Financial Sector
Kate Farley
Ryan O’Connor
Agenda
 S&P and SIM Sector Analysis
 Financial Sector Analysis
 Current and Future Sector Outlook
 Business and Industry Cycles
 Financial Evaluation
 Economic Indicators
 Recommendations
S&P 500 Sector Weights
SIM Sector Weight
 S&P Financial Weight:
10.72%
 SIM Weight: 9.59%
 Currently
underweighted by 113
bps
Current Holdings in 1Q09
 Berkshire Hathaway
(BRKA)
 Goldman Sachs (GS)
 Wells Fargo (WFC)
SIM Financial Sector Returns
Berkshire
Hathaway
Goldman
Sachs
Wells
Fargo
SP 500
SP
Financials
% YTD
-7.35%
-4.34%
-35.89%
-8.62%
-25.45%
% 2008
-31.78%
-60.76%
-2.35%
-37.44%
-52.62%
Select Industries
Select Financial Segments
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Foreign Money Center Banks
Money Center Banks
Property & Casualty Insurance
Life Insurance
Diversified Investments
Foreign Regional Banks
Closed-End Fund - Debt
Credit Services
Regional - Midwest Banks
Asset Management
REIT - Retail
Investment Brokerage – National
Regional – Northeast Banks
Savings & Loans
Accident & Health Insurance
Investment Brokerage – Regional
Closed-End Fund - Equity
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REIT - Residential
Regional - Mid-Atlantic Banks
REIT - Industrial
Insurance Brokers
REIT - Healthcare Facilities
Regional - Pacific Banks
Property Management
Regional - Southwest Banks
Regional - Southeast Banks
REIT - Diversified
Mortgage Investment
Surety & Title Insurance
Closed-End Fund - Foreign
REIT - Office
REIT - Hotel/Motel
Real Estate Development
Leaders in Monetary Banks
Market Cap
P/E
JP Morgan
89.77B
17.58
Wells Fargo
78.63B
24.58
Royal Bank of
Canada
33.49B
9.23
Bank of NY Mellon
Co.
31.18B
22.57
BOA
26.59B
9.57
Leaders in P&C Insurance
Market Cap
P/E
Berkshire
Hathaway
140.20B
17.91
Travelers
22.93B
8.13
Chubb
Corporation
15.13B
8.73
ACE Limited
14.27B
8.30
Allstate
11.73B
NA
Leaders in Diversified Investments
Market Cap
P/E
Goldman Sachs
116.90B
15.3
Morgan Stanley
38.24B
18.51
CME Group
11.49B
11.17
NYSE Euronext
5.52B
7.35
Nasdaq OMX
4.29B
11.10
Current Industry Conditions
 Firms getting rid of “toxic” assets
 Recession and layoffs
 Poor public perception
 Evolving TARP Rules
- Executive compensation limits
- Dividends
- Monies loaned only used for lending
Financial Stability Plan
 Vagueness released today
 Four main routes of action
 Equity injections into banks
 Programs to help homeowners
 Expansion of consumer lending
 Allow banks to get rid of bad assets
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Public-private joint venture
Future Industry Conditions
 SEC to increase regulation
 Further consolidations
 Possible nationalization of banks
 Removing “toxic” debt could make things worse
before they get better
 Less faith in the markets
"There will be time for them
to make profits, and there
will be time for them to get
bonuses. Now is not that
time.”
~ President Obama
Economic Business Cycle
Seguin-Associates Financial Services Ltd.
Industry Growth Cycle
S&P Financials 10 Year Performance
Problems With Financial Valuation
 Stock Val data doesn’t have 2008 sector data
- Based on 2007, nothing has changed except profit.
2008 was when deleveraging occurred.
 Price to Book Ratios’ accuracy questionable
S&P Financials Key Ratios
Financial Price without Bubble
Economic Indicators
Industry Safety
 Broad categories have performed worse than S&P 500
since 2006
 Individual industries may provide some safety
 Individual companies have outperformed with respect
to the market
Real Estate Woes
 Estimated $3.3 Trillion loss to date
 “mid-prime” loans are failing
 Brought down Indy-Mac
 Poses problems for insurance companies
 US Banks hold ~ $800B
 Commercial Real Estate is expected to decline in value
4Q08 SIM Activity
 Sold Bank of America and Merrill Lynch
 Purchased Wells Fargo
 Recommended to hold underweighting at 200bps
Recommendations
 Further underweight to a total of 150 bps
 Reduces Exposure
 Keeps the fund in the game when upside occurs