By Jacob Siegmund
Marc Richcreek
Robert Smith
Vinay Mohan
Agenda
Section
Section Name
Slide Number
1
Sector Overview
3-4
2
Economic Analysis
5-6
3
Business Analysis
7-9
4
Financial Analysis
10-15
5
Valuation Analysis
16-21
6
Recommendations
22
Sector Overview
SIM Portfolio vs. S&P500
25.00%
20.00%
15.00%
10.00%
S&P 500 Weight
5.00%
SIM Weight
0.00%
Overview
Economic
Business
Financial
Valuation
Recommendations
Sector Overview
Sector Weights
Financial Sector
S&P 500 Weight
SIM Weight
+/-
Jan 31st, 2011
16.13%
11.74%
-4.39%
Dec 31st, 2010
16.06%
11.79%
-4.27%
Sep 30th, 2010
15.57%
11.83%
-3.74%
Sector Performance
30.00%
20.00%
10.00%
Financial Sector
S&P 500
0.00%
1 Year
3 Year
5 Year
-10.00%
-20.00%
Overview
Economic
Business
Financial
Valuation
Recommendations
Economic Analysis
• Financials Performance correlation with Feds Funds
Rate is nearly perfect at 0.98
• Strong correlation with 10 Year Treasury Yield at 0.89
• Fed Funds Rate predicted by economists to be between
0 and 0.25% until at least 2012.*
*http://economix.blogs.nytimes.com/2010/06/14/a-near-zero-fed-funds-rate-until-2012/
Overview
Economic
Business
Financial
Valuation
Recommendations
Economic Analysis
• Strong negative correlation with Unemployment rate
at -0.90
• Latest unemployment rate at 9.0% which has
improved from 9.4%
• Moderate Correlation with Real GDP at 0.41
•For 2010, growth winds up at +2.9% after -2.6% in
2009. 3% is expected for 2011, followed by +3.5% in
2012.*
*Decision Economics, Jan 28th, 2011
Overview
Economic
Business
Financial
Valuation
Recommendations
Business Analysis
• Industries are mature with very high barriers to entry
- Huge requirements for capital and regulatory clearance essentially
prohibits new entry
• Competition is fierce
- Never ending focus on competition
- Pulled back during the crisis, starting to pick back up
• Virtually no replacement or substitution of products
- Limited to movement from provider to provider within each
industry
- Money Center Banks attempt to consolidate many financial
functions under one roof
- Domestic and Foreign MCBs comprise over 55% of the sector’s
market cap
Overview
Economic
Business
Financial
Valuation
Recommendations
Business Analysis
 Highly dependent on economic
factors
 Current high corporate cash
balances
 Consumer Credit delinquency
 Interest rates
 Regulatory impact
 Dodd-Frank
 Basel III
Source: http://seekingalpha.com/article/250282-cash-levels-relative-to-debt-levels
Overview
Economic
Business
Financial
Valuation
Recommendations
Current Ownership in SIM
SIM Weight
3%
2%
3%
0%
Consumer Discretionary
9%
4%
Consumer Staples
Energy
9%
Financials
Health Care
22%
12%
Industrials
Information Technology
Materials
12%
Telecommunication Services
11%
Utilities
13%
Cash
Ticker
GS
JPM
LNC
WFC
Overview
Shares Held
3,700
15,600
22,400
19,700
Economic
Market Market Value Unrealized
Total Cost($) Price($)
($)
Gain/(Loss)($)
617,039.16
163.62
605,394.00
(11,645.16)
617,944.08
44.94
701,064.00
83,119.92
561,375.36
28.84
646,016.00
84,640.64
571,508.82
32.42
638,674.00
67,165.18
Business
Financial
Valuation
Recommendations
Financial Sector Performance
Price Action
Overview
Economic
Revenues
Business
Financial
Valuation
Recommendations
Financial Sector
 Market Cap: $54.1
Sector breakdown by
indsutry Mkt Cap
Trillion
 16.13% of S&P 500
 Industries
 Money Center Banks Asset
 Management Property
24%
40%
&Casualty Insurance Life
 Insurance Investment
 Brokerage - National REIT
- Diversified Mortgage
 Investment Real Estate
Development
Overview
Economic
Business
Over 1000B
100B to 1000B
less than 100B
36%
Financial
Valuation
Recommendations
Largest Companies in Financial Sector
Mkt Cap (B)
ROE
P/B
P/E
Name
JPMorgan Chase &
Co.
Symbol
JPM
174.3
9%
1.1
9.5
Wells Fargo & Co.
WFC
171.9
11.4%
1.5
11.7
144.1
4.8%
0.7
14.7
205.6
7%
1.3
N/A
Bank of America Corp. BAC
BERKSHIRE
HATHAWAY B
BRKB
Citigroup Inc.
C
Goldman Sachs Group
Inc.
