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Financial Sector Review (XLU)

Financial Sector Review (XLU). By: Corey Malone Matt Landen Tung Linh Lillian Mojica Kyle Irion. Overview. Consists of many industries Diversified Financial Services Insurance Commercial Banks Capital Markets Real Estate Investments Etc. Overview. XLF Price: $17.15 (1/18/13)

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Financial Sector Review (XLU)

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  1. Financial Sector Review (XLU) By: Corey Malone Matt Landen Tung Linh Lillian Mojica Kyle Irion

  2. Overview • Consists of many industries • Diversified Financial Services • Insurance • Commercial Banks • Capital Markets • Real Estate Investments • Etc.

  3. Overview • XLF Price: $17.15 (1/18/13) • 52 week high/low: $17.15/$13.30 • Beta: 1.52 • Great sector for investors tolerant to risk • Makes up 15.65% of S&P 500

  4. Performance

  5. 1-Year Chart

  6. 3 Month Chart

  7. YTD Chart

  8. Largest Holdings JP Morgan Chase & Co (JPM): 8.50% Berkshire Hathaway (BRK.B): 8.35% Wells Fargo & Co (WFC): 8.23% Citigroup Inc. (C): 5.88% Bank of America Corp (BAC): 5.78%

  9. 3-Month Movers Genworth Financial Inc. (GNW): 31.52% Bank of America Corp (BAC): 21.57% Assurant Inc. (AIZ): -15.40%

  10. Macroeconomic Factors Fiscal Cliff Automatic Spending Cuts Debt Ceiling Earnings Reports

  11. Fiscal Cliff Increased taxes on individuals making $400k per year or couples making $450k per year Pay roll tax cut expires Capital Gains and dividends will rise to 20% for those above 450k/400k Banks benefit from extension of Mortgage Forgiveness Debt Relief Act

  12. YTD XLF Performance

  13. Spending Cuts • Spending cuts • Automatic $85 billion in cuts • About 7.3% across the board cuts to the Pentagon and 5.1% cut to domestic agency budgets • Pushed back until March 1st • Expect to see more uncertainty as deadline approaches

  14. Debt Ceiling • Could reach ceiling by mid-February • Self-imposed $16.4 trillion debt limit • Could default on debt for the first time in our nations history • January 23rd Congress agreed to suspend the $16.4 trillion cap on federal borrowing until May 19th • No Budget, No Pay

  15. Earnings • Big Wall-Street banks like MS, GS, and JPM all beat estimates • Cited increased revenue from their institutional securities business • Commercial banks didn’t perform as well • Capital One, Citigroup missed • Citing drop in the Net Interest Margin

  16. Key Drivers • Economy • Hasn’t been enough economic growth to reduce unemployment rate • GDP expected to rise from 2.5% to 3% • Federal Funds Rate • 30 year security: 3.05% • Government is trying to keep the rate low for investors • Borrower’s ability to repay lenders • More likely to borrow if there is a low interest rate

  17. Valuation Matrices • Price to Book (P/B) • This ratio works well with companies that have a lot of hard/liquid assets, such as loans • = • Good for valuing companies in finance, investments, insurance, and banking firms

  18. Past Recommendations • JPMorgan Chase Oct. 11 • Prudential Oct. 16 • Blackrock Oct. 18 • Keycorp Oct. 23 • American Express Oct. 25 • Capital One Oct. 30 • Morgan Stanley Nov.6 • MetLife Nov. 8 • US Bancorp Nov. 13 • Simon Property Nov. 15 • Northern Trust Dec. 4

  19. MetLife (MET)

  20. MetLife (MET) No Buy Then: $34.70 Now: $37.35 Settled deposit deal with GE

  21. Capital One (COF)

  22. Capital One (COF)* Buy Then: $59.76 Now: $56.24 S&P financial ratings unaffected after underachieving Q4 earnings. Shares fall 9% because COF is not benefiting from acquisitions as anticipated.

