800 a creditor to avoid exposure to contracts. CDS allow nancial risk from a bad debt, while still maintaining 700 formal contractual control rights to enforce the terms of the debt agreement and legal rights under bankruptcy 600 laws. While creditors are normally interested in keeping 500 a solvent rm out of bankruptcy and in maximizing the value of an insolvent rm, this may no longer be 400 valid for insured creditors. Hu and Black (2008a) refer to debt holders who300 retain formal contractual control rights and legal rights, yet have partly or fully hedged 200 2003 2001 2002 2004 their economic risk as empty creditors . Such creditors lack incentives to monitor a debtors actions or to save the company from bankruptcy, as they can receive payment from the CDS protection seller. Despite the concerns associated with CDS, there are potential benets of CDS trading to the borrowing company. Hu and Black (2008a) argue that CDS allow lenders to diversify risk; in addition, prior work observes that rms with traded CDS contracts on their debt are able to maintain higher leverage ratios and hold longer debt maturities. Having traded CDS contracts on its debt may afford the company better access to capital and favorable credit terms, all of which dampens the companys business risk.
0 1 2 3
US
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2005
2006
Figure 3: Average and median credit rating around CDS initiations

Ratings AMedian BBB Mean
completed on March 12th, 2010. As indicated in Figure 4, the stock price of Black & Decker jumped from $47.34 per share to $62 per share following the announcement, implying a one-day return of 30.97%. Figure 4 also US plots CDS spreads of Black & Decker for the ve-year contract with modied restructuring clauses the most popularly traded CDS contracts in the U.S. market.3 On November 3rd, the spread of the five-year CDS contract dropped from 1.08% to 0.49%, indicating a return of 54.98%. In other words, investors in the CDS market believe that the default risk of Black & Decker decreased significantly after the merger announcement. To be more specic, on November 3rd, 2009, if 2007 2008 2009 2010 a bondholder of Black & Decker was concerned about the default possibility of Black & Decker, he or she could pay an annual fee of 0.49% (as compared to 1.08% on November 2nd, 2009) per par value to a CDS seller, in return for protection from a credit event by 15 Black & Decker. In addition, Figure 4 shows that CDS spread started to decrease gradually Maryland before the merger announcement, which suggests that the CDS market anticipated the merger before the actual announcement.
Figure 4: CDS market reaction to merger announcement

2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% July 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 80 Stock 70 60 50 40 30 CDS 20 10
References
1 2
ISDA (2012). www.isdacdsmarketplace.com/.
Credit Derivatives Report (2006). British Bankers Association. Available at www.bba.org.uk/publications/entry/bba-credit-derivatives-report-2006/books-reports-subscriptions/

3 Modied restructuring has become common practice in North America. It limits deliverable obligations to bonds with maturity of less than 30 months after a restructuring. 4 Hu, H., Black, B., 2008a. Equity and debt decoupling and empty voting II: importance and extensions. University of Pennsylvania Law Review 156, 625-739.
BB-
Credit Default Swaps: Dear or Dangerous?
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CCC+
-3
-2
-1
interest in trading against credit events of Maryland based companies; that is, creditors were not concerned about these companies default risk. The decline was also driven by mergers and acquisitions between 2007 and 2009, such as the acquisition of MedImmune by AstraZeneca in 2007 and the merger between the Stanley Works and Black & Decker in 2010. While companies do not initiate CDS trading on their own debt, their debt holders do, so the initiation of CDS trading is non-random. Why do creditors initiation CDS against the underling rm? How do rms with CDS differ from those who do not have CDS against their debt? Compared to other Maryland based companies, CDS companies tend to be bigger rms with higher credit rating, lower market-to-book ratio, higher prot margin, higher return on assets, higher operation cash ow ratio, and lower receivable and inventory ratio.
Figure 3 compares credit 2001 ratings for based 2002 Maryland 2003 2004 CDS rms for the seven years centered on the CDS initiation year. Prior to CDS initiations, the median of S&P long-term credit ratings for CDS companies was around BB. From the year of CDS initiation onward, the median credit ratings increased monotonically to BBB. On average, Maryland based rms held more assets and had higher credit ratings after the initiation of CDS trading against their debts. However there is no evidence that CDS trading affects a rms ability to borrow debt.
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2006
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Does CDS market provide timely signal? The case of the Black & Decker merger announcement
Several studies document that CDS prices provide a timely measure of underlying rms default likelihood. To illustrate, Figure 4 plots stock market and CDS market reactions to the merger announcement between Stanley Works (NYSE: SWK) and Black & Decker (NYSE: BDK) on November 2nd, 2009. The merger was later
The recent credit crisis has brought intense debates over the impact of CDS. On the one hand, CDS facili9 tate efcient risk sharing among lenders, which 2007 more 2008 2009 2010 can improve a companys access to capital and credit terms. CDS prices also provide investors with forward-looking market signals of their clients survival probabilities. On the other hand, CDS may create an empty creditor problem, where debt holders are able insure against default but still retain control rights.4 Because CDS offer creditors protection against default, these empty creditors are less forgiving in debt renegotiations and more likely to force debtors into bankruptcy. Empty creditors also lack incentives to monitor managerial actions, which reduce debt governance. However, for this ongoing debate on CDS, the answer is far from obvious.
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Hu, H.T.C., Black, B., 2008b. Debt, equity and hybrid decoupling: Governance and systemic risk implications. European Financial Management 14 (4), 663-709.
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As we begin the New Year, Maryland investors nd themselves in a bit of a quandary: where to invest in 2014. There do not appear to be any clear options. The consensus view on Wall Street is that interest rates will move higher. If correct, that would mean their more safe investments, bonds, are headed for another difcult year. Stocks are up signicantly since the nancial crisis and appear fully valued. Perhaps the year will not be kind to stocks either. Cash is yielding nothing and unless the Fed has a drastic change of heart, that is not expected to change. So, whats an investor to do in this environment?
Figure 1: Yield on 10-year Treasury bonds, NSA (pct.)

20
15
10 10-Year Treasury Bond Yield 5
0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
For Maryland residents, Maryland municipal bonds offer an excellent relative value. Yields on Maryland bonds for most of 2013 were actually higher than yields on the equivalent Treasury. Of course, the added bonus Maryland bonds provide to Maryland residents is they do not pay federal or state income tax on the interest.
Investors are not used to losing money in their bond investments. When yields are moving lower, bond prices move higher and vice versa. As we can see from the chart of the 50-year history of the 10-year Treasury yield, bond investors have experienced a long and strong bull market since about 1982. But the bull market in bonds has to come to an end at some point, as yields cannot go to zero because investors require a return on their investment. Lending money to the government at 1.40% for 10 years, as was the case in July of 2012, is unattractive at best. In fact, not only were real rates of return (the yield minus the ination rate) negative but the equity market, as measured by the S&P 500, provided a higher yield. If the yield on the 10-year Treasury increases by 1% during 2014, that will work out to a drop in that bonds price of roughly 9%. If the yield on that same bond increases by 2% next year, the price will drop by 16%. Given the incredibly long run of this bull market in bonds, many have forgotten that money can be lost in this asset class. 1999 and 1994 were the last years when bonds experienced a negative return for investors. During 1994, the yield on the 10-year ranged between roughly 6% and 8%. During 1999, the yield ranged between 5% and 6.5%. Given todays lower nominal yield level, the price volatility will be higher because, all things being equal, the lower the yield and longer the maturity the more leveraged is the price of a bond to interest rate movements. For example, if one felt strongly that interest rates were going to move lower in a meaningful way, the best way to invest for that forecast would be to purchase a zero coupon bond with the longest maturity available.
Whats an Investor To Do?

