S&P 500 - Financial Sector (S5FINL)
•Stock Market FIN 824
•Rebecca Dunn
•Christina Durrough
•Nicholas Ferrugia
•May 12, 2009
Business Cycle

Financial Sector is cyclical

Mature phase of life cycle

High barriers to entry

High level of competition
•S&P 500 - Financial Sector
2
S&P 500 Weighting

S&P 500 – 10 Sectors

Largest Sector: Information Tech -18.8%

Smallest Sector: Materials – 3.2%

Financial Sector: 11.6% Market Cap
•Current
Sector
CONSUMER DISCRETIONARY
CONSUMER STAPLES
•Historical
Market Cap
Market Cap as a
(mil)
% of Total
$ 784,864
9.8%
$ 1,047,306
13.1%
ENERGY
$ 986,733
12.3%
FINANCIALS
$ 930,237
11.6%
$ 1,061,320
13.3%
$ 821,787
10.3%
$ 1,504,611
18.8%
MATERIALS
$ 259,406
3.2%
TELECOMMUNICATIONS
$ 286,761
3.6%
UTILITIES
$ 310,709
3.89%
HEALTH CARE
INDUSTRIALS
INFORMATION TECH
Grand Total
$ 7,993,734
100.00%
•Source: http://www.soundmoneytips.com/
•S&P 500 - Financial Sector
3
Financial Sector Weighting

Current Financial sector weight is below average

Weight is trending up

Weight increased during the housing boom
Top Ten Stocks
http://www.bloomberg.com/apps/cbuilder?tic
ker1=S5FINL%3AIND
•S&P 500 - Financial Sector
4
Performance Analysis

Frequency

The percentage of months the returns of Financial sector outperformed the returns of
S&P 500
-

At least 2 out 3 times (67%) to statistically favor future out performance
Frequency data suggests the S&P 500 has a positive probability of outperforming the
returns of the Financial sector in the future
Last 20
Years
Last 10
Years
Last 5
Years
Last 3
Years
Last 12
Months
S&P 500
49%
55%
63%
75%
67%
Financial Sector
51%
45%
37%
25%
33%
Frequency

Compounded Rate of Return

The monthly compounded return of $1 invested in S&P 500 and Financial sector over
the last 25 years
-
S&P 500 consistently outperforms the financial sector
Compounded Rate of Return
S&P 500
Financial Sector
Last 25
Years
Last 20
Years
Last 10
Years
Last 5
Years
Last 3
Year
Last 12
Months
$5.45
$2.82
$0.67
$0.78
$0.67
$0.63
$2.10
$0.43
$0.38
$0.32
$0.41
•Data as of 4/30/2009
•S&P 500 - Financial Sector
5
Sector Performance

