S&P 500 - Financial Sector (S5FINL)

1. S&P 500 - Financial Sector (S5FINL) • Stock Market FIN 824 • Rebecca Dunn • Christina Durrough • Nicholas Ferrugia • May 26, 2009

2. FINANCIAL SECTOR RECAP

3. Business Cycle • Financial Sector is cyclical • Currently in the mature phase of life cycle • High barriers to entry • High level of competition

4. Financial Sector Weighting • Current Financial sector weight is below average • Weight is trending up • Weight increased during the housing boom Top Ten Stocks

5. Sector Performance • Financial Sector has seen the greatest negative returns YTD • Financial Sector has seen the most positive returns QTD • Over the past 20 years, the S&P 500 has outperformed the financial sector • Data as of 4/30/2009

6. SIM Market Capitalization • Financial Sector Market Capitalization • SIM is underweight (4.05%) relative to the S&P 500

7. Regression Analysis • Fama and French Style Factors • 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 • Financial Sector • Momentum (+) showed to be “statistically significant” to predict future return in Sector • Financial Sector – Forecast using Macroeconomic Factors • 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) • Rf (+) • Unemployment (-) • CPI (-) • Aaa Corporate Rate Spread (-) • Consumer Credit Outstanding (+)

8. Sector Summary and Recommendations • 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 • Recommendations • 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 • Result – keep current weighting as of 04/30/2009

9. Stock analysis

10. Potential Stocks • Goldman Sachs & Company – GS • Bank holding company and global investment banking, securities and investment management firm • Provides services worldwide to corporations, financial institutions, governments and high-net-worth individuals • JPMorgan Chase & Company – JPM • JPMorgan Chase & Co. is a leading global financial services firm with assets of $2.2T and operates in more than 60 countries. • JPMorgan Chase & Co. provides a wide range of financial services worldwide. • The company operates through six lines of business: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury and Securities Services, and Asset Management. • Rank 2009: Second largest U.S. bank and third in the U.S. in deposits • Northern Trust Corporation – NTRS • Financial holding company that provides investment management, asset and fund administration, fiduciary, and banking solutions • Clients include corporations, institutions, and affluent individuals

11. SIM – Financial Sector – Current Stocks • SIM Portfolio • 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

12. Goldman Sachs Group, Inc. Industry: Investment Banks and Brokerage Performing better than other comparable stocks in the market Performing better than the financial sector 8/21 analysts recommend buy or overperform 20/21 recommend buy, overperform, or hold

13. JPMorgan Chase & Company Industry: Diversified Financial Services Outperforming the sector and many other stocks 10/15 recommend buy or overperform 15/15 recommend buy, overperform, or hold

14. Northern Trust Corporation Industry: Asset Management Performing better than other comparable stocks in the market 7/14 analysts recommend buy or overperform 14/14 recommend buy, overperform, or hold

15. GS vs. JPM vs. NTRS – Past 5 Years • GS has performed best over a 5-year period • Up approximately 50% • JPM has performed worst • Slightly down over this period

16. GS vs. JPM vs. NTRS – Past 2 Years • NTRS has performed best over the past 2 years • Down approximately 20% (compared to 30-40% for JPM and GS)

17. GS vs. JPM vs. NTRS – Past Year • Over the past year, JPM has slightly outperformed GS • NTRS is the worst performer of the three

18. GS vs. JPM vs. NTRS – Past 6 Months • Nearly identical to the 1-year results • JPM slightly better than GS (~-20%)

19. GS vs. JPM vs. NTRS – Past 3 Months • JPM has clearly performed the best over the past 3 months • Up 60% • GS up approximately 50%

20. Stock Comparison

21. Regression Analysis • Summary • Macro Factor regression analysis provided minimal insight to predict future changes in earning • Statistically significant macro factors were identified for all 3 companies; however, R2 never reached above 12% • 15 macro factors were reviewed in initial regression analysis • Different time periods and staggering of data were used to identify relationships to predict future changes in earning • GS • Current Month: Aaa Corporate Rate Spread (-) • 2 Month: Retail Sales (+) • 3 Month: Retail Sales (+) • JPM • Current Month: Consumer Confidence (+) • 2 Month: Rf (+), Aaa Corporate Rate Spread (-), Unemployment (-) • 3 Month: Retail Sales (+), Balance of Trade (+) • NTRS • Current Month: rf (+), Real Consumer Spending (-) • 2 Month: Unemployment Rate (-), Real Consumer Spending (+)

22. JPMorgan Chase vs. Others • JPM appears to be accurately valued, with strong upside potential • JPM has outperformed GS over the past year, six months, and three months • JPM expects a higher percentage increase in earnings Changes in Earnings Per Share

23. JPMorgan Chase Performance • Summary • Over the past 5 years JPM has recorded a better compounded rate of return compared to the S&P 500, Financial sector and the Div. Fin’l Services industry. • Frequency of JPM beating the returns of the S&P 500, Financial sector or Div. Fin’l Svs has only been statistically significant in the last 12 months against Div. Fin’l Svs Data as of 4/30/09

24. Technical Analysis • JPM analysis indicates continued steady future growth • Upper and Lower bound have been established indicating a tested upward sloping channel • Today lower bound was tested and stock rebound with positive growth • Government regulation and legislation can quickly deteriorate channel

25. Initiation of Coverage • JPMorgan Chase & Company • BUY rating • Although, the JPM will challenged by the weaken credit market it has proved to be able achieve future sustainability, growth and profitability • Fortress brand, strong capital reserve levels relative to peers, diversified revenue, proactive risk management, reduced exposure to heritage assets, consistent investment in growth and dedication to building long-term customer relationships

26. Summary • Many stocks in the sector have performed well in the past 3 months • Goldman Sachs, JPMorgan Chase, and Northern Trust have performed better than average in the sector • JPMorgan Chase appears to have the best potential performance in the Financial Sector

27. Recommendations • Purchase JPMorgan Chase • Re-weight Financial Sector SIM holdings • BRKB: 46.38% • HCBK: 28.61% • WFC: 25.01% • Suggested weighting • BRKB: 35% • JPM: 25% • HCBK: 20% • WFC: 20%

28. Questions?