Dave Stepherson, CFA
Chief Investment Ofcer, Portfolio Manager and Partner at Hardesty Capital Management
The bond market is probably not the answer as we are most likely headed for another difcult year. The Quantitative Easing program should end in 2014 and the Fed may begin to seriously contemplate increasing the Fed Funds rate. The mere threat of tapering the QE program in 2013 caused a violent reaction as the yield on the 10-year Treasury spiked from 2% in June to 3% in September. The 10-year Treasury began 2013 yielding 1.76%. An upward bias to yields of most maturities longer than 2 years persisted throughout 2013 and many pundits suggest 2014 will likely be no different.
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Figure 2: Estimated Weekly Bond Mutual Fund & ETF Inows/Outows, 2013
$14,000 $9,000 $4,000 -$1,000 -$6,000 -$11,000 -$16,000 -$21,000 -$26,000 -$31,000 Jan Feb Mar Apr May Jul Aug Sep Municipal Bond MFs Taxable Bond MFs U.S. and Int'l Fixed Income ETFs
(in millions)
Figure 3: S&P P/E Valuation

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P/E Ratio
30 25 20 15 10 5 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 1993-2013 Average 18.1
As the consensus forecast for 2014 is for higher yields, investors have already started to move. Bond mutual funds are witnessing what can only be described as massive withdrawals (see table). These withdrawals began in earnest when the Fed began openly discussing tapering the QE program. Selling bond mutual funds before individual bond holdings is a very good strategy. With an individual bond, investors typically receive a xed coupon and maturity date. Bond mutual funds provide neither. These two elements of an individual bond provide some assurances to investors that bond funds cannot provide. A $25,000 investment in an individual bond will provide the investor with two important outcomes: a xed return until maturity (3% per year for example) and the face amount of the bonds at maturity (in this case $25,000). Assuming no credit default, no matter what happens to yields between the time of purchase and maturity, investors will get their money back at maturity with a xed annual rate of return along the way. In contrast, a $25,000 investment in a bond fund can go up or down in value and yield on any given day. There are no assurances at all that investors will get their original investment back or what rate of return they might earn. In a bond bull market, bond mutual funds are perfectly good investments. We will see how they hold up in a rising interest rate environment. For Maryland residents, Maryland municipal bonds offer an excellent relative value. Yields on Maryland bonds for most of 2013 were actually higher than yields on the equivalent Treasury. Of course, the added bonus Maryland bonds provide to Maryland residents is they do not pay federal or state income tax on the interest. Not only was the nominal yield higher but when one considers the after tax benets, municipal bonds were far more attractive. That situation remains in place today. Due to the relatively high tax rate in Maryland, demand for Maryland bonds is typically very high making them hard to nd. Other states that are triple-A-rated may offer equal or better after-tax yields and there are more bonds from which to choose. Municipal bonds, however, are subject to the same issues as other bonds, so investors need to analyze these securities carefully. Although bonds could be the least attractive asset class in 2014, cash is not far behind. At least with cash reserves, there is no real risk to losing money. Banks and investment rms that manage most of the money market investments are very well positioned to keep
Table 1: S&P 500 (Operating Basis)

Estimate Tables - EPS FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E Fiscal Year 67.68 74.94 87.38 89.00 67.80 62.64 83.78 96.90 101.55 108.76 117.78 130.91 P/E (x) 17.9 16.7 16.2 16.5 13.3 17.8 15.0 13.0 14.0 16.3 15.0 13.5 CY Ending Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13E Dec 14E Dec 15E Cal. Year 67.68 74.94 87.38 89.00 67.80 62.64 83.78 96.90 101.55 108.76 117.78 130.91 P/E (x) 17.9 16.7 16.2 16.5 13.3 17.8 15.0 13.0 14.0 16.3 15.0 13.5
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money market funds safe. We remember the terrible experience the nancial crisis created in the money market industry. Several local rms had to inject hundreds of millions of dollars into their money market funds to keep their prices at $1. In a few well-known specic examples, the $1 price was broken and investors lost money in their money market investments. New regulations make a repeat of this situation highly unlikely. Money market funds, though, are not paying investors anything. This is the equivalent of putting your money under the mattress. With no return, ination eats away at the value of the investment.
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As we begin to witness what could be the end of a huge bull market in bonds, stocks are facing issues of their own. Outside of the obvious (politics, disappointing economic growth, global debt, etc.), valuation could be the most difcult obstacle of all. The valuation of the overall market is at a critical threshold. As you can see from the chart, the price-earnings (P/E) multiple on forward operating earnings of the S&P 500 is at the high end of the range experienced since the nancial crisis. Since 1922, the market has averaged a P/E multiple of approximately 16 times forward earnings. For long periods of time, however, the market tends to settle into a P/E range with which it is comfortable. Typically, some kind of signicant event (good or bad) will shift the multiple to a new range. By way of example, we can look at two distinct periods of time to illustrate this point. In the 1970s, ination became a signicant problem. Because of this, the market took the range for the P/E multiple from average levels all the way down to high single digits. For a decade, the market went nowhere as the P/E multiple contracted to this low level. In the 1990s, the US economy experienced the longest uninterrupted economic expansion since World War II. For that and other reasons, investors expanded the P/E multiple well beyond anything normal to greater than 30 times earnings.
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The nancial crisis of 2008 and 2009 brought with it a signicant and dramatic resetting of the P/E multiple. Earnings for the S&P 500 dropped by 30% from a peak of $89 in 2007 to a trough of $62.64 in 2009 (see table). The market, however, dropped over 50% from peak to trough, effectively lowering the P/E multiple from 16.5 before the crisis to 13.3 as the crisis abated. Earnings recovered relatively quickly. By 2011, earnings of the S&P 500 had already exceeded the 2007 peak. The market, however, was not to reach the 2007 peak until the spring of 2013. Investors have not been willing to pay higher P/E multiples for current earnings streams because of all of the global nancial issues that the crisis created. Currently, the P/E multiple is at the high end of this new range established after the crisis. So, the market is now at a crossroads: either the P/E multiple will remain within the post-crisis range or it will begin to reset to a higher range. Should the market remain within the current range, the best investors can hope for is returns that roughly equate to the level of earnings growth. According to FactSet Research, the consensus view for 2014 and 2015 earnings growth for the S&P500 is 9% and 10%, respectively. Given that we are currently trading at the high end of the P/E multiple range, it is very likely that if earnings expectations begin to come down investors would experience a P/E multiple contraction. It would then follow that stock returns could be in for a below-average year. If, however, investors reset the P/E multiple range higher, closer to its normal range in the high teens, we could see signicant upside from current levels. For this to occur, we would need a much stronger economy that would drive earnings higher than the consensus expectations. Given the current economic backdrop, it seems unlikely that we will be breaking out of this 2% real GDP level for a while.
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Its not just a credential. Its a commitment.

The market, therefore, will most likely continue to pay below-average P/E multiples, given all of the pressures on the stock market. In this environment, stocks do not appear to have much near- to intermediate-term upside. We are expecting below-average returns in the market in 2014. In this type of environment, dividend paying stocks tend to perform better than non-dividend paying stocks. Moreover, stocks with higher yields would be more attractive, as a large percentage of the expected return in a low-return environment would come from the dividend. For example, if the expectation is for a ve to eight percent return, stocks that yield four percent will provide a very large portion of the expected return. There are some Maryland-based companies worth taking a look at. Bethesda-based Lockheed Martin (LMT) yields 4%. Rockville-based Washington Real Estate Investment Trust (WRE) yields 4.5%. Columbia-based Corporate Ofce Properties (OFC) yields 4.5%. US equities appear to be the best investment alternative. Even though we are only anticipating single digit returns for 2014, that should prove to be better than any other asset class. International equities may offer the best relative value. Emerging markets are depressed and Europe is just coming out of a long, deep recession. Even China has been affected by the global economic slowdown as its growth rate has slowed from around 11% to 7%. Keeping in mind that international markets tend to be more volatile than the US market, international stocks may offer better returns in 2014 as countries and regions begin their recovery. For 2014, there is a very good chance we will experience another year of rising interest rates. Individual bonds are, therefore, preferred over mutual funds. In addition, investors will generally want bonds with higher coupons and shorter maturities to avoid the large potential losses possible holding lower coupon, longer maturity bonds. In 2014, limiting the damage in bonds might be the best strategy. As has been the case for a few years, cash returns should be non-existent for most of 2014. So what is an investor to do in 2014? Focus on dividend paying stocks with low valuations, lower your expectations, beware of bond funds and cash and have an eye toward international markets.
New Baltimore CFA Society Charterholders