Financial Sector has seen the greatest negative returns YTD

Financial Sector has seen the most positive returns QTD
Companies
in Sector
Market Cap
500
7,626,466
0.54%
9.98%
-2.85%
Energy
39
977,849
3.05%
8.01%
-5.04%
Materials
28
256,116
0.31%
15.45%
12.19%
Industrials
58
800,743
1.10%
19.02%
-6.89%
Consumer Discretionary
81
717,135
-0.66%
17.75%
7.61%
Consumer Staples
41
917,842
0.46%
3.51%
-8.20%
Health Care
54
1,048,033
-0.13%
-1.02%
-9.46%
Financials
80
908,860
-1.68%
20.12%
-15.31%
Information Technology
75
1,404,006
0.58%
12.69%
17.15%
9
285,789
1.42%
3.68%
-5.10%
35
310,094
2.66%
3.09%
-9.14%
Sector
S&P 500
Telecommunications Services
Utilities
•S&P 500 - Financial Sector
MTD
QTD
YTD
•Data as of 4/30/2009
6
Industry Performance
Description
S&P 500
Index
% of 500
Value
or Sector
869.6
Price Changes (%)
1 Wk.
100
13 Wks.
1.5
2.3
YTD
-3.7
2008
5-Year
5-Yr CAGR
-38.5
Beta Std. Dev.
-4.7
1
15.2
Financials
149.18
12.53
4.1
14.7
-11.6
-56.9
-16.9
1.6
27.7
Asset Management & Custody Banks
108.42
10.54
0
17.2
3
-49.3
-2.9
1.3
23
Consumer Finance
183.32
4.12
8.3
1.3
-9.4
-55.4
-18.1
1.8
35.9
Diversified REITs
48.87
0.68
10.3
-13
-22.9
-31.4
NA
NA
NA
Diversified Banks
161.34
12.87
4.1
7.3
-29.1
-35.4
-14.4
1.4
33.2
Industrial REITs
16.59
0.37
5.8
-34.9
-40
-78.1
NA
NA
NA
Insurance Brokers
186.34
2.32
3.6
-3
-12.2
-6.7
-6
0.7
25.7
Investment Banking & Brokerage
72.66
11.14
-0.8
54.2
39.4
-71.4
-9.9
1.5
29.4
Life & Health Insurance
130.58
6.58
4.9
-12
-25.4
-49.5
-8.6
2.1
36.8
Multi-line Insurance
39.16
2.25
8
-1.9
-12.9
-89
-38.2
2.5
45.0'
Multi-Sector Holdings
41.37
0.35
-2.9
-1
-7.1
-58
NA
NA
NA
Office REITs
64.05
0.6
7
-1.8
-14.2
-40.1
NA
NA
NA
Other Diversified Financial Services
37.38
22.49
6
41
-13.3
-57.5
-21.1
1.8
40.1
Property & Casualty Insurance
161.38
7.49
1
0.7
-9.9
-31.4
-7.4
1.1
19.7
Real Estate Services
45.68
0.14
12.4
40.1
38.2
NA
NA
NA
NA
Regional Banks
39.27
6.6
17.9
11.9
-19.1
-47.7
-19
1.3
34.6
Residential REITs
50.53
1.25
2.9
-10
-17.8
-29.2
NA
NA
NA
Retail REITs
32.42
1.68
13.2
-4.8
-15.1
-60.4
NA
NA
NA
Specialized Finance
80.82
3.97
-1.9
26.5
4.8
-65.8
-9.6
1.4
27.9
Specialized REITs
60.15
3.25
3.1
-5
-17.1
-21.2
NA
NA
NA
Thrifts & Mortgage Finance
5.13
1.31
-5.5
-2.6
-14.8
-89.5
-45.5
1.3
37.3
•S&P 500 - Financial Sector
•Data as of 5/1/2009
7
Technical Analysis

Financial Sector

Channel is indicating continuous decline
-
Upper and Lower bound of channel each have > 3 solid contact points

Upward movement on 4/29 reached upper bound, but did not break bound and
receded

Increasing Forward P/E ratio suggest near term breakout
•S&P 500 - Financial Sector
8
Breadth
S&P 500 indicating positive near term growth

S&P 500

S&P 500 is currently trading 3.73% above its 50-day moving average
-

Average stock in the index is 5.34% above its 50-day moving average
Sectors

Energy sector stocks are starting rally
-

Financial sector is trading 10.12% above its 50-DMA, but lead by a few key stocks
-

+4.58 between the average stock's distance from its 50-day versus the sector's distance from its
50-day
-4.58 between the average stock's distance from its 50-day versus the sector's distance from its
50-day
Only two sectors remain below their 50-days
-
Health Care and Utilities (Defensive in Nature)
•Source: http://seekingalpha.com/
•S&P 500 - Financial Sector
9
SIM Market Capitalization

Financial Sector Market Capitalization

Market Cap. $1.2 mil

SIM is underweight (3.15%) relative to the S&P 500
-
SIM: 8.45%
-
S&P: 11.60%
SIM Market Cap %
of Total
S&P 500 Market
Cap % of Total
$993,454
6.90%
9.80%
-2.90%
CONSUMER STAPLES
$1,951,842
13.56%
13.10%
0.46%
ENERGY
$1,689,959
11.74%
12.30%
-0.56%
FINANCIALS
$1,216,064
8.45%
11.60%
-3.15%
HEALTH CARE
$2,841,378
19.75%
13.30%
6.45%
INDUSTRIALS
$1,410,075
9.80%
10.30%
-0.50%
INFORMATION TECH
$2,976,444
20.68%
18.80%
1.88%
MATERIALS
$580,160
4.03%
3.20%
0.83%
TELECOMMUNICATIONS
$358,065
2.49%
3.60%
-1.11%
100.00%
100.00%
Sector
CONSUMER DISCRETIONARY
Grand Total
•S&P 500 - Financial Sector
SIM Market Cap
$ 14,390,311
SIM vs. S&P 500 %
Change
10
SIM Market Capitalization

