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

2 S&P Financial Sector Business Cycle Financial Sector is cyclical Mature phase of life cycle High barriers to entry High level of competition

3 S&P Financial Sector 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 Total CONSUMER DISCRETIONARY $ 784,8649.8% CONSUMER STAPLES $ 1,047, % ENERGY $ 986, % FINANCIALS $ 930, % HEALTH CARE $ 1,061, % INDUSTRIALS $ 821, % INFORMATION TECH $ 1,504, % MATERIALS $ 259,4063.2% TELECOMMUNICATIONS $ 286,7613.6% UTILITIES $ 310, % Grand Total $ 7,993, % Current Historical Source:

4 S&P Financial Sector Financial Sector Weighting Current Financial sector weight is below average Weight is trending up Weight increased during the housing boom Top Ten Stocks ker1=S5FINL%3AIND

5 S&P Financial Sector 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 Frequency Last 20 Years Last 10 Years Last 5 Years Last 3 Years Last 12 Months S&P 50049%55%63%75%67% Financial Sector 51%45%37%25%33% Data as of 4/30/2009 Compounded Rate of Return Last 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

6 S&P Financial Sector Sector Performance Financial Sector has seen the greatest negative returns YTD Financial Sector has seen the most positive returns QTD Sector Companies in SectorMarket CapMTDQTDYTD S&P ,626, %9.98%-2.85% Energy , %8.01%-5.04% Materials , %15.45%12.19% Industrials , %19.02%-6.89% Consumer Discretionary , %17.75%7.61% Consumer Staples , %3.51%-8.20% Health Care 54 1,048, %-1.02%-9.46% Financials , %20.12%-15.31% Information Technology 75 1,404, %12.69%17.15% Telecommunications Services 9 285, %3.68%-5.10% Utilities , %3.09%-9.14% Data as of 4/30/2009

7 S&P Financial Sector Industry Performance Index% of 500Price Changes (%)5-Year Description Valueor Sector1 Wk.13 Wks.YTD20085-Yr CAGRBetaStd. Dev. S&P Financials Asset Management & Custody Banks Consumer Finance Diversified REITs NA Diversified Banks Industrial REITs NA Insurance Brokers Investment Banking & Brokerage Life & Health Insurance Multi-line Insurance ' Multi-Sector Holdings NA Office REITs NA Other Diversified Financial Services Property & Casualty Insurance Real Estate Services NA Regional Banks Residential REITs NA Retail REITs NA Specialized Finance Specialized REITs NA Thrifts & Mortgage Finance Data as of 5/1/2009

8 S&P Financial Sector 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 S&P Financial Sector 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 ­ 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 ­ 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:

10 S&P Financial Sector 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% SectorSIM Market Cap SIM Market Cap % of Total S&P 500 Market Cap % of Total SIM vs. S&P 500 % Change CONSUMER DISCRETIONARY $993, %9.80%-2.90% CONSUMER STAPLES $1,951, %13.10%0.46% ENERGY $1,689, %12.30%-0.56% FINANCIALS $1,216, %11.60%-3.15% HEALTH CARE $2,841, %13.30%6.45% INDUSTRIALS $1,410, %10.30%-0.50% INFORMATION TECH $2,976, %18.80%1.88% MATERIALS $580, %3.20%0.83% TELECOMMUNICATIONS $358, %3.60%-1.11% Grand Total $ 14,390, %

11 S&P Financial Sector 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 S&P Financial Sector 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 CompanyTotal Value% of Total % Change Since Purchase Berkshire Hathaway Inc. - CL A$564, %-14.12% Hudson City Bancorp$347, %8.00% Wells Fargo$304, %-36.19% Grand Total$1,216, %

