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

FINANCIAL SECTOR RECAP

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

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

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 Sector Companies in Sector Market Cap MTD QTD YTD S&P 500 500  7,585,482  9.39% -3.37% Energy 39  948,939 4.81% -7.85% Materials 28  255,334 15.09% 11.85% Industrials 58  792,036 17.72% -7.91% Consumer Discretionary 81  721,919 18.54% 8.33% Consumer Staples 41  913,657 3.03% -8.62% Health Care 54  1,049,425 -0.89% -9.34% Financials 80  924,373 22.17% -13.86% Information Technology 75  1,395,938 12.04% 16.48% Telecommunications Services 9  281,800 2.23% -6.43% Utilities 35  302,059 0.42% -11.49% Data as of 4/30/2009

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

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 (+)

Sector Summary and Recommendations 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

Stock analysis

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

SIM – Financial Sector – Current Stocks 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 Company Total Value % of Total % Change Since Purchase Berkshire Hathaway Inc. - CL A $564,000.00 46.38% -14.12% Hudson City Bancorp $347,912.00 28.61% 8.00% Wells Fargo $304,152.00 25.01% -36.19% Grand Total $1,216,064.00   -42.31%

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

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

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

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

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)

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

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

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%

# Shares Outstanding ('000) Stock Comparison Ticker P/E Forward 4 Qtrs P/E 2009 P/E 2010 Earnings Estimate 2009 Earnings Estimate 2010 Earnings Estimate 2011 Price/Share 05/22/09 Price Momentum Value P/S Latest 4 Qtrs. P/S Current Yr. # Shares Outstanding ('000) BANK OF AMERICA BAC 77.4 26.6 9.9 0.42 1.12 2.66 11.07 5 0.93 0.71 7651388 CITI GROUP C NM -3.82 -1.04 - 3.15 1 0.63 0.76 388770 GOLDMAN SACHS GROUP GS 12.7 11.0 10.77 12.37 16.52 136.35 54 2.94 2.05 502434 JPMORGAN CHASE & CO JPM 21.9 23.1 12.6 1.49 2.73 5.12 34.41 65 1.72 1.28 3757923 NORTHERN TRUST NTRS 15.4 16.8 13.5 3.10 3.86 4.64 52.00 67 3.03 3.12 238461 WELLS FARGO WFC 16.9 1.44 1.80 3.44 24.31 76 2.64 1.37 4578777 TICKER P/B P/B 10 Yr Avg. P/CF P/CF 10 Yr. Avg ROE ROE 10 Yr. Avg. Pretax ROA ROA 10 Yr. Avg Net Profit Margin BANK OF AMERICA BAC 0.4 1.9 7.4 10.4 0.0510 0.1640 0.0040 0.0200 0.0850 CITI GROUP C 0.3 2.3 1.0 NM 0.1810 0.0190 GOLDMAN SACHS GROUP GS 1.5 2.2 15.8 11.8 0.0560 0.1950 0.0020 0.0120 0.1040 JPMORGAN CHASE & CO JPM 0.9 18.2 9.5 0.0220 0.0800 0.0010 0.0100 0.0390 NORTHERN TRUST NTRS 9.6 20.0 0.2200 0.1720 0.0230 0.0170 0.2640 WELLS FARGO WFC 2.8 9.9 10.3 0.1540 0.0210 0.2110 *ROA 5 Yr average for WFC, data not meaningful for 10 yr.

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 (+) Macro Factors rf Consumer Confidence Business Confidence Unemployment Rate CPI Real Federal Funds Rate Aaa Corporate Rate Spread Case Shiller Home Price (20-Metro) Brent Crude Oil Spot Price Consumer Credit Outstanding Real Consumer Spending Personal Saving Rate Retail Sales Balance of Trade Housing Starts

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   Ticker Change in Earnings 2010 Change in Earnings 2011 GOLDMAN SACHS GROUP GS 15% 34% JPMORGAN CHASE & CO JPM 83% 88% NORTHERN TRUST NTRS 25% 20%

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

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

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 Initiation of Coverage Ticker: NYSE JPM Rating BUY Current Price – 05/26/09 $36.28 Price Target - 12 Month $44.09 % Change 21.53%   FY $(Millions) 2011E 2010E 2009E 2008 2007 Net Revenue 112,240 102,890 96,714 67,252 71,372 Growth Rate 9% 6% 44% -6% 15% Avg. Estimate 104.6B 99.4B No. of Analysts 14.0 Low Estimate 96.9B 86.4B High Estimate 120.2B 111.0B Year Ago Sales 67.3B Diluted earnings per share 2011E 2010E 2009E Net income $4.64 $ 2.65 $ 1.44 Average Estimate   $2.66 $1.45 Number of Analysts 17 18 Low Estimate $1.00 $0.95 High Estimate $3.50 $1.82 Year Ago EPS $1.46 $1.37

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

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%

Questions?