  23. Northern Trust (NTRS)

  24. Northern Trust (NTRS) No Buy Then: $48.06 Now: $50.57 Revenue and profits missed Q4 expectations due to FOREX trading income declining 40%. Reduced currency market volatility.

  25. Key Corp (KEY)

  26. Key Corp (KEY) No Buy Then: $8.60 Now: $9.30 Trading at a discount to its book value so the stock may be undervalued. Could receive approval to increase dividend payments Loan growth of 5% Stronger balance sheet since crisis

  27. Simon Property Group (SPG)

  28. Simon Property Group (SPG) No Buy Then: $148.15 Now: $161.50 Simon not to buy smaller rival GGP Plans to pay a portion of debt from acquisitions with proceeds from 2018 notes.

  29. JPMorgan Chase (JPM)

  30. JPMorgan Chase (JPM) • Quarter ending Dec-12 : • sales miss estimate (-0.16%) • Earnings beat estimate (19.79%) • Plan to start an electronic bond-trading service

  31. Prudential (PRU)

  32. Prudential (PRU) Appoint new Chief Operating Officer for Prudential Group Insurance Expand in Latin America

  33. BlackRock (BLK)

  34. BlackRock (BLK) • Quarter ending Dec-12 : • sales beat estimate (1.86%) • Earnings beat estimate (6.19%) • Expand in China and Europe • Bought at $188.77 – Sold at $205.82

  35. American Express (AXP)

  36. American Express (AXP) • Quarter ending Dec-12: • Sales in line with estimate (0%) • Earnings in line with estimate (0.29%) • Net profit fell 47% due to reorganization cost

  37. Morgan Stanley (MS)

  38. Morgan Stanley (MS) • Quarter ending Dec-12 : • sales beat estimate (6.53%) • Earnings beat estimate (68.29%) • $1.7 billion reserve for a settlement with bond insurer MBIA

  39. U.S. Bancorp (USB)

  40. U.S. Bancorp (USB) • Quarter ending Dec-12 : • sales in line with estimate (-0.87%) • Earnings in line with estimate (0.6%)

  41. Sentiment Overall, we are bullish about the financial sector Upcoming fiscal debates will impact performance Morningstar Direct: 2 Stars

  42. References Reuters Morningstar Direct Yahoo Finance Y-Charts http://finance.yahoo.com/news/dow-p-500-end-five-214408995.html;_ylt=Aha35Goe7qSXFvJGSj.CUQT.uYdG;_ylu=X3oDMTNqZGgyMDVwBG1pdAMEcGtnAzA2YjBkYmY4LTZmZTQtMzhkYi04NTViLTY0MmVkMzdiYmJmYwRwb3MDNzkEc2VjA01lZGlhVG9wU3RvcnlUZW1wBHZlcgM3NmUwM2NhMC02MWI4LTExZTItOTVjYi0yMjllZTJiMjIwMGQ-;_ylv=3 http://www.bankinvestmentconsultant.com/news/Banks-Brace-for-What-Follows-Fiscal-Cliff-Deal-2682645-1.html http://www.marketwatch.com/story/this-week-could-make-or-break-financials-rally-2013-01-13?siteid=yhoof2 http://finance.yahoo.com/news/house-votes-defuse-debt-limit-183338191.html;_ylt=AhICCC7lP7vOqTcJ4S14nD2iuYdG;_ylu=X3oDMTRwMGt2NzNhBG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yaWVzIG1peGVkIGxpc3QEcGtnAzhlNjA2MTI0LTBiMTAtM2MzZS1iNTBhLWU4ZDE5YmQ1YTk1MgRwb3MDMgRzZWMDTWVkaWFCTGlzdE1peGVkTFBDQVRlbXAEdmVyAzEzMThmZDg4LTY1YjktMTFlMi05ZTlhLTAzMjg3Y2I3MGE1YQ--;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

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