FIN 824 The Stock Market Financials Sector Kyle

FIN 824 The Stock Market Financials Sector Kyle M. Ward-Dahl Marsel J. Tadger Ke Wang Adam J. Wilson 2/2/2010 FIN 824 The Stock Market 1

Index & SIM Weights Financials 12/31/2009 1/31/2010 S&P 500 14. 38% 14. 71% SIM 11. 10% 11. 37% +/- -3. 28% -3. 34% • Growth in S&P 500’s financials sector • Increasing underweighting of SIM 2/2/2010 FIN 824 The Stock Market 2

Size and Composition • Market Cap: 1. 6 Trillion • 14. 71% of S&P 500 • Industries – – – Banks Consumer Finance Diverse Financial Service Insurance Multi-sector Holdings Real Estate Investment Trust 2/2/2010 Largest Companies (Market Cap in Billions) • American Express (AXP) $44. 8 • Bank of American (BAC) $150. 8 • Berkshire Hathaway (BRK) $234. 6 • Citigroup (C) $93. 8 • Goldman Sachs (GS) $76. 5 • Bank of NY Mellon (BK) $35 • JP Morgan Chase & Co (JPM) $153. 4 • Morgan Stanley (MS) $36. 4 • U. S. Bancorp (USB) $48 • Wells Fargo (WFC) $145. 3 FIN 824 The Stock Market 3

Sector Performance • Revenue increased by 8% in latest Qtr • Earnings per share increased by 256% in latest Qtr and 644% in latest 12 months • A strong rebound in terms of earnings per share 2/2/2010 FIN 824 The Stock Market 4

Business Analysis • This sector is in the mature stage of its life cycle • Financials are cyclical • Influenced by economic conditions and conditions in financial markets • Regulations are also an important factor • Interest rate rise has negative impact 2/2/2010 FIN 824 The Stock Market 5

Financial Analysis • L-T Future Growth Rate for Earning per share is 8% • Sector Sales are still extremely down from precrises numbers possibly indicating upside • Compared with historic numbers, margins are still low in the sector 2/2/2010 FIN 824 The Stock Market 6

Valuation Analysis - P/B 2/2/2010 FIN 824 The Stock Market 7

Valuation Analysis - P/E P/Trailing E 2/2/2010 P/Forward E FIN 824 The Stock Market 8

Valuation Analysis - P/S & P/CF P/S 2/2/2010 P/CF FIN 824 The Stock Market 9

Valuation Summary • Current P/E and P/CF ratios are way higher than the median • Current P/B and P/S ratios are much lower than median • For financial institutions, P/B is important because most assets and liabilities are valued at market values. • From this perspective, the sector is cheaper than usual Absolute Basis P/Trailing E P/Forward E P/B P/S P/CF High 135. 2 21. 6 3. 4 3. 6 140. 7 Low 10. 5 10. 6 0. 5 0. 6 7. 2 Median 14. 6 12. 7 2. 1 2. 5 10. 2 Current 33. 2 18. 5 1. 1 1. 3 19. 0 Relative to SP 500 P/Trailing E P/Forward E P/B P/S P/CF High 7. 8 1. 4 0. 9 13. 4 Low 0. 51 0. 53 0. 9 0. 6 Median 0. 75 0. 76 0. 7 1. 6 0. 9 Current 1. 8 1. 3 0. 5 1. 1 1. 9 2/2/2010 FIN 824 The Stock Market 10

GDP Forecast Nominal GDP (Expected) $18, 000 $17, 000 $16, 000 $15, 000 Nominal GDP (Expected) $14, 000 $13, 000 $12, 000 2009 2010 5. 0% 2011 2012 2013 2014 % Change in GDP 4. 0% 3. 0% 2. 0% 1. 0% % Change in GDP 0. 0% -1. 0% -2. 0% -3. 0% 2009 2/2/2010 2011 2012 FIN 824 The Stock Market 2013 2014 11

Opportunities & Risks • Upside – GDP growth – Sales & earnings growth – Market rebound • Downside – Liability tax bill – Interest rate rise – Uncertainties such as other regulations 2/2/2010 FIN 824 The Stock Market 12

Recommendations • The conditions in financials sector has improved and sales & earnings are growing. The percentage of this sector in S&P 500 also grew by about 0. 4%. All these signals demonstrate the market rebound. • Future growth is also expected in the sector and the whole market as well, showing the increasing confidence of investors and analysts. • However, the uncertainties and risks are not negligible. • We recommend to buy 200 basis points to bring SIM weighting relative to S&P 500 to 13. 10%. As a result, SIM will be underweight in this sector by 1. 61%. Thus, SIM can gain from the growth of financials sector and also avoid risks to certain extent. 2/2/2010 FIN 824 The Stock Market 13

Q&A 2/2/2010 FIN 824 The Stock Market 14