Boyko Atanassov, CFA James Basnight, CFA Stephen Bass, CFA Doni Brodie, CFA David Clewell, CFA James Depfer, CFA Sean Dooley, CFA Joshua Hartig, CFA Jeffrey Huber, CFA Brian Judy, CFA Vidya Kadiyam, CFA Joshua Kakel, CFA Adam Kelly, CFA Kyle Lagratta, CFA John Laun, CFA James Lynch, CFA Craig Martin, CFA Kelley Peel, CFA Richard Phillips, CFA Steven Shui, CFA Arash Soleimani, CFA Russell Sterner, CFA Siby Thomas, CFA Joshua Tyson, CFA Benjamin Waller, CFA Daniel Willard, CFA
Congratulations and best wishes to our members
who have earned the CFA credentials in 2013.
Those listed are among the 95,000 professionals worldwide who hold the prestigious Charted Financial Analyst designation, the only globally recognized credential for investment analysis and advice. Around the world you will find CFA charterholders in leading investment firms, as well as in local organizations like the Baltimore CFA Society. Only those who have mastered three rigorous exams and gained at least three years of hands-on experience earn the right to use the CFA designation. Every year they reaffirm in writing their continuing commitment to the CFA institute Code of Ethics - to act with integrity, exercise independent judgement, and put investor interest first. All of which makes these professionals an asset to our society and our community.
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For further Information please visit www.baltimorecfasociety.org.
Ocean ports are the gateway to the global economy. In 2012, $2.3 trillion in imports and $1.56 trillion in exports owed through U.S. ports which resulted in 13 million jobs (Asbury, 2013). Last year Baltimores port moved up in the national rankings to 9th in terms of dollars of commerce. According to a Maryland Port Commission report, the dollars of freight processed at the Port of Baltimore showed an overall upward trend for the past ten years even with the recessionary effects of 2009 and 2010 (Maryland Port Administration, 2012). The Port of Baltimore includes both private and public terminals. Twenty-eight private terminals process 74% of the freight moving through the port. These private terminals process primarily bulk cargo including; coal, gypsum, sugar, salt, sand, gravel, petroleum products and iron ore (Maryland Port Administration, 2012). Six public terminals are operated by the Maryland Port Administration. The public terminals process automobiles, Roll-On/Roll-Off, steel, containerized freight, and forest products (Figure 2). Containerized freight represents 66% of the cargo processed by the Maryland Port Administration. While Baltimore has a signicant port operation, there is the potential to increase cargo volumes over the next several years. Ships that are too large to transit the Panama Canal are often unloaded at west coast ports including Los Angeles, Long Beach, Oakland, and Seattle. Currently, east coast bound containers can be unloaded on the west coast and then moved eastward using the land bridge facilitated by trucks and rail service. Using rail service to transfer a container from the west coast to Baltimore can add $1000 in shipping costs compared to water delivery direct to Baltimore. The larger west coast ports have long dominated the ght for Asian containerized cargo. However, the bottlenecks that slow down container processing at those busy ports, coupled with additional rail costs and the expansion of the Panama Canal, may tip the scale and make east coast ports like Baltimore viable alternatives.
Figure 1: Dollars of Baltimore Port Commerce

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Year-to-Year Change
30 25 20 15 10 5 2003 2004 2005 2006 2007 2008 2009 2010 2011
Export
Import
2012
Maryland Port Administration, 2012 Foreign Commerce Statistical Report
Figure 2: Types of Cargo Processed

BB/Steel Ro/Ro Container Autos Forest Products
Source: http://www.mpa.maryland.gov/_media/client/cargo/cargo_statistics/cargo1.pdf
Baltimore Poised to Prot in New-Panamax Economy

Tobin E. Portereld
Associate Professor, Department of eBusiness & Technology Management, College of Business and Economics at Towson University
Chaodong Han
Assistant Professor, Department of eBusiness & Technology Management, College of Business and Economics at Towson University
Panama Canal Expansion

Since opening in 1914, the Panama Canal has provided a vital trade route from Asia to the gulf and east coast ports of the U.S. By transiting the 48 mile long canal, ships from Asia avoid the additional 12,000-mile trip around the treacherous southern tip of South America (Zelasney, 2010).
The Panama Canal uses three sets of locks to raise and lower ships in order to crossover Central America, thus connecting the Atlantic and Pacic Oceans. The size of the ships that can traverse the canal is limited by the capacity of the locks. Panamax is the term used to describe the largest ships that can t through the original locks (1,050 ft. long, 110 ft. wide, and a draft less than 41.2 ft). The largest Panamax container ships carry 5,000 twenty-foot long containers. The standard measure of ships capacity is based on how many twenty-foot long containers it will hold, which is known as twenty-foot equivalent units (TEU). Ships are much larger since the opening of the canal nearly 100 years ago. Todays largest container ships, Maersks new Triple-E Series, are over 1,300 ft. long and can carry more than 18,000 TEU. Accommodat-
Jacobo Brandel
Graduate Student, MS-Supply Chain
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Table 1: Worlds Largest Container Shipping Lines

Rank 1 2 3 4 5 6 Operator APM-Maersk Mediterranean Shipping Company CMA-CGM Group Evergreen Line Cosco Container Line Hapag Lloyd TEU Market Share 2,630,861 14.9% 2,382,755 13.5% 1,507,019 8.5% 813,015 4.6% 790,939 4.5% 733,939 4.1%
Retrieved from www.alphaliner.com/top100/
Other competing east coast ports will not be big ship ready by 2015. Most notably, the Port of New York New Jersey, which is the third largest container port in the country, will not be welcoming the New-Panamax ships for several years. The Bayonne Bridge stands in the way of ships reaching the ports four largest container terminals. A project is now underway to raise the bridge deck from 151 ft. to 215 ft. above the water, with completion of the project targeted for 2017. The Port of Baltimore is currently called on by three major container shipping companies. They include the Mediterranean Shipping Company, the second-largest container shipping line in the world; Evergreen Marine Corp., the fourth-largest container shipping line; and Hapag-Lloyd, the sixth-largest (Table 1). All three of these companies currently have New-Panamax sized ships in their eet. A newly formed shipping alliance, called P3, may soon be calling on Baltimore as well. P3 is a coalition of the three largest container shipping lines in the world (Maersk, Mediterranean and CMA-CGM). An agreement between the Port of Baltimore and P3 would have ve of the top six shipping companies calling on Baltimore. Logistics analysts suggest that the creation of P3 could result in efciencies that force other shippers to transform their eets to the lower cost mega-ships (Tirschwell, 2013). For Baltimore that could mean even more ships on the water that will require the New-Panamax infrastructure that is already in place here.
One of our goals is to attract a rst port in service, notes Joseph Greco, Deputy Director of Marketing for the Maryland Port Administration. Being the rst port in service means that ships would come to Baltimore before calling on any other U.S. port. That would position Baltimore to be a gateway for a large volume of cargo looking to move quickly inland. Then with a lighter load, the ships would not require a 50-foot deep channel when calling on subsequent east coast ports.
Stimulating Growth in Exports

Saving costs in water transportation goes both ways. U.S. exporters as well as importers can see great benets. Of the $58.85 billion shipped from the Port of Baltimore in 2012, only $11.72 billion was manufactured here. A recent Brookings Institute report ranks Baltimore 32nd of 100 U.S. metro areas based on the value of exports (McDearman, Donahue, & Marchio, 2013). Regional companies like Allied International Corp. and Barcelona Nut Company are just dipping their toes in the export market water but decreased shipping costs could accelerate use of that strategy (Hopkins, 2013). Foreign markets offer a world of opportunity to a manufacturer with access to low cost shipping.
ing larger vessels translates into greater efciency and lower transportation costs between Asia and the U.S gulf and east coast ports. When the $5.25 billion canal expansion project is completed in 2015, the canal will double its throughput capacity and be able to accommodate ships over 12,000 TEU. The New Panamax constraint will be ships 1,200 ft. long, 160.7 ft. wide with a draft of 49.9 ft. Without the expansion, Panamanian ofcials estimate that the canal will soon reach its maximum sustainable capacity. With completion of the expansion, ofcials predict that canal volumes will increase 3% per year through 2025.
Baltimore Prepares for New-Panamax Ships

Currently, only three ports on the east coast will be ready to handle the larger New-Panamax ships by 2015. Baltimore and Norfolk have completed infrastructure improvements including deeper channels and larger cranes (Conway, 2012). Dredging and crane installations at the Port of Miami are expected to be completed by the time the expanded canal opens in 2015. The Port of Baltimore became big ship ready with the recent completion of a $100 million upgrade. Modications to the container processing facility at the Seagirt Marine Terminal created a 50-foot deep berth, installed four long-reaching cranes that can stretch across the wider ships, and increased cargo processing capabilities.
Intermodal Cargo Movement

When shipping containers are received into a port, they need to be moved to their nal destination using truck or rail. Intermodal facilities transfer the cargo from one mode of transportation to another. Intermodal facilities are designed to efciently move cargo from ships to trucks or ships to trains. When it comes to shipping large quantities over long distances, rail is substantially cheaper. Rail cars can now carry two containers end-to-end and stacked two high called double-stack. From an efciency standpoint, a train of the same length can now carry twice as many containers using double-stacking. Unfortunately, rail cars leaving the Seagirt Marine Terminal cannot be double-stacked due to the limited height of the Howard Street Tunnel. A proposed expansion of the CSX rail yard at Mount Clare in southwest Baltimore would result in nearly 300 trucks per day shuttling containers from Seagirt Marine Terminal to the Mount Clare yard. Double-stacking the containers at the Mount Clare rail yard would allow trains to avoid the Howard Street Tunnel. However, that could create signicant congestion and trafc in the surrounding neighborhood of Morrell Park. On the positive side, the intermodal facility would create
jobs and stimulate the ow of cargo into Baltimore that could be efciently shipped via rail throughout the east and midwest. The $90 million project is on hold while CSX ofcials resolve differences with area residents and city ofcials.
Warehousing and Distribution

