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Financial Sector

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.

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Financial Sector

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  1. Financial Sector Kate Farley Ryan O’Connor

  2. Agenda • S&P and SIM Sector Analysis • Financial Sector Analysis • Current and Future Sector Outlook • Business and Industry Cycles • Financial Evaluation • Economic Indicators • Recommendations

  3. S&P 500 Sector Weights

  4. SIM Sector Weight • S&P Financial Weight: 10.72% • SIM Weight: 9.59% • Currently underweighted by 113 bps

  5. Current Holdings in 1Q09 • Berkshire Hathaway (BRKA) • Goldman Sachs (GS) • Wells Fargo (WFC)

  6. SIM Financial Sector Returns

  7. Select Industries

  8. Select Financial Segments • 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 • 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

  9. Leaders in Monetary Banks

  10. Leaders in P&C Insurance

  11. Leaders in Diversified Investments

  12. 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

  13. 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 • Public-private joint venture

  14. 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

  15. "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

  16. Economic Business Cycle Seguin-Associates Financial Services Ltd.

  17. Industry Growth Cycle

  18. S&P Financials 10 Year Performance

  19. 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

  20. S&P Financials Key Ratios

  21. Financial Price without Bubble

  22. Economic Indicators

  23. 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

  24. 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

  25. 4Q08 SIM Activity • Sold Bank of America and Merrill Lynch • Purchased Wells Fargo • Recommended to hold underweighting at 200bps

  26. Recommendations • Further underweight to a total of 150 bps • Reduces Exposure • Keeps the fund in the game when upside occurs

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