GS
140
6.8%
0.9
11.2
84.3
12.5%
1.2
9.6
U.S. BANCORP
USB
52.6
12.2%
1.9
12.9
American Express Co. AXP
52.7
27%
3.3
12.9
MORGAN STANLEY MS
45.2
6.3%
1.0
10.5
MetLife Inc.
MET
49.9
10.9
0.9
9.7
Lincoln National Corp. LNC
9.8
8.4%
0.7
8.3
Overview
Business
Economic
Financial
Valuation
Recommendations
Industries by Revenues
Overview
Economic
Business
Financial
Valuation
Recommendations
Financials to S&P 500
Overview
Economic
Business
Financial

Trailing P/E
-slightly expensive
-multiples not always
reliable
-varies greatly across
companies

ROE
-regaining ground
-still below historical
averages
-varies greatly across
companies
Valuation
Recommendations
Financials relative to S&P 500


Overview
Economic
Business
Financial
Net profit margin
-lower than historical
-rebounding from lows
at end of 08
-expect margins to
grow slower
Dividend Yield
-lower than historical
average
-failed to cut at start of
crisis
-most have not started
to increase again
Valuation
Recommendations
Sector Valuation
Financial Sector
Forward
Trailing P/E P/E
Relative to S&P 500
P/S
P/B
Forward
Trailing P/E P/E
P/CF
P/S
P/B
P/CF
High
135.2
20.1
3.4
3.3
140.7
High
7.8
1.4
1.9
0.9
13.4
Low
10.5
10.6
0.6
0.5
7.2
Low
0.7
0.6
0.9
0.3
0.7
Median
14.6
12.7
2.4
2.0
9.9
Median
0.8
0.8
1.6
0.7
0.9
Current
15.9
13.0
1.6
1.2
11.2
Current
1.0
0.9
1.2
0.5
0.7
•On Both absolute basis and relative to the market
• Slightly expensive compared to historical multiples for earnings
and cash flow
• Cheap on sales and book multiples
•Highly varied across industries and companies
Overview
Economic
Business
Financial
Valuation
Recommendations
Major Industry Valuations
Diversified Financial Services
High
Low
Median
Current
T P/E
F P/E
P/S
147.2
91.2
8.8
9.2
13.0
11.7
18.7
11.4
P/B
3.2
0.5
2.6
1.5
2.4
0.3
0.9
0.8
Relative to S&P 500
T P/E
P/CF
959.9
2.1
10.1
9.8
F P/E
9.8
0.6
0.8
1.2
Relative to Financial Sector
P/S
5.9
0.7
0.7
0.8
P/B
2.1
0.8
1.8
1.1
P/CF
0.8
0.2
0.4
0.4
T P/E
85.7
0.2
0.9
1.0
F P/E
4.2
0.8
0.9
1.2
P/S
4.8
0.8
0.9
0.9
P/B
1.4
0.8
1.1
0.9
P/CF
1.1
0.2
0.8
0.7
24.5
0.2
1.0
0.9
Diversified Banks
High
Low
Median
Current
T P/E
F P/E
P/S
54.8
25.2
9.5
10.0
13.7
12.5
16.8
12.8
P/B
4.0
0.8
3.4
2.1
T P/E
P/CF
2.8
0.7
2.1
1.6
F P/E
4.6
0.6
0.7
1.1
32.8
5.6
10.3
12.4
P/S
1.6
0.5
0.8
0.9
P/B
2.7
1.2
2.2
1.6
P/CF
0.9
0.5
0.7
0.7
T P/E
2.9
0.7
0.9
1.2
F P/E
1.1
0.2
0.9
1.1
P/S
1.3
0.8
1.0
1.0
P/B
1.8
1.2
1.4
1.4
P/CF
1.7
0.8
1.1
1.3
1.4
0.1
1.0
1.1
Regional Banks
High
Low
Median
Current
T P/E
F P/E
P/S
311.4
91.8
8.3
10.7
14.1
13.7
311.4
20.8
P/B
4.4
0.6
3.4
1.9
T P/E
P/CF
3.1
0.3
2.1
1.0
F P/E
19.6
0.5
0.8
19.6
27.1
8.0
10.8
15.4
P/S
6.1
0.7
0.8
1.4
P/B
3.0
0.9
2.2
1.4
P/CF
1.0
0.2
0.7
0.4
T P/E
3.0
0.7
1.0
1.5
F P/E
19.6
0.4
1.0
19.6
P/S
5.8
0.9
1.1
1.6
P/B
1.7
0.8
1.3
1.2
P/CF
1.2
0.6
1.0
0.9
2.6
0.4
1.1
1.4
Investment Banks & Brokerage
High
Low
Median
Current
T P/E
F P/E
P/S
151.5
70.5
8.0
8.5
13.5
12.0
11.3
12.0
Overview
P/B
3.0
1.0
2.3
1.9
