Slide 1: Financial Sector
Kate Farley Ryan O’Connor
Slide 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
Slide 3: S&P 500 Sector Weights
Slide 4: SIM Sector Weight
S&P Financial Weight:
10.72% SIM Weight: 9.59% Currently underweighted by 113 bps
Slide 5: Current Holdings in 1Q09
Berkshire Hathaway
(BRKA) Goldman Sachs (GS) Wells Fargo (WFC)
Slide 6: SIM Financial Sector Returns
Berkshire Hathaway Goldman Sachs Wells Fargo SP 500 SP Financials
% YTD
-7.35%
-4.34%
-35.89%
-8.62%
-25.45%
% 2008
-31.78%
-60.76%
-2.35%
-37.44%
-52.62%
Slide 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
Slide 9: Leaders in Monetary Banks
Market Cap JP Morgan Wells Fargo Royal Bank of Canada Bank of NY Mellon Co. BOA 89.77B 78.63B 33.49B 31.18B 26.59B P/E 17.58 24.58 9.23 22.57 9.57
Slide 10: Market Cap Berkshire Hathaway Travelers Chubb Corporation ACE Limited Allstate 140.20B 22.93B 15.13B 14.27B 11.73B
P/E 17.91 8.13 8.73 8.30 NA
Slide 11: Market Cap Goldman Sachs Morgan Stanley CME Group NYSE Euronext Nasdaq OMX 116.90B 38.24B 11.49B 5.52B 4.29B
P/E 15.3 18.51 11.17 7.35 11.10
Slide 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
Slide 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
Slide 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
Slide 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
Slide 16: Seguin-Associates Financial Services Ltd.
Slide 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
Slide 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
Slide 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
Slide 25: 4Q08 SIM Activity
Sold Bank of America and Merrill Lynch Purchased Wells Fargo Recommended to hold underweighting at 200bps
Slide 26: Recommendations
Further underweight to a total of 150 bps Reduces Exposure Keeps the fund in the game when upside occurs
