S&P 500 - Financial Sector (S5FINL)

S&P 500 - Financial Sector (S5FINL)•Stock Market FIN 824

•Rebecca Dunn

•Christina Durrough

•Nicholas Ferrugia

•May 12, 2009

2•S&P 500 - Financial Sector

Business Cycle

Financial Sector is cyclical

Mature phase of life cycle

High barriers to entry

High level of competition


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

Sector Market Cap (mil)Market Cap as a

% of TotalCONSUMER DISCRETIONARY $ 784,864 9.8%

CONSUMER STAPLES $ 1,047,306 13.1%

ENERGY $ 986,733 12.3%

FINANCIALS $ 930,237 11.6%

HEALTH CARE $ 1,061,320 13.3%

INDUSTRIALS $ 821,787 10.3%

INFORMATION TECH $ 1,504,611 18.8%

MATERIALS $ 259,406 3.2%

TELECOMMUNICATIONS $ 286,761 3.6%

UTILITIES $ 310,709 3.89%

Grand Total $ 7,993,734 100.00%

•Current •Historical

•Source: http://www.soundmoneytips.com/


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?ticker1=S5FINL%3AIND


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

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

FrequencyLast 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%

•Data as of 4/30/2009

Compounded Rate of ReturnLast 25 Years

Last 20 Years

Last 10 Years

Last 5 Years

Last 3 Year

Last 12 Months

S&P 500 $5.45 $2.82 $0.67 $0.78 $0.67 $0.63

Financial Sector $2.10 $0.43 $0.38 $0.32 $0.41


Sector Performance

Financial Sector has seen the greatest negative returns YTD

Financial Sector has seen the most positive returns QTD

SectorCompanies in Sector Market Cap MTD QTD YTD

S&P 500 500 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%

Telecommunications Services 9 285,789 1.42% 3.68% -5.10%

Utilities 35 310,094 2.66% 3.09% -9.14%

•Data as of 4/30/2009


Industry Performance

Index % of 500 Price Changes (%) 5-Year

Description Value or Sector 1 Wk. 13 Wks. YTD 2008 5-Yr CAGR Beta Std. Dev.

S&P 500 869.6 100 1.5 2.3 -3.7 -38.5 -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•Data as of 5/1/2009


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


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

+4.58 between the average stock's distance from its 50-day versus the sector's distance from its 50-day

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

Only two sectors remain below their 50-days

Health Care and Utilities (Defensive in Nature)

•Source: http://seekingalpha.com/


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%

Sector SIM Market CapSIM Market Cap %

of TotalS&P 500 Market Cap % of Total

SIM vs. S&P 500 % Change

CONSUMER DISCRETIONARY $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%

Grand Total $ 14,390,311 100.00% 100.00%


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 – Financial Sector

Current Composition

Berkshire Hathaway: 46.38%

Hudson City Bancorp:28.61%

Wells Fargo: 25.01%

Hudson City Bancorp has had the best performance - up 8% since purchase

•SIM Portfolio

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 -42.31%


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


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


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


Ratio Valuation

Forward P/E

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

Avg. of P/E FORWARD

4QTRSAvg. 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

MULTI-SECTOR HLDGS - 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


Sector Industry Valuation

Industry Average of P/E FORWARD 4QTRS

Average of P/E 10 YR AVG

Average of P/CF 5 YR 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

INSURANCE-BROKERS 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 11.73 $ 113,398.00

MULTI-SECTOR HLDGS - 80.70 - 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 13.39 $ 930,237.00


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)

P/E FORWARD 4QTRS P/E 10 YR AVG P/CF 5 YR AVG

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 WELLS FARGO $83,103.00 $ 14.60 $ 15.80 $ 8.50 $10.70 THRIFTS&MORTGAGE FIN HUDSON CITY BANC $ 6,336.00 $ 11.90 $ 24.00 $ 12.20 $22.70 THRIFTS&MORTGAGE FIN PEOPLES UNITED FIN'L $ 5,377.00 $ 40.20 $ 28.60 $ 24.60 $26.60


Economic factors – past 5 years

As oil prices increase, home prices and financial returns decrease


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


MACRO Factors

Factor

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)

— Consumer Confidence (+)

— CPI (+)

— 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 (-)

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

9 Case Shiller Home Price (20-Metro)

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


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 (+)


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 (-)



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


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

Overweight diversified industries

Expect hedge funds to continue to struggle

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 500Frequency Last 30 Days 12-Month 24-Month 36-MonthHCBK 45% 50% 63% 53%BRK-A 40% 42% 54% 50%WFC 50% 50% 38% 33%

Compound Rate of Return $1

Return Last 30 Days 12-Month 24-Month 36-Month % of Total

S&P 500 1.06 $ 0.63 $ 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%


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S&P 500 - Financial Sector (S5FINL)

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