Economic
P/CF
3.8
0.5
2.0
1.2
T P/E
29.8
6.8
9.8
9.8
F P/E
8.7
0.5
0.8
0.7
Business
P/S
5.9
0.6
0.8
0.8
P/B
3.1
1.1
1.6
1.4
P/CF
0.9
0.3
0.7
0.5
Financial
T P/E
2.8
0.7
0.9
1.0
F P/E
4.6
0.5
1.0
0.7
Valuation
P/S
4.9
0.5
1.0
0.9
P/B
2.6
0.7
1.0
1.2
P/CF
1.6
0.8
1.0
1.0
1.3
0.2
1.0
0.9
Recommendations
Major Industry Valuations
Insurance Property/Casualty
High
Low
Median
Current
T P/E
F P/E
P/S
47.0
24.4
7.2
5.8
11.7
9.9
11.9
13.7
P/B
1.6
0.6
1.3
1.1
Relative to S&P 500
T P/E
P/CF
1.9
0.7
1.5
1.1
F P/E
1.9
0.5
0.7
0.8
29.9
3.8
9.5
9.9
Relative to Financial Sector
P/S
1.6
0.5
0.6
0.9
P/B
1.1
0.7
0.9
0.8
P/CF
0.6
0.4
0.5
0.5
T P/E
2.3
0.5
1.0
1.0
F P/E
2.6
0.1
0.9
0.8
P/S
1.7
0.4
0.8
1.0
P/B
1.0
0.4
0.6
0.7
P/CF
1.4
0.5
0.8
1.0
2.3
0.0
1.0
0.9
Insurance Life/Health
High
Low
Median
Current
T P/E
F P/E
P/S
17.2
15.5
4.0
4.4
13.2
12.6
10.6
9.7
P/B
1.5
0.3
1.1
1.0
T P/E
P/CF
2.2
0.5
1.5
1.0
F P/E
0.9
0.4
0.7
0.7
13.8
4.6
10.8
9.6
P/S
0.9
0.4
0.7
0.7
P/B
1.0
0.4
0.7
0.7
P/CF
0.7
0.3
0.5
0.5
T P/E
1.1
0.6
1.0
1.0
F P/E
1.2
0.1
0.9
0.7
P/S
1.2
0.3
0.9
0.7
P/B
0.7
0.4
0.5
0.6
P/CF
1.4
0.6
0.8
0.9
1.6
0.1
1.0
0.9
Asset Management
High
Low
Median
Current
T P/E
F P/E
P/S
26.5
19.8
8.6
9.7
18.5
16.5
16.5
14.3
P/B
5.9
1.3
3.5
2.9
T P/E
P/CF
6.1
0.9
2.9
1.6
F P/E
1.2
0.7
1.0
1.0
21.2
7.6
13.4
13.8
P/S
1.4
0.9
1.0
1.0
P/B
3.4
1.8
2.4
2.2
P/CF
1.4
0.7
1.0
0.7
T P/E
1.5
0.9
1.3
1.4
F P/E
1.8
0.1
1.3
1.0
P/S
1.5
0.7
1.4
1.1
P/B
2.3
1.3
1.7
1.9
P/CF
2.0
1.3
1.5
1.3
2.0
0.1
1.3
1.2
Residential REITs
High
Low
Median
Current
T P/E
F P/E
P/S
27.1
25.4
7.5
8.3
18.6
18.3
26.4
22.7
Overview
P/B
6.8
1.9
5.4
6.7
Economic
P/CF
3.4
0.9
2.1
3.3
T P/E
27.2
8.4
16.7
26.6
F P/E
1.8
0.7
1.1
1.7
Business
P/S
1.7
0.7
1.2
1.6
P/B
5.2
2.7
3.9
5.0
P/CF
1.5
0.7
1.0
1.5
Financial
T P/E
2.9
1.1
1.5
2.7
F P/E
1.9
0.1
1.4
1.7
Valuation
P/S
2.0
0.6
1.4
1.7
P/B
4.8
2.3
3.2
4.3
P/CF
2.9
1.5
2.0
2.8
2.7
0.1
0.5
2.4
Recommendations
Sector Price to Book
 P/B multiples
have been
compressing for
years
 Accelerated by
Financial Crisis
 Rebounding off
lows
 Still historically
inexpensive
Overview
Economic
Business
Financial
Valuation
Recommendations
Sector Price to Sales
 Relatively
consistent during
periods of economic
growth
 Compresses during
recessions, about
inline with the
market
 Recovering from
Crisis lows
 Also historically
cheap
Overview
Economic
Business
Financial
Valuation
Recommendations
Technical Analysis
•Financial stocks as a whole had been range-bound for most of the past 18 months
•Trading above short and intermediate term MAs
•Ascending Triangle: Breaking out?
Overview
Economic
Business
Financial
Valuation
Recommendations
Recommendations
 Sector valuation vary by industry and company
 Recovery from crisis varies
 More risk averse through
 Regulation
 Necessity
 Continued regulation presents some uncertainty in
financial sector
 Increase weight closer to S&P weight
Overview
Economic
Business
Financial
Valuation
Recommendations