13 S&P Financial Sector 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 S&P Financial Sector 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 S&P Financial Sector 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 S&P Financial Sector 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 4QTRS Avg. of P/E 10 YR Avg. of P/CF 5 YR Avg. of P/CF ASSET MANAGEMENT CONSUMER FINANCE DIVERSE FIN'L SVC DIVERSIFIED BANKS DIVERSIFIED REITS INDUSTRIAL REITS INSURANCE-BROKERS INSURANCE-LIFE/HLTH INSURANCE-MULTI-LINE INSURANCE-PROP/CAS INV BANK & BROKERAGE MULTI-SECTOR HLDGS OFFICE REITS REAL ESTATE SERVICES REGIONAL BANKS RESIDENTIAL REITS RETAIL REITS SPECIALIZED FINANCE SPECIALIZED REITS THRIFTS&MORTGAGE FIN Grand Total

17 S&P Financial Sector Sector Industry Valuation Industry Average of P/E FORWARD 4QTRS Average of P/E 10 YR AVG Average of P/CF 5 YR AVGAverage of P/CF Sum of MRKT CAP (MILS) ASSET MANAGEMENT $ 99, CONSUMER FINANCE $ 41, DIVERSE FIN'L SVC $ 194, DIVERSIFIED BANKS $ 117, DIVERSIFIED REITS $ 8, INDUSTRIAL REITS $ 3, INSURANCE-BROKERS $ 20, INSURANCE-LIFE/HLTH $ 63, INSURANCE-MULTI-LINE $ 21, INSURANCE-PROP/CAS $ 68, INV BANK & BROKERAGE $ 113, MULTI-SECTOR HLDGS $ 5, OFFICE REITS $ 5, REAL ESTATE SERVICES $ 2, REGIONAL BANKS $ 53, RESIDENTIAL REITS $ 11, RETAIL REITS $ 15, SPECIALIZED FINANCE $ 38, SPECIALIZED REITS $ 34, THRIFTS&MORTGAGE FIN $ 11, Grand Total $ 930,237.00

18 S&P Financial Sector 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 INDUSTRYCOMPANY NAME MRKT CAP (MILS) P/E FORWARD 4QTRS P/E 10 YR AVG P/CF 5 YR AVG DIVERSE FIN'L SVCBANK OF AMERICA $55, $ $ $ 5.80 $12.10 DIVERSE FIN'L SVCCITIGROUP $16, NM $ NM $15.40 DIVERSE FIN'L SVCJPMORGAN CHASE & CO $ 122, $ $ $ $10.80 DIVERSIFIED BANKSCOMERICA $ 3, NM $ $ $10.90 DIVERSIFIED BANKSU.S. BANCORP $31, $ $ $ $12.20 DIVERSIFIED BANKSWELLS FARGO $83, $ $ $ 8.50 $10.70 THRIFTS&MORTGAGE FINHUDSON CITY BANC $ 6, $ $ $ $22.70 THRIFTS&MORTGAGE FINPEOPLES UNITED FIN'L $ 5, $ $ $ $26.60

19 S&P Financial Sector Economic factors – past 5 years As oil prices increase, home prices and financial returns decrease

20 S&P Financial Sector 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 S&P Financial Sector 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 (-) NumberMacro Factors 1mktrf 2rf 3Consumer Confidence 4Business Confidence 5Unemployment Rate 6CPI 7Real Federal Funds Rate 8Aaa Corporate Rate Spread 9Case Shiller Home Price (20-Metro) 10Brent Crude Oil Spot Price 11Consumer Credit Outstanding 12Real Consumer Spending 13Personal Saving Rate 14Retail Sales 15Balance of Trade

22 S&P Financial Sector 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) —R f (+) —Unemployment (-) —CPI (-) —Aaa Corporate Rate Spread (-) —Consumer Credit Outstanding (+)

23 S&P Financial Sector 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 S&P 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 Compound Rate of Return $1 ReturnLast 30 Days12-Month24-Month36-Month% of Total S&P $ 0.63 $ 0.59 $ 0.69 HCBK 0.96 $ 0.66 $ 0.94 $ % BRK-A 0.97 $ 0.70 $ 0.86 $ % WFC 1.35 $ 0.67 $ 0.56 $ %

25 S&P Financial Sector Questions?