When cargo enters the port, it is often stored locally and then redistributed which requires trucks and warehouses. Rukert Terminal Corporation is a bulk cargo handler with outdoor storage and one million square feet of inside storage. The far east is a growing market and we hope to gain additional business with the canal expansion, states Rukert Terminals Vice President, Andrew Nixon. Similar to Seagirt, Rukert also has a 50-foot depth berth to unload bulk and general cargo (cargo that is not in shipping containers) from New Panamax ships.
The Double-edged Sword of Competition

When larger ships begin calling on Baltimore, area businesses could see savings in shipping costs. However, without being able to call on the major port of New York and New Jersey, will the shipping companies even send the mega-ships to the east coast? The combined strength of Norfolk and Baltimore being ready to accept bigger ships may or may not be enough to attract them. Norfolk could become our partner in success rather than our long standing rival. Angela Czajkowski, Manager of Global Supply Chain at Samuel Shapiro & Company, adds that it remains to be seen whether the carriers will recognize the value in adding these mega-ships to the east coast or whether Norfolk and Baltimore will be enough of a draw on their own to get the larger ships calling on the east coast.
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Many markets (i.e., Washington DC, Pittsburgh, Philadelphia, some Midwest cities) can be served by truck and can be reached within 6 8 hours driving from the port. Expanded cargo operations coupled with the recently announced 1 million square-foot Amazon distribution center being built in Baltimore could put a squeeze on the supply of truck transportation resources. The trucking industry will need to be increased, but with new regulations and an aging workforce, this could be tough, notes Nixon.
take less prime locations. First Mover Advantage often translates into larger market shares and greater prots which are both slow to erode as competition arrives. When the Panama Canal expansion is completed in 2015, the Port of Baltimore will be ready to receive the larger New-Panamax ships. However, capitalizing on that position could be difcult. Larger ships will call on ports where there is demand for imports and exports. If Baltimore can build that trafc before other east coast ports are ready, the economic benets can be secured. Which came rst, the port or the demand? That question may actually be easier to answer than the old chicken and egg question. We can be 100% condent that if the Maryland Port Administration had not stepped up with an extensive investment in infrastructure to be New Panamax ready, none of the larger ships would call on Baltimore - ever. However, only time will tell if the increased cargo trafc will come, and more importantly if it will stay. References
Alphaliner - Top 100. (2013). London. Retrieved from http://www. alphaliner.com/top100/ Asbury, N. (2013, June 20). American Jobs and Prestige Depend on US Ports. Money News. Retrieved from http://www. moneynews.com/NealAsbury/port-Panama-Canal-Post-Panamaxship/2013/06/20/id/510909 Conway, K. (2012). North American Port Analysis. Colliers International. Retrieved from www.colliers.com/research Hopkins, J. S. (2013, September 29). A Push for more Exports from the Baltimore Region. The Baltimore Sun. Maryland Department of Transportation (2012). Maryland Port Commission Annual Report. Baltimore, MD: MDOT. Maryland Port Administration. (2012). 2012 Foreign Commerce Statistical Report. Baltimore, MD: Maryland Port Administration. McDearman, B., Donahue, R., & Marchio, N. (2013). Export Nation 2013. The Brookings Institute. Tirschwell, P. (2013). P3 Roils the Waters. The Journal of Commerce, 14(14), p. 70. Zelasney, J. (2010). Gateway Glance: Panama. Retrieved October 18, 2013, from Cargo Business News: http://www.cargobusinessnews.com/Feb10/gateway_panama.html
A Driving Force of Regional Economic Growth

In the era of global supply chains, the economy of the Baltimore Metropolitan Area is linked to the global economy via the Port of Baltimore. The port expansion and further investments are expected to produce the following benets: (1) decreasing material costs for manufacturers located in this region; (2) reducing transit times for goods routing through the port due to improved operational efciency; (3) providing local manufacturers greater access to foreign markets via exports; (4) and a well-positioned port will attract more shipping lines to make stops, which would attract more businesses to be located in the proximity of the port. This virtuous cycle will add more jobs directly in the sectors along the Port of Baltimore supply chain and indirectly in the related service sectors.
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We Built It Will They Come?

Its simple economics, explains Stu Tobin, co-owner of Thunderbolt Global Logistics, shippers select a port which is cheapest and easiest to move their goods through. With few east coast ports ready to serve the New-Panamax ships, the Port of Baltimore could secure the coveted First Mover Advantage. Marketing research shows that a signicant advantage is gained by the rst occupant of a market. McDonalds, Starbucks, and Walmart were quick to establish locations in many markets which shut out their competition, built customer loyalty, or forced the later competitors to
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To learn more about the lab or pledge your support contact Ron Brown, Ofce of Development, (410) 704-2559, ronbrown@towson.edu or visit www.towson.edu/support. Donations also can be mailed to: Ron Brown, Development Ofce, Towson University, 8000 York Road, Towson, MD 21252 Make checks payable to Towson University Foundation. Indicate T. Rowe Price Finance Lab.
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Unemployment is often treated as a national issue, but unemployment is often driven by regional or industry sector issues.This article pries apart the causes of unemployment since 1976, state-by-state. Though there is a national component to every US states unemployment level, it is notable that local factors often dominate national trends. Here are some examples: n North Dakota has an energy boom amid increasing unemployment following the housing bust in 2008. n Texas had increasing unemployment in the mid1980s as energy prices fell dramatically, in the midst of an economic boom. n Coastal economies benefited during the housing boom (pre-2008), and were punished in the bust this is parallel to the US economy as a whole, but more severe. n The Rust Belt prospered slowly in the early 1980s as the rest of the nation began to prosper rapidly. The rest of this article will explain the causes of unemployment over the last 36 years, related to how connected a state is to the rest of the US economy, and how well the industry mix in a given state is doing.
Figure 1: Individual State Sensitivity to National Unemployment

