S&P 500 - Financial Sector (S5FINL)

1. S&P 500 - Financial Sector (S5FINL) • Stock Market FIN 824 • Rebecca Dunn • Christina Durrough • Nicholas Ferrugia • May 12, 2009

2. Business Cycle • Financial Sector is cyclical • Mature phase of life cycle • High barriers to entry • High level of competition

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

4. 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

5. 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 • Data as of 4/30/2009

6. Sector Performance • Financial Sector has seen the greatest negative returns YTD • Financial Sector has seen the most positive returns QTD • Data as of 4/30/2009

7. Industry Performance • Data as of 5/1/2009

8. 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

9. 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/

10. 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%

11. 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%

12. SIM – Financial Sector • SIM Portfolio • 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

13. 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

14. 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

15. 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

16. 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)

17. Sector Industry Valuation

18. 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

19. Economic factors – past 5 years • As oil prices increase, home prices and financial returns decrease

20. 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

21. 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 (-)

22. 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 (+)

23. 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

24. 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

25. Questions?