Financial Sector Market Capitalization

SIM is underweight (3.15%) relative to the S&P 500
-
SIM: 8.45%
-
S&P: 11.6%
SIM PORTFOLIO
Telecommunicati
Consumer
ons Utilities Discretionary
2%
7%
3%
Materials
4%
Information
Technology
21%
S&P 500
Telecommunications
Services
4%
Utilities
Materials
3%
4%
Energy
12%
Consumer
Discretionary
10%
Industrials
10%
Health Care
20%
Financials
8%
Consumer Staples
12%
Information
Technology
18%
Industrials
10%
Consumer
Staples
13%
Energy
13%
Health Care
14%
•S&P 500 - Financial Sector
Financials
12%
11
SIM – Financial Sector


Current Composition

Berkshire Hathaway: 46.38%

Hudson City Bancorp:28.61%

Wells Fargo: 25.01%
•SIM Portfolio
Hudson City Bancorp has had
the best performance - up 8%
since purchase
Company
Total Value
% of Total
% Change
Since
Purchase
Berkshire Hathaway Inc. - CL A
$564,000.00
46.38%
-14.12%
Hudson City Bancorp
$347,912.00
28.61%
8.00%
Wells Fargo
$304,152.00
25.01%
-36.19%
Grand Total
$1,216,064.00
•S&P 500 - Financial Sector
-42.31%
12
Ratio Valuation
Financial sector is inline with expectation

Forward P/E

Current Forward P/E ratio of 17.2 is considered to be in the fair value range
-

Forward P/E ratio is only 1.1x relative to the S&P 500
P/CF

Current P/CF ratio is 2.5 relative to the S&P 500
-
Implies the market expects the company to be financially stable in the future
Forward P/E
P/CF
•S&P 500 - Financial Sector
13
Ratio Valuation

P/B


Sector is inline although P/B is increasing and ROE is decreasing
-
Recent increase in P/B has been attributed to new mark-to-market
accounting rules in Q1 09 that positively effect ration
-
P/B is still considered low at .08
Key indicator when Financial sector is undervalued - BUY
-
ROE trending up and P/B has not adjusted for increase
P/B
ROE
•S&P 500 - Financial Sector
14
Profit Margin

Financial sector credit loss provision have eroded profit margin

Lowest profit margin since 1990 compared S&P 500
-

Main contributor to low profit margin are losses related to toxic assets and credit
defaults
Profit Margin is a lagging indicator, but based on the markets expectations of sector
should rebound in mid 2009
•S&P 500 - Financial Sector
15
Ratio Valuation

Forward P/E



Avg. of P/E
FORWARD
4QTRS
Avg. of P/E
10 YR
Avg. of
P/CF 5 YR
Avg. of
P/CF
ASSET MANAGEMENT
19.52
21.06
9.46
14.49
CONSUMER FINANCE
17.85
18.37
9.70
12.15
DIVERSE FIN'L SVC
35.50
13.83
11.35
12.77
DIVERSIFIED BANKS
17.10
13.97
10.37
11.27
DIVERSIFIED REITS
10.60
13.10
7.00
14.90
INDUSTRIAL REITS
8.80
12.40
2.90
13.00
INSURANCE-BROKERS
13.25
20.25
10.50
12.40
INSURANCE-LIFE/HLTH
5.89
13.56
6.20
9.83
INSURANCE-MULTI-LINE
5.30
13.84
3.18
7.70
INSURANCE-PROP/CAS
7.92
19.23
7.12
10.59
INV BANK & BROKERAGE
22.53
27.18
10.98
11.73
-
80.70
-
23.10
OFFICE REITS
10.50
14.70
9.40
16.80
REAL ESTATE SERVICES
12.30
17.10
6.50
11.70
REGIONAL BANKS
18.27
15.81
6.49
11.16
RESIDENTIAL REITS
9.40
14.33
8.47
17.20
RETAIL REITS
8.80
12.70
6.60
14.40
SPECIALIZED FINANCE
15.80
23.70
9.67
20.17
SPECIALIZED REITS
22.43
14.27
10.77
15.62
THRIFTS&MORTGAGE FIN
26.05
26.30
18.40
24.65
Grand Total
14.83
18.28
8.60
13.39
High: Div Fin’l SVC (35.50)
Low: INS Multi-Line (5.30)
Avg. P/CF 5 Year