State Michigan Nevada Indiana Alabama West Virginia Ohio Rhode Island Illinois Tennessee North Carolina Oregon South Carolina California Washington Florida Pennsylvania Wisconsin Arizona Kentucky New Jersey Mississippi Missouri Georgia Delaware Connecticut Utah Idaho Colorado Maine Massachusetts Minnesota District of Columbia New York Arkansas Virginia Maryland Iowa Vermont Louisiana New Hampshire New Mexico Montana Oklahoma Wyoming Alaska Hawaii Texas Kansas Nebraska South Dakota North Dakota Alpha (2.50) (2.44) (2.47) (1.80) 0.28 (1.10) (1.03) (0.51) (0.86) (1.44) (0.00) (0.72) 0.20 0.07 (0.53) (0.33) (1.30) (0.50) 0.20 (0.10) 1.57 (0.28) (0.22) (0.83) (0.41) (0.60) 0.36 (0.01) 0.31 0.17 (0.29) 2.45 1.48 1.46 (0.30) 0.31 (0.17) 0.06 2.45 0.12 2.67 1.84 1.49 1.48 4.52 1.46 2.89 1.68 0.61 0.95 1.49 Beta Alpha SD Beta SD 1.67 0.25 0.04 1.42 0.22 0.03 1.35 0.20 0.03 1.32 0.23 0.03 1.24 0.48 0.07 1.23 0.17 0.03 1.17 0.26 0.04 1.17 0.14 0.02 1.17 0.15 0.02 1.14 0.19 0.03 1.13 0.17 0.03 1.13 0.18 0.03 1.12 0.18 0.03 1.09 0.15 0.02 1.07 0.18 0.03 1.07 0.14 0.02 1.07 0.17 0.03 1.06 0.18 0.03 1.05 0.20 0.03 1.01 0.21 0.03 0.99 0.27 0.04 0.97 0.12 0.02 0.96 0.16 0.02 0.95 0.20 0.03 0.91 0.23 0.03 0.88 0.15 0.02 0.88 0.20 0.03 0.87 0.17 0.03 0.87 0.19 0.03 0.86 0.24 0.04 0.82 0.12 0.02 0.81 0.18 0.03 0.81 0.18 0.03 0.79 0.18 0.03 0.78 0.08 0.01 0.78 0.12 0.02 0.77 0.19 0.03 0.74 0.19 0.03 0.73 0.38 0.06 0.68 0.20 0.03 0.64 0.21 0.03 0.61 0.21 0.03 0.59 0.22 0.03 0.56 0.29 0.04 0.53 0.28 0.04 0.52 0.27 0.04 0.52 0.19 0.03 0.48 0.13 0.02 0.46 0.13 0.02 0.45 0.11 0.02 0.39 0.18 0.03 R-squared Alpha T-stat 81.46% (9.98) 80.77% (11.22) 81.90% (12.42) 75.95% (7.72) 40.15% 0.59* 83.93% (6.49) 65.95% (3.88) 87.48% (3.64) 85.25% (5.65) 77.35% (7.40) 80.95% (0.03)* 79.11% (3.94) 79.43% 1.14* 83.84% 0.49* 78.09% (2.93) 85.43% (2.40) 78.88% (7.49) 77.62% (2.81) 72.97% 1.00* 68.87% (0.47)* 57.37% 5.86 86.47% (2.35) 78.07% (1.37)* 67.93% (4.05) 61.44% (1.80)* 76.69% (3.91) 65.13% 1.77* 71.86% (0.04)* 66.45% 1.61* 55.28% 0.72* 82.17% (2.43) 66.11% 13.40 67.90% 8.45 66.27% 8.23 90.79% (3.84) 81.92% 2.66 61.15% (0.86)* 60.28% 0.34* 26.41% 6.40 52.48% 0.60* 48.44% 12.78 45.25% 8.65 41.23% 6.70 26.35% 5.08 25.87% 16.05 27.58% 5.52 41.71% 15.10 55.86% 12.53 54.10% 4.62 63.95% 8.93 31.54% 8.14 Beta T-Stat 17.82 12.80 11.63 9.06 3.42 9.21 4.33 8.08 7.29 4.85 5.11 4.69 4.61 3.98 2.80 3.52 2.57 2.28 1.56* 0.32* (0.29)* (1.54)* (1.81)* (1.73)* (2.79) (5.13) (4.09) (5.06) (4.49) (3.94) (9.78) (6.86) (7.28) (7.87) (18.90) (12.83) (7.98) (9.04) (4.69) (10.73) (11.36) (12.16) (12.25) (10.17) (11.13) (12.07) (16.90) (25.79) (27.48) (34.82) (22.19) Correlation Group 3 2 3 6 6 3 5 3 3 2 3 2 5 6 5 6 3 2 3 5 3 4 2 1 5 3 6 4 1 5 3 1 1 6 1 1 3 1 6 1 6 6 3 3 6 1 4 4 3 3 6
Data & Method

Unemployment data for each state and the US as a whole was obtained from the St. Louis Federal Reserves Federal Reserve Economic Data (FRED) database. The data covers the period from 1976 to August 2013. Ordinary least squares regression was used to calculate how sensitive unemployment rates were in each state relative to overall US unemployment rates. The equation looks like this:
Differences in US States Unemployment over the Last 36 Years

David J. Merkel, CFA
Principal of the equity and bond asset management rm Aleph Investments, LLC
Ustate,t = state + stateUUS,t + state,t
The intuition behind this equation is that the unemployment rate of a given state can be explained by the amount that it varies in proportion to the unemployment rate for the US as a whole (the beta term), a xed difference (the alpha term), and the error term. Here were the results by State: (Figure 1).
* Indicates not statistically signicant from zero for alpha, and one for beta at a 5% level.
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Figure 2: Sensitivity of State Unemployment Rates as a Function of US Average Unemployment Rates
extraction, nancial sector concentration, or Federal government work. Note that the recent boom and bust would argue that nancials are more cyclical than previously believed, but that was during a small period during the study period. The same applies in reverse to agriculture and resource extraction, which beneted from increased demand for Sensitivityworld, making these raw materials Very fromHigh the developing (Beta over 1.3) industries appear less cyclical than previously believed. High Sensitivity Betas reect the overall sensitivity to moves in US unem(Beta 1.11.3) ployment rates from 1976 to 2013, but the correlation Average Sensitivity (Beta 0.91.1) of the residuals of the states highlight hidden factors that were inuential in unemployment rate movements. Low Sensitivity (Beta 0.70.9) Typically, the factors stemmed from the economic sectors Very group Low Sensitivity prominent in each of states, as their protability (Beta under 0.70) waxed and waned. Starting with ten groups of states randomly divided, the groups were iteratively adjusted, combining groups that were highly correlated with each other until there were no more improvements possible, ending with six groups. Here is the average correlation matrix:
Figure 4: Unemployment Residual Correlation Groups in the United States
Group 1 Group 2 Group 3 Group 4 Group 5 Group 1

90/0/65/3 80/30/0/0 70/50/0/0 10/10/5/55
Group 6 Group 7 Group 8
Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 Group 8
Very High Sensitivity

(Beta over 1.3) (Beta 1.11.3) (Beta 0.91.1) (Beta 0.70.9)
High Sensitivity Average Sensitivity Low Sensitivity Very Low Sensitivity

(Beta under 0.70)
Figure 3: Average Correlation Matrix

Avg Corr 1 2 3 4 5 6 Group 1 40% Group 2 -4% 43% Group 3 -34% -15% 43% Group 4 -37% 12% 24% 36% 90/0/65/3 80/30/0/0 70/50/0/0 10/10/5/55 Group 5 41% 26% -51% -22% 61% Group 6 -14% -43% 30% -5% -46% 50%
The difference in sensitivity to the US unemployment rate is considerable by state. If the unemployment rate rose 1% in the US, Michigans unemployment rate would tend to rise 1.67%, while the North Dakotas unemployment rate would only tend to rise 0.39%. The states were then divided into ve beta groups, symmetric around 1.0, with a width of 0.2 for the three middle groups. On a map, it looks like this: (Figure 2). The highest sensitivity states to US unemployment rates are largely found in states with high exposure to the Auto and Gambling industries. When times are bad, people shepherd their money more carefully. They cut back on buying new cars, and gambling. High sensitivity states tend to have a lot of gearing to industrial activity, which tends to be more boom-bust than other economic activity. Average sensitivity states tend to have balanced economies, reecting a mix of business similar to that of the US as a whole. Low-sensitivity states tend to have a large amount agriculture, resource 44
Here is a graph of the average unemployment residuals for the six correlation groups over the 36-year study period: (See Figure 5)
Description of the Correlation Groups

Group 1 composed of Maryland, other Mid-Atlantic States, New England and Hawaii, this had high unemployment relative to the rest of the US in 1976 and 1997, and low unemployment in 1987. It has high relative exposure to the consumer noncyclicals and nancials sectors, and low relative exposure to energy and technology. The high weight in nancials helps explain the employment gains from 1976 to 1987, as nancial companies beneted from falling interest rates, rising equity markets, and expanding product offerings. Group 2 composed of the Carolinas, Georgia, Arizona and Nevada had high unemployment relative to the rest of the US in 2011, and low unemployment in 1984 and 1991. It has a lot of relative exposure to the consumer noncyclicals and utilities sectors, and low relative exposure to energy, nancials, and technol-
And here is the map identifying the groups: (See Figure 4). Groups 1, 2 and 5 correlate strongly internally and moderately among each other. The same is true for 3, 4 and 6. The rest of the group correlations are weak if not negative. Groups 3, 4, and 6 cover the center of the US. They have proportionately more economic sectors in agriculture, energy, consumer cyclicals, and basic materials. Much of the area is rural. Groups 1, 2 and 5 cover the coasts of the US and are more heavily urbanized. Their economic sectors have a greater proportion of nance, healthcare, and technology. Post-2007 unemployment was relatively worse in groups 1, 2 and 5 versus the other groups, because they were part of the hot housing markets, and lost more construction jobs as a result.
ogy. During the mid-1980s to early 1990s, this group beneted from the growth in demand for noncyclical goods from the Baby Boomers. After the popping of the nancial bubble in 2008, weakness in construction and gambling in Arizona and Nevada led to higher levels of unemployment. Group 3 composed of the Midwest, parts of the South, Utah and Oregon had high unemployment relative to the rest of the US in 1976 and 1992, and low unemployment in 1986. It has high relative exposure to the consumer cyclicals and noncyclicals and basic materials sectors, and low relative exposure to energy and technology. The US economy as a whole peaked and troughed along with group 3, which makes sense given their relatively large exposure to cyclical sectors. Group 4 composed of Texas, Missouri, Kansas and Colorado had high unemployment relative to the rest of the rest of the US in 1987 and 2003, and low unemployment in 1976. It has a lot of relative exposure to the energy and utilities sectors, and low relative exposure to nancials and technology. Performance
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Master
Figure 5: Average Residual Unemployment for the State Correlation Groups
2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 Group 1 Group 2 Group 3 Group 4 Group 5 Group 6
agriculture and basic materials, as did growth in demand from emerging markets in 2009. Those factors were absent in 1987, as nancial rms were booming. Marylands unemployment rates have held down well being next to Washington, DC. The growth in the US government during the last 10 years has supported employment in Maryland. The grand question to ponder is what would ever happen to Maryland, Washington, DC and Virginia if signicant cuts were made to Federal payrolls?
Supply Chain Management

