Financials

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

•Rebecca Dunn

•Christina Durrough

•Nicholas Ferrugia

•May 26, 2009

2•S&P 500 - Financial Sector

FINANCIAL SECTOR RECAP


Business Cycle

Financial Sector is cyclical

Currently in the mature phase of life cycle

High barriers to entry

High level of competition


Financial Sector Weighting

Current Financial sector weight is below average

Weight is trending up

Weight increased during the housing boom

Top Ten Stocks


Sector Performance

Financial Sector has seen the greatest negative returns YTD

Financial Sector has seen the most positive returns QTD

Over the past 20 years, the S&P 500 has outperformed the financial sector

SectorCompanies in Sector Market Cap MTD QTD YTD

S&P 500 500 7,585,482 9.39% 9.39% -3.37%

Energy 39 948,939 4.81% 4.81% -7.85%

Materials 28 255,334 15.09% 15.09% 11.85%

Industrials 58 792,036 17.72% 17.72% -7.91%

Consumer Discretionary 81 721,919 18.54% 18.54% 8.33%

Consumer Staples 41 913,657 3.03% 3.03% -8.62%

Health Care 54 1,049,425 -0.89% -0.89% -9.34%

Financials 80 924,373 22.17% 22.17% -13.86%

Information Technology 75 1,395,938 12.04% 12.04% 16.48%

Telecommunications Services 9 281,800 2.23% 2.23% -6.43%

Utilities 35 302,059 0.42% 0.42% -11.49%

•Data as of 4/30/2009


SIM Market Capitalization

Financial Sector Market Capitalization

SIM is underweight (4.05%) relative to the S&P 500


Regression Analysis

Fama and French Style Factors

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

Financial Sector

Momentum (+) showed to be “statistically significant” to predict future return in Sector

Financial Sector – Forecast using Macroeconomic Factors

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 (+)


Sector Summary and Recommendations 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

Recommendations

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

Result – keep current weighting as of 04/30/2009


STOCK ANALYSIS


Potential Stocks

Goldman Sachs & Company – GS

Bank holding company and global investment banking, securities and investment management firm

Provides services worldwide to corporations, financial institutions, governments and high-net-worth individuals

JPMorgan Chase & Company – JPM

JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.2T and operates in more than 60 countries.

JPMorgan Chase & Co. provides a wide range of financial services worldwide.

The company operates through six lines of business: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury and Securities Services, and Asset Management.

Rank 2009: Second largest U.S. bank and third in the U.S. in deposits

Northern Trust Corporation – NTRS

Financial holding company that provides investment management, asset and fund administration, fiduciary, and banking solutions

Clients include corporations, institutions, and affluent individuals


SIM – Financial Sector – Current Stocks

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%


Goldman Sachs Group, Inc.

Industry: Investment Banks and Brokerage

Performing better than other comparable stocks in the market

Performing better than the financial sector

8/21 analysts recommend buy or overperform

20/21 recommend buy, overperform, or hold


JPMorgan Chase & Company

Industry: Diversified Financial Services

Outperforming the sector and many other stocks

10/15 recommend buy or overperform



Northern Trust Corporation

Industry: Asset Management

Performing better than other comparable stocks in the market

7/14 analysts recommend buy or overperform



GS vs. JPM vs. NTRS – Past 5 Years

GS has performed best over a 5-year period Up approximately 50%

JPM has performed worst Slightly down over this period


GS vs. JPM vs. NTRS – Past 2 Years

NTRS has performed best over the past 2 years Down approximately 20% (compared to 30-40% for JPM and GS)


GS vs. JPM vs. NTRS – Past Year

Over the past year, JPM has slightly outperformed GS

NTRS is the worst performer of the three


GS vs. JPM vs. NTRS – Past 6 Months

Nearly identical to the 1-year results

JPM slightly better than GS (~-20%)