High: Mult-Sec Hldgs (80.70)

Low: Ind. REITs (2.90)
Industry
MULTI-SECTOR HLDGS
•S&P 500 - Financial Sector
16
Sector Industry Valuation
Industry
Average of P/E
FORWARD 4QTRS
Average of P/E 10 Average of P/CF 5 YR
YR AVG
AVG
Average of P/CF
Sum of MRKT CAP
(MILS)
ASSET MANAGEMENT
19.52
21.06
9.46
14.49 $ 99,470.00
CONSUMER FINANCE
17.85
18.37
9.70
12.15 $ 41,607.00
DIVERSE FIN'L SVC
35.50
13.83
11.35
12.77 $ 194,051.00
DIVERSIFIED BANKS
17.10
13.97
10.37
11.27 $ 117,794.00
DIVERSIFIED REITS
10.60
13.10
7.00
14.90 $ 8,235.00
INDUSTRIAL REITS
8.80
12.40
2.90
13.00 $ 3,646.00
13.25
20.25
10.50
12.40 $ 20,282.00
INSURANCE-LIFE/HLTH
5.89
13.56
6.20
9.83 $ 63,036.00
INSURANCE-MULTI-LINE
5.30
13.84
3.18
7.70 $ 21,922.00
INSURANCE-PROP/CAS
7.92
19.23
7.12
10.59 $ 68,476.00
INV BANK & BROKERAGE
22.53
27.18
10.98
INSURANCE-BROKERS
MULTI-SECTOR HLDGS
-
80.70
-
11.73 $ 113,398.00
23.10 $ 5,168.00
OFFICE REITS
10.50
14.70
9.40
16.80 $ 5,643.00
REAL ESTATE SERVICES
12.30
17.10
6.50
11.70 $ 2,096.00
REGIONAL BANKS
18.27
15.81
6.49
11.16 $ 53,651.00
RESIDENTIAL REITS
9.40
14.33
8.47
17.20 $ 11,021.00
RETAIL REITS
8.80
12.70
6.60
14.40 $ 15,994.00
SPECIALIZED FINANCE
15.80
23.70
9.67
20.17 $ 38,660.00
SPECIALIZED REITS
22.43
14.27
10.77
15.62 $ 34,374.00
THRIFTS&MORTGAGE FIN
26.05
26.30
18.40
24.65 $ 11,713.00
Grand Total
14.83
18.28
8.60
•S&P 500 - Financial Sector
13.39 $ 930,237.00
17
Financial Sector Valuation

Forward P/E ratios vary amongst industries and companies
 Insurance and REIT industries have lower forward P/E ratios

P/CF ratios vary greatly
 REITs and thrifts and mortgages have higher P/CFs

Ratios have contracted over recent years due to the collapse of the market, largely due to
mortgage crisis

Expect the sector to expand in coming years based on the forward valuations
INDUSTRY
COMPANY NAME
MRKT CAP
(MILS)
DIVERSE FIN'L SVC
BANK OF AMERICA
$55,692.00
$ 51.00
$ 12.10
$ 5.80
$12.10
DIVERSE FIN'L SVC
CITIGROUP
$16,264.00
NM
$ 15.00
NM
$15.40
DIVERSE FIN'L SVC
JPMORGAN CHASE & CO
$ 122,095.00
$ 20.00
$ 14.40
$ 16.90
$10.80
DIVERSIFIED BANKS
COMERICA
$ 3,169.00
NM
$ 12.10
$ 11.60
$10.90
DIVERSIFIED BANKS
U.S. BANCORP
$31,522.00
$ 19.60
$ 14.00
$ 11.00
$12.20
DIVERSIFIED BANKS
THRIFTS&MORTGAGE
FIN
THRIFTS&MORTGAGE
FIN
WELLS FARGO
$83,103.00
$ 14.60
$ 15.80
$ 8.50
$10.70
HUDSON CITY BANC
$ 6,336.00
$ 11.90
$ 24.00
$ 12.20
$22.70
PEOPLES UNITED FIN'L
$ 5,377.00
$ 40.20
$ 28.60
$ 24.60
$26.60
•S&P 500 - Financial Sector
P/E FORWARD
4QTRS
P/E 10 YR AVG
P/CF 5 YR AVG
18
Economic factors – past 5 years

As oil prices increase, home prices and financial returns decrease
140.00
0.25
0.2
120.00
0.15
100.00
0.1
0.05
80.00
0
60.00
-0.05
-0.1
40.00
-0.15
20.00
0.00
4/1/2004
-0.2
4/1/2005
4/1/2006
4/1/2007
4/1/2008
Brent Crude Oil Spot Price
Case Shiller Home Price (20-Metro)
Average Financials Returns
Linear (Average Financials Returns)
•S&P 500 - Financial Sector
-0.25
4/1/2009
19
Fama and French Style Factors


Factors

HML (Value – Growth)

SMB (Small Cap. - Large Cap.)

