1. S & P 500 Financials Sector 7/21/2009 Jerod Tilton Jon Verworn Zachary Wang

2. Agenda Sector Weighting Condition of Sector (5 Forces) Economic Drivers Performance Relevant Facts Recommendation Questions 7/21/20092S & P 500 Financials Sector

3. Historical Sector Weighting Information Technology: Largest 18.4% Materials: Smallest 3.2% Financials: 13.7% Financial Sector Weighting Trending Upwards 7/21/20093S & P 500 Financials Sector

4. Sector Weighting Financial Sector Underweight Relative to S&P 500 by 4.4% – 4.0% excl cash 7/21/20094S & P 500 Financials Sector

5. Industry Breakout Industries showing declining growth 7/21/20095S & P 500 Financials Sector

6. Top Stocks SIM Class has 5 Financial Stocks 3 of five in top four regarding capitalization Capitalization has decreased significantly since 2007 7/21/20096S & P 500 Financials Sector

7. Porters Five Forces Barriers to Entry – Little to none Competition – High Substitution – Little, but can be a pain Supplier Power – High, the Fed has a lot of control Buyer Power – Can go to a number of banks 7/21/20097S & P 500 Financials Sector

8. Economic Drivers 7/21/2009S & P 500 Financials Sector8 Direct Crude Oil Consumer Confidence Inverse Unemployment Direct Fed Funds rate

9. Economic Drivers Cont’d Direct – Home Price – Mortgage Applications Directional Direct – Housing Starts 7/21/2009S & P 500 Financials Sector9

10. Performance relative to the S&P 500 Relative to the market (S&P 500), the financial sector has performed relatively well on average within the past decade. However, due to the banking crisis and the recession, performance dropped significantly within the last two years.  In 2008, the financial sector’s performance fell to -30% when compared to the market.  Currently, the sector has rebound a little to -27% Financial Sector in Relation to S&P 500 10 Yr Financial Sector in Relation to S&P 500 2 Yr 7/21/200910S & P 500 Financials Sector

11. Performance relative to other sectors S&P 500 Operating Earnings by Economic Sector: Bottom-Up Estimates as of 07/14/2009 2007A2008A2009E 2010E KEY S&P 500 82.54 49.51 56.05 74.98 A - Actual Consumer Discretionary 13.31 5.27 7.54 13.09 E - Estimate Consumer Staples 15.62 17.18