GS vs. JPM vs. NTRS – Past 3 Months

JPM has clearly performed the best over the past 3 months Up 60%

GS up approximately 50%


Stock Comparison


Regression Analysis

Summary

Macro Factor regression analysis provided minimal insight to predict future changes in earning

Statistically significant macro factors were identified for all 3 companies; however, R2 never reached above 12%

15 macro factors were reviewed in initial regression analysis

Different time periods and staggering of data were used to identify relationships to predict future changes in earning

GS

Current Month: Aaa Corporate Rate Spread (-)

2 Month: Retail Sales (+)

3 Month: Retail Sales (+)

JPM

Current Month: Consumer Confidence (+)

2 Month: Rf (+), Aaa Corporate Rate Spread (-), Unemployment (-)

3 Month: Retail Sales (+), Balance of Trade (+)

NTRS

Current Month: rf (+), Real Consumer Spending (-)

2 Month: Unemployment Rate (-), Real Consumer Spending (+)

Macro Factors

rfConsumer ConfidenceBusiness ConfidenceUnemployment RateCPIReal Federal Funds RateAaa Corporate Rate SpreadCase Shiller Home Price (20-Metro)Brent Crude Oil Spot PriceConsumer Credit OutstandingReal Consumer SpendingPersonal Saving RateRetail SalesBalance of TradeHousing Starts


JPMorgan Chase vs. Others

JPM appears to be accurately valued, with strong upside potential

JPM has outperformed GS over the past year, six months, and three months

JPM expects a higher percentage increase in earnings

Changes in Earnings Per Share


JPMorgan Chase Performance

Summary

Over the past 5 years JPM has recorded a better compounded rate of return compared to the S&P 500, Financial sector and the Div. Fin’l Services industry.

Frequency of JPM beating the returns of the S&P 500, Financial sector or Div. Fin’l Svs has only been statistically significant in the last 12 months against Div. Fin’l Svs

Data as of 4/30/09


Technical Analysis

JPM analysis indicates continued steady future growth

Upper and Lower bound have been established indicating a tested upward sloping channel

Today lower bound was tested and stock rebound with positive growth

Government regulation and legislation can quickly deteriorate channel


Initiation of Coverage

JPMorgan Chase & Company

BUY rating

Although, the JPM will challenged by the weaken credit market it has proved to be able achieve future sustainability, growth and profitability

Fortress brand, strong capital reserve levels relative to peers, diversified revenue, proactive risk management, reduced exposure to heritage assets, consistent investment in growth and dedication to building long-term customer relationships

FY FY FY FY FY$(Millions) 2011E 2010E 2009E 2008 2007Net Revenue 112,240 102,890 96,714 67,252 71,372 Growth Rate 9% 6% 44% -6% 15%Avg. Estimate 104.6B 99.4B No. of Analysts 14.0 14.0 Low Estimate 96.9B 86.4B High Estimate 120.2B 111.0B Year Ago Sales 99.4B 67.3B

Diluted earnings per share 2011E 2010E 2009E

Net income $4.64 $ 2.65 $ 1.44 Average Estimate $2.66 $1.45 Number of Analysts 17 18Low Estimate $1.00 $0.95 High Estimate $3.50 $1.82 Year Ago EPS $1.46 $1.37

Initiation of Coverage

Ticker: NYSE JPMRating BUYCurrent Price – 05/26/09 $36.28 Price Target - 12 Month $44.09 % Change 21.53%


Summary

Many stocks in the sector have performed well in the past 3 months

Goldman Sachs, JPMorgan Chase, and Northern Trust have performed better than average in the sector

JPMorgan Chase appears to have the best potential performance in the Financial Sector


Recommendations

Purchase JPMorgan Chase

Re-weight Financial Sector SIM holdings

BRKB: 46.38%

HCBK: 28.61%

WFC: 25.01%

Suggested weighting

BRKB: 35%

JPM: 25%

HCBK: 20%

WFC: 20%


Questions?

Financials

Documents

financial sector data

financial sector recap

sector summary

sector companies

financial institutions

diversified financial

retail financial services

sp sp weight