Financial Sector
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Transcript of Financial Sector
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Financial Sector
Kate FarleyRyan O’Connor
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AgendaS&P and SIM Sector AnalysisFinancial Sector AnalysisCurrent and Future Sector OutlookBusiness and Industry CyclesFinancial EvaluationEconomic IndicatorsRecommendations
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S&P 500 Sector Weights
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SIM Sector WeightS&P Financial
Weight: 10.72% SIM Weight: 9.59%Currently
underweighted by 113 bps
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Current Holdings in 1Q09Berkshire Hathaway
(BRKA)Goldman Sachs (GS)Wells Fargo (WFC)
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SIM Financial Sector Returns
Berkshire Hathaway
Goldman Sachs
Wells Fargo
SP 500SP
Financials
% YTD -7.35% -4.34% -35.89% -8.62% -25.45%
% 2008 -31.78% -60.76% -2.35% -37.44% -52.62%
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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
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Leaders in Monetary BanksMarket
CapP/E
JP Morgan 89.77B 17.58
Wells Fargo 78.63B 24.58
Royal Bank of Canada
33.49B 9.23
Bank of NY Mellon Co.
31.18B 22.57
BOA 26.59B 9.57
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Market Cap P/E
Berkshire Hathaway
140.20B 17.91
Travelers 22.93B 8.13
Chubb Corporation
15.13B 8.73
ACE Limited 14.27B 8.30
Allstate 11.73B NA
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Market Cap P/E
Goldman Sachs
116.90B 15.3
Morgan Stanley
38.24B 18.51
CME Group 11.49B 11.17
NYSE Euronext
5.52B 7.35
Nasdaq OMX 4.29B 11.10
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Current Industry ConditionsFirms getting rid of “toxic” assetsRecession and layoffsPoor public perceptionEvolving TARP Rules
- Executive compensation limits- Dividends- Monies loaned only used for lending
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Financial Stability PlanVagueness released todayFour main routes of action
Equity injections into banksPrograms to help homeownersExpansion of consumer lendingAllow banks to get rid of bad assets
Public-private joint venture
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Future Industry Conditions
SEC to increase regulationFurther consolidationsPossible nationalization of banksRemoving “toxic” debt could make
things worse before they get betterLess faith in the markets
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"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
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Seguin-Associates Financial Services Ltd.
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Problems With Financial ValuationStock 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
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Industry SafetyBroad categories have performed worse than
S&P 500 since 2006Individual industries may provide some safetyIndividual companies have outperformed with
respect to the market
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Real Estate WoesEstimated $3.3 Trillion loss to date“mid-prime” loans are failing
Brought down Indy-MacPoses problems for insurance companiesUS Banks hold ~ $800B
Commercial Real Estate is expected to decline in value
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4Q08 SIM ActivitySold Bank of America and Merrill LynchPurchased Wells FargoRecommended to hold underweighting at
200bps
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RecommendationsFurther underweight to a total of 150 bps
Reduces ExposureKeeps the fund in the game when upside
occurs