UMD (Momentum)
Regression Analysis

S&P 500
-
HML and UMD monthly change are both “statistically significant” and negatively
correlated to the S&P 500 monthly returns
— These Style factors explain 15% of the variance in the S&P 500 monthly
returns
-

Momentum (+) showed to be “statistically significant” relationships to predict
future return
Financial Sector
-
Momentum (+) showed to be “statistically significant” to predict future return
•Regression: Dependent S&P 500 monthly return change, Independent Style factors month return change
•S&P 500 - Financial Sector
20
MACRO Factors

Factor


Number Macro Factors
1
mktrf
2
rf
3
Consumer Confidence
4
Business Confidence
5
Unemployment Rate
6
CPI
7
Real Federal Funds Rate
8
Aaa Corporate Rate Spread
— Consumer Confidence (+)
9
Case Shiller Home Price (20-Metro)
— CPI (+)
10
Brent Crude Oil Spot Price
11
Consumer Credit Outstanding
12
Real Consumer Spending
13
Personal Saving Rate
14
Retail Sales
15
Balance of Trade
Reviewed 15 Macro Factors
Regression Analysis

S&P 500 – Month
-
These Macro factors explain 25% of the variance in
the monthly returns of the S&P 500 (statistically
significant)
— Aaa Corporate Rate Spread (-)
— Consumer Credit Outstanding (+)

S&P 500 – Forecast
-
These Macro factors explain 09% of the variance in
the monthly returns of the S&P 500 that occurs in 3
months (statistically significant)
— Rf (+)
— Unemployment (-)
•S&P 500 - Financial Sector
21
MACRO Factors

Regression Analysis

Financial Sector – Month
-
These Macro factors explain 27% of the variance in the monthly return of the
Financial Sector (statistically significant)
— RF (+)
— Consumer Confidence (+)
— Consumer Credit Outstanding (+)

Financial Sector – Forecast
-
Next Month Return: Rf (-), CPI (+) and Unemployment (-) are statistically
significant Macro factors that explain 11% of the variance
-
These Macro factors explain 34% of the variance in the monthly return of the
S&P 500 that occur in 3 months (statistically significant)
— Rf (+)
— Unemployment (-)
— CPI (-)
— Aaa Corporate Rate Spread (-)
— Consumer Credit Outstanding (+)
•S&P 500 - Financial Sector
22
Summary


Current portfolio is underweight relative to the S&P

S&P weight is currently below historical levels

Weight will increase as the market increases
Based on the data, the SIM portfolio is in a good position

P/B ratio and ROE show that the sector is undervalued

Valuation ratios reflect the expectation of positive returns for financial
sector

There is currently much momentum in the market relative to the
financial sector
•S&P 500 - Financial Sector
23
Recommendation

Expect positive returns relative to the market

Expect housing starts and investments in major assets to be a positive for the
sector as the recession comes to an end


Expect hedge funds to continue to struggle


Overweight diversified industries
Underweight REITs and Specialized Industries
Recommendation: Continue to underweight relative to the market

Begin to increase as the market rebounds

Continue to underweight by 315 bp
Frequency Returns Beat S&P 500
Frequency
Last 30 Days 12-Month
HCBK
45%
50%
BRK-A
40%
42%
WFC
50%
50%
24-Month
63%
54%
38%
36-Month
53%
50%
33%
Compound Rate of Return $1
Return
•S&P 500 - Financial Sector
Last 30 Days 12-Month
$
0.63
24-Month
36-Month % of Total
$
$
S&P 500
1.06
0.59
0.69
HCBK
0.96
$
0.66
$
0.94
$
0.92
29%
BRK-A
0.97
$
0.70
$
0.86
$
1.02
46%
WFC
1.35
$
0.67
$
0.56
$
0.30
25%
24
Questions?
•S&P 500 - Financial Sector
25