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Maryland
Conclusion and Recommendations to Policymakers

There are two main conclusions: 1) State level unemployment is a result of sensitivity to US unemployment levels and the mix of local industries. Policymakers should know how sensitive their state is to the national economy, and what industries are doing well or poorly before taking credit for low unemployment rates. More often than not, the employment rates are low or high due to factors beyond the control of policymakers. 2) In general, greater employment stability exists when that industry mix is more diversied. This is something policymakers can limitedly affect. Most states have efforts to attract businesses to their states. If you want unemployment levels to be more stable, aim your efforts at attracting businesses that diversify your existing mix.
90/0/65/3
80/30/0/0
70/50/0/0
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10/10/5/55
of the energy sector is the critical factor here it was relatively strong in the mid-to late 1970s, but weak after oil prices bottomed out in the mid-1980s and late 1990s. Group 5 composed of the densely populated coastal states of California, Florida, New Jersey, Massachusetts, Connecticut and Rhode Island had high unemployment relative to the rest of the rest of the US in 1976, 1992 and 2012, and low unemployment in 1986. It has a lot of relative exposure to the healthcare and technology sectors, and low relative exposure to energy and consumer noncyclicals. In the early 1990s, the aerospace industry in California went bust while the commercial property markets were at the deepest point of their slump. Most of the rest of the unemployment cyclicality can be attributed to the more cyclical nature of the industries in this group an amplied version of the US economy. Group 6 looks like a bunch of leftovers, but it is not. Composed of states in the Northwest and Alaska, New Mexico, Louisiana, Arkansas and Alabama, West Virginia and Pennsylvania, this group had high unemployment relative to the rest of the rest of the US in 1987, and low unemployment in 1976 and 2009. It has a lot of relative exposure to the agriculture and basic materials sectors, and low relative exposure to nancials. The stagation of the mid-1970s beneted
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The Towson University Index (TUI) was rst created as a way to measure performance of publicly traded companies that have a history of hiring Towson University students, are thought to be possible hirers of Towson students, or have some other connection to the University or the state of Maryland. The index is comprised of only a sample of companies that might t the description and is not meant to be all-encompassing. The original index was comprised of 30 Maryland based companies and 10 companies based elsewhere. This year, the modied list is composed of 50 publicly traded companies with 33 Maryland and 17 non-Maryland companies. We used a value-weighted approach to create the index; hence the larger the companys market capitalization the greater the companys representation in the index. In addition, Maryland based companies were given a proportionately larger weighting in the index than their non-Maryland counterparts. Figure 1 illustrates the performance of the Towson University Index relative to the S&P 500, a parallel comparison of two weighted indices. The graph tracks and compares the total performances of the two indices over a 6-year period between July 2007 and August 2013. Since 2007, TUI outperformed the S&P 500 by 47.6%. The TU Index is comprised of many small and mid cap stocks which have collectively outpaced the S&P 500 in 2012 and 2013. The recent acceleration of outperformance is also attributable to changes in the number of TUI constituents, the expansion of the TUI, as well as the change in time period tracked.
The four most represented sectors in the TUI are Financials at 53.7%, Consumer Staples at 20.5%, Industrials at 15.94%, and Consumer Discretionary at 5.7%. The TUIs superior returns as of late are largely due to its
The TUI highlights the job opportunities available to Towson students and emphasizes the relative performance of publicly traded companies connected to the University.
heavy exposure to well performing sectors (Financials and Consumer Staples) and small- and mid- cap stocks. Not only have TU Index constituents outperformed the S&P 500 handily, but they have contributed to the labor recovery as over 75% of Maryland-based companies in the TU Index have increased their workforce since the last review. The TUI outperformed the S&P 500 by over 23% over the most recent measured twelve months. The weakest quarterly performance of the TUI occurred during the fourth quarter of 2008. The TUI heavy overweighting in nancials caused the TUI to underperform the S&P 500 by 3.04% during this period. The TUI heavy over-
Figure 1: Towson University Index relative to the S&P 500
Towson University Index Towson University Investment Group

Travis Crouse
Portfolio Manager, Towson University Investment Group
William Mason
Junior Portfolio Manager, Towson University Investment Group
80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
TU Index
TU Index
S&P 500
S&P 500
Jul-13
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Disclosure:
This years TUI was based on last years TUI and was updated with assistance from the Internship and Career Services program at Towson University. Historical prices obtained from Bloomberg hosted in the T. Rowe Price Finance Laboratory. To obtain the market caps as of August 30, 2013, the most recent price as of the writing of this article was divided by the most recent market cap and then multiplied by the closing price on August 30, 2013; the effects of changes due to share issuances are expected to be minimal.
Table 1. Companies Based in Maryland

Ticker Company Market Cap* LMT Lockheed Martin Corp 40,590 DISCA Discovery Holding Co 20,450 TROW T Rowe Price Group Inc 18,620 MAR Marriott International Inc 12,990 MKC McCormick & Co Inc 8,950 UA Under Armour Inc 8,280 GRA W.R. Grace & Co 6,610 CVH Coventry Health Care Inc 5,610 LM Legg Mason Inc 4,190 UTHR United Therapeutics Corp 3,870 MCRS Micros Systems Inc 3,853 OHI Omega Healthcare Investors Inc 3,430 SBGI Sinclair Broadcast Group Inc 2,910 CIEN Ciena Corp 2,600 CHH Choice Hotels International 2,410 FIRE Sourcere Inc 2,390 CSE CapitalSource Inc 2,260 OFC Corporate Ofce Properties Trust 2,000 SLCA U.S Silica Holdings 1,350 ARB Arbitron Inc 1,280 JOSB Jos A Bank Clothiers Inc 1,180 ADX Adams Express Co 1,140 OPNT Opnet 750 SASR Sandy Spring 574 OSIR Osiris Therapeutics Inc 563 GPX GP Strategies Corp 496 MED Medifast Inc 359 AGX Argan Inc 278 TESS Tessco Technologies Inc 264 TSYS TeleCommunication Systems Inc 157 USU USEC Inc 54 GVP GSE Systems Inc 28 FMAR. First Mariner Bancorp 25 UUU Universal Security Instruments Inc 11 Total 160,520 Sector Quarterly Revenue* Employees Industrials 11,408 116,000 Consumer Discretionary 1,467 4,500 Financials 854 5,448 Consumer Discretionary 3,263 127,000 Consumer Staples 1,003 9,000 Consumer Discretionary 455 1,900 Materials 803 6,500 Healthcare 3,517 14,400 Financials 657 2,975 Healthcare 281 623 Information Technology 329 6,506 Financials 103 25 Consumer Discretionary 314 4000 Information Technology 508 4546 Consumer Discretionary 184 1095 Information Technology 65 674 Financials 120 543 Financials 140 428 Materials 130 785 Consumer Discretionary 107 1,292 Consumer Discretionary 233 4,636 Financials 12 30 Information Technology 44 654 Financials 48 706 Healthcare 5 59 Industrials 105 2,775 Consumer Discretionary 97 947 Industrials 58 246 Information Technology 144 843 Information Technology 93 1,400 Energy 285 1,770 Information Technology 11 246 Financials 20 594 Industrials 3 17 *numbers expressed in millions
Table 2. Companies Based Elsewhere

Ticker Company WFC Wells Fargo & Co PG Procter & Gamble Co C Citigroup Inc UPS United Parcel Service Inc MS Morgan Stanley COF Capital One Financial PNC PNC Financial Services BBT BB&T Corp NOC Northrop Grumman Corp SHW Sherwin-Williams Co MTB M&T Bank Corp SWK Stanley Black & Decker BBY Best BUY Co Inc LUV Southwest Airlines Co KIM Kimco Realty Corp CSGP CoStar Group Inc SUSQ Susquehanna Bancshares Total Market Cap* 224,020 216,500 153,540 83,190 55,090 39,250 38,930 23,940 22,140 17,780 14,560 14,290 13,030 9,820 8,300 4,810 2,360 941,550 Sector Quarterly Revenue* Employees Financials 22,455 274,300 Consumer Staples 20,655 121,000 Financials 18,183 253,000 Industrials 13,507 222,560 Financials 8,503 55,610 Financials 6,095 39,600 Financials 4,275 50,947 Financials 2,689 34,000 Industrials 6,294 68,100 Materials 2,573 34,154 Financials 1,259 14,885 Industrials 2,814 45,327 Consumer Discretionary 10,753 165,000 Industrials 4,643 45216 Financials 244 635 Industrials 1,965 1,514 Financials 223 3,304 *numbers expressed in millions
Towson University Investment Group

The Towson University Investment Group (TUIG), which was formerly known as the Wall Street Investors Investment Club, was founded to bring together highly motivated students that are seeking a hands-on experience with equity investments and research. The group routinely prepares stock research reports to analyze equities for inclusion in the actively managed portfolio that is the core of the group. The organization is completely student-run and depends on the efforts of members while offering valuable professional development opportunities. TUIG offers a unique form of student involvement that lls the gap between the classroom and real-world investment management. As part of the learning experience, the group travels to various locations, both domestically and internationally, to meet with nancial and economic professionals or attend investment forums. In March 2011, the group travelled to Hamden, Connecticut to attend the inaugural Quinnipiac Global Asset Management Education (G.A.M.E) Forum, presented by keynote speakers at Quinnipiac University. Keynote panelists discussed the economy, stock markets, alternative investments and corporate governance. Past events include golf outings to support local charities. TUIG is afliated with the Towson University College of Business and Economics and the Department of Finance. Members work closely with faculty and other students to advance the colleges mission and to promote the academic success and education of students.
weighting in nancials caused the TUI underperformed the S&P 500 by 3.04%. One of the TUIs best performers has been Under Armour, which has ourished since the nancial crisis. Under Armours shares are up approximately 50% year-to-date and have outperformed the market over virtually every measurable time period. Since going public, Under Armour has become a leading innovator in performance apparel and has developed strong customer loyalty as it has continued to expand its product line. It is important to note that we have replaced Coventry Health Care (acquired by Aetna) with U.S. Silica Holdings. U.S Silica Holdings is a materials company that specializes in delivering silica products to various end markets. The companys 50
products play a vital role to the fracking process in various shale regions. Shares are up approximately 40% during the rst eight months of 2013. When looking at the TUI, it is important to remember there are a large number of private companies (especially healthcare rms) and government organizations in Maryland that contribute to growth and job opportunities. The TUI highlights the job opportunities available to Towson students and emphasizes the relative performance of publicly traded companies connected to the University.
The Sixth Annual TUIG Market Summit will be held in Stephens Hall Room 310 from 6PM - 8PM on April 22, 2014.
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Contributors
JACOBO BRANDEL , MS , is a Graduate Assistant, Department of eBusiness & Technology Management at Towson University. Jacobo earned his B.A. in Industrial Engineering and M.S. in Project Management from the Universidad Tecnologica Centroamericana, C.A. His career experience includes expertise in transportation and logistics working for global leading companies in the shipping and apparel manufacturing industries. MATTHEW CHAmBERs, PH.D., is an Associate Professor of Economics in the College of Business and Economics at Towson University. He received his PhD in Economics from Florida State University in 2003. His research is in the areas of macroeconomics, housing and health. His current research agenda focuses on the role of mortgage innovation in the recent nancial crisis. His published works appear in such journals as the International Economic Review, and the Journal of Monetary Economics and outlets published by the NBER. His work has been nancially supported through the National Science Foundation and the Center for Medicare and Medicaid Services. TRAVIs CROUsE, from Aberdeen, Md., is a student at Towson University with an expected graduation of May 2014. He is currently pursuing a major in Economics. Since the summer of 2012, Travis has served as the Portfolio Manager for the Towson University Investment Group prior to which he served as the Junior Portfolio Manager. Travis currently interns as a Financial Planning Assistant at Heritage Financial Consultants. MICHAL DEWALLY, PH.D., CoEditor of the Baltimore Business Review, Assistant Professor in the Finance department, holds a MS in Chemical Engineering from France and a MBA and Ph.D. from the University of Oklahoma. Upon graduation with his doctoral degree, he accepted a position at Marquette University in Milwaukee from where he joined Towson University in 2010. Michals research interests are in the elds of Investments and Corporate Governance. His research areas span from the link between corporate governance structure and firm performance to the prots of market participants in the crude oil futures market. His research has appeared in the Review of Financial Studies, the Journal of Business, the Journal of Banking and Finance, the Journal of Corporate Finance, the Financial Analysts Journal among others. LIjING DU, PH.D., is an Assistant Professor of Finance. She received a master in Economics and a Ph.D. in Business from the University of Kansas in 2007 and 2013, respectively. Her teaching and research interests include empirical asset pricing anomalies, distress risk, and credit derivatives. Her academic work has examined the relation between distress risk, idiosyncratic volatility, and future stock returns in up versus down market, the role of information uncertainty and short-sale constraints on the informativeness of Credit Default Swap (CDS) market, the effect of CDS on the pricing of audit services, and CDS market reactions to restatement announcements. FARHAN S. MUsTAfA, CFA, CoEditor of the Baltimore Business Review, is Associate Coordinator and Research Analyst at Legg Mason Capital Management. He serves on the Board and is the Membership Chair of the CFA Baltimore Society. He is completing his Executive MBA at the University of Marylands Robert H. Smith School of Business. Farhan has B.A. from Washington and Lee University in Economics and Computer Science.
Contributors
CHAODONG HAN, PH.D., is an Assistant Professor, Department of eBusiness and Technology Management at Towson University. He received his Ph.D. in logistics from Robert H. Smith School of Business, University of Maryland in 2008. Focusing on global supply chain management, his research has been published in logistics journals with Emerald Journals Highly Commended Paper Award in 2009. He was selected as a Junior Fellow of Towson Academy of Scholars for his research project in humanitarian supply chain management for AY 2010-2011. He earned his MBA from Smith School of Business, M.A. from Georgetown University and B.A. from Beijing University, China. WILLIAm MAsON , from Little Orleans, Md., is a student at Towson University with an expected graduation of May 2016. He is pursuing a major in Economics with a minor in Business Administration. William serves as the Towson University Investment Groups Assistant Portfolio Manager and is a Leadership Consultant for Towson Universitys Ofce of Student Activities. DAVID J. MERKEL, CFA, is Principal of the equity and bond asset management rm Aleph Investments, LLC, and writes The Aleph Blog. Previously, he was the Director of Research for Finacorp Securities, Senior Investment Analyst at Hovde Capital, and a leading commentator at RealMoney.com. Before that, he managed corporate bonds for Dwight Asset Management, mortgage bonds and investment risk at Mount Washington Investment Group, after working with Provident Mutual, AIG, and Pacic Standard Life. David holds Bachelors and Masters degrees from Johns Hopkins. In his spare time, he takes care of his eight children with his wonderful wife Ruth. CLEmENT K. MILLER, CFA, is the 2012-2014 President of the CFA Society Baltimore. Clem is an Investment Strategist for Wilmington Trust Investment Advisors, a subsidiary of M&T Bank. His position includes portfolio management of the Wilmington Trust international fund, selection of investment managers in international equities and xed income, and provision of international asset allocation advice. Before entering the investment management industry in 2008, he was for many years involved in international trade nance, with both the Export-Import Bank of the United States and M&T Bank. He holds a bachelors degree from Georgetown Universitys School of Foreign Service and an MBA from George Washington University. ERICA D. NIEmANN, CFA, is an Analyst at Lane Five Capital Management, a long-biased, concentrated valuation-driven hedge fund based in Towson, MD. Erica joined Lane Five in the summer of 2007 and has covered various industries including retail, industrials, media, payment processing, education, automotive and travel. While Lane Five primarily invests in equities, the fundamental research process has spurred investments in high yield bonds and options strategies as well. Prior to joining Lane Five, she was an Associate Analyst in the Equity and Capital Markets Research Group of Mercantile Capital Advisors (now PNC Advisors). Erica graduated from Loyola College in Maryland in 2005 with a double major in Finance and Economics, and received her CFA designation in 2010.
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Contributors
NIALL H. OMALLEY, MBA, Co-Editor of the Baltimore Business Review, founder and Managing Director of Blue Point Investment Management, which manages equity portfolios for separate account clients. The style can best be described as 2/3s GARP and 1/3 turnaround. Niall leverages over 12 years of international experience and an innate curiosity about the creative destructive cycle that governs both innovation and capitalism to identify investment opportunities. Working for Crestar Bank and SunTrust Bank as a Credit and Risk Management Ofcer, Niall has underwritten over a $1 billion dollars of equipment nancing transactions. He serves on the Board and on the Program Committee for CFA Society Baltimore. Niall has taught Investments and Equity Security Analysis at Towson University as Adjunct Professor in the Department of Finance. TOBIN PORTERfIELD, PH.D., is an Associate Professor in the Department of eBusiness & Technology Management at Towson University. He conducts research in business-tobusiness relationship management and the use of information technology in the supply chain. Dr. Portereld teaches operations management, project management, and business analysis courses at both the undergraduate and graduate levels. He holds a Ph.D. in Logistics from the University of Maryland-College Park. His research has been presented at regional and national conferences as well as being published in such journals as Transportation Journal and The International Journal of Physical Distribution and Logistics Management. YINGYINGSHAO, PH.D., CFA , Co-Editor for the Baltimore Business Review, is an Assistant Professor in the Department of Finance at Towson University.Prior to receiving her Ph.D. in Finance from the University of Arkansas in 2010, she completed a Master of Science in Finance from the University of Tulsa in 2006, and earned her MBA from the University of Arkansas in 2003. Her research interests, taking root from her many years of experience at Bank of China, include banking, risk management, corporate nance and emerging markets. DAVE STEpHERsON, CFA , is Chief Investment Ofcer, Portfolio Manager and Partner at Hardesty Capital Management. Dave joined the rm in February of 1999, following nearly a decade of work in the Personal Trust Department of the Mercantile Safe Deposit and Trust Company. He received a BA in government from the University of Texas at Austin. Dave successfully completed the Chartered Financial Analyst program in 1997 and is a member of the CFA Institute and a former President of the CFA Society Baltimore. He is a resident of Dayton in Howard County. Daves expertise includes investment performance, fundamental analysis, and portfolio management.
Master Accounting and Business Advisory Services

Take your career to a new level in one of the fastest growing elds with a Master of Science degree in Accounting and Business Advisory Services, a program offered jointly by Towson University and the University of Baltimores Merrick School of Business. The M.S. in Accounting and Business Advisory Services is fully accredited by AACSB-International (Association to Advance Collegiate Schools of Business), the gold standard for business education. Depending on your academic interests and professional goals, you can tailor the program to t your needs through a balance of foundational course work and electives. After gaining a solid foundation in accounting and nancial management, you can focus in either applied information technology through Towson University or management information systems through University of Baltimore. Students who enroll in the program have the opportunity to take classes in person and onlineat both institutions and graduate ready to sit for the Uniform Certied Public Accountant exam in Maryland and many other states. From there, you will move on to an exciting, satisfying career as an auditor, management accountant, consultant, internal auditor or other high-level role in public, nonprot, small business or corporate settings.
grad.towson.edu/acbs-ms
for more information.
54
Visit
About Towson University
Founded in 1866, Towson University is recognized among the nations best regional public universities, offering more than 100 bachelors, masters and doctoral degree programs in the liberal arts, sciences and applied professional elds on its 328-acre campus. Serving more than 21,000 students, Towson University is one of the largest public universities in Maryland. The university provides innovative graduate courses and programs that respond to specic state, regional and national work force demands. As a metropolitan university, Towson plays a key role in the educational, economic and cultural life of its surrounding communities, the Baltimore metropolitan area and the state of Maryland.
About The CFA Society Baltimore
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The CFA Society Baltimores mission is to provide the nancial community with information and knowledge, while advocating ethical conduct with regard to investments and nancial management. The CFA Society Baltimore also seeks to encourage and aid the education of persons engaged in the investment profession, and to provide members of the society with opportunities to exchange ideas and information amongst their peers. The CFA Society Baltimore is an afliate of the CFA Institute, which has over 100,000 members globally. BCFAS membership, 600 members strong, draws from a diverse cross section of local investment rms, nancial and educational institutions, and government agencies. 56
WMA CFS CIMC FRM MS AFC RFC MSFS C CAIA CFA QPFC CASL CCFC PFS AWMA CFS C C FRM CMA CMFC C ChFC CDFA CEBS AAM CDP CLTC CLU PFS CP CRPC AWMA CTFA REB CFP AFC RFC MSFS CA A QPFC CASL CCFC P WMA CFS CIMC FRM C FRM CMA CMFC C
C H A R T E R E D F I N A N C I A L A N A LY S T
In the ever-growing alphabet soup of credentials, CFA is the unrivaled standard for investment professionals.
For more information about the society please visit www.BaltimoreCFASociety.org
2010 CFA Institute. CFA and CFA Institute are registered trademarks of CFA Institute in many countries around the world.
College of Business and Economics Towson University 8000 York Road Towson, MD 21252-0001
TowsonGlobal
Bridging Global Markets
TowsonGlobal is Towson Universitys business incubator that helps both domestic and foreign entrepreneurial ventures learn how to compete in the global economy, both at home and abroad. TowsonGlobal provides businesses with a wide range of support, including high-quality, affordable ofce facilities; business counseling; mentoring; network assistance; workshops and other educational forums. Members also draw from the experience of an active advisory board composed of executives in technology, nancial and legal services, logistics, manufacturing, contracting and venture capital elds. Tap into TowsonGlobals resources today!
For more information contact: Frank Bonsal, Interim Director TowsonGlobal Towson University 7801 York Road, Suite 342 Towson, MD 21204 Tel: 410-769-6449 Fax: 410-769-6477 Email: info@TowsonGlobal.com www.TowsonGlobal.com

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BALTIMORE

Marylands Housing Recovery and a Nobel Perspective

Put the Investor First by Advocating for Shareholder Rights

Distance in Small Business Lending in Maryland

Reversal of Fortune - Competitive Advantages Redening Industrial Investment in the U.S.

Credit Default Swaps of Maryland Based Firms

Baltimore Business Review A Maryland Journal 2014

Whats an Investor To Do?

Baltimore Poised to Prot in New-Panamax Economy

Differences in US States Unemployment over the Last 36 Years

Towson University IndexTowson University Investment Group

Contributors 52 TU / BCFAS Prole 56

Message from the Dean

Message from the President

Top 10 Employers CFA Charterholders

Shohreh A. Kaynama, Ph.D. Dean, College of Business and Economics

Clement K. Miller, CFA President, CFA Society Baltimore

Screening Asset Managers for Ethical Behavior

Are the right investment professionals working for you?

ETHICS. Charterholders adhere to the highest standards of ethical

CFA Institutes peerless system is one of integrity-based professional

behavior, which prevents conicts of interest and fosters trust. The

conduct, supported by a signed annual statement of ethical behavior.

EXPERTISE. CFA Charterholders have successfully completed a

programs provide opportunities for lifetime learning.

KNOWLEDGE. . In addition, comprehensive continuing education

U.S. BaltimoreTowson Maryland

Residential Housing Prices Comparison

Marylands Housing Recovery and a Nobel Perspective

Table 1: Ranking of Maryland MSAs

Is the Housing Recovery Sustainable?

A Nobel Perspective: The Return of Irrational Exuberance

The Evolution of Activism

The Cost of Activism

Put the Investor First by Advocating for Shareholder Rights

Pay for Performance and Share Ownership

All Investors Have a Say

Its Still an Uphill Battle

$180 $150 $120 $90 $60 $30 $0 In State Out of State

Figure 2: Historical Distribution of In State versus Out of State Loan Supply

Historical small business loans supply in Maryland

80% In State Out of State

Distance in Small Business Lending in Maryland

Yingying Shao, Ph.D., CFA

The case for local lenders

Figure 4: Historical Small Business Loan Default Rate

20% Out of state 15% In-state

Figure 3: Historical Distance and Loan Default Rate

Default Rate 0.15

-2 -3 -4 1950 1960 1970 1980 1990 2000 2010

Figure 1: The U.S. Shale Gas Competitive Advantage

Competitive Advantage Natural Gas

*Barrel of Oil Equivalent = 5.5514 MM BTU

Reversal of Fortune - Competitive Advantages Redening Industrial Investment in the U.S.

Table 1: Pounds of C02 emitted

Exports Net Exports

Figure 4: Bakken Shale Gas Flares Visible from Space

What is the Shale Gas Advantage?

PMS 202 - TowsonU CBE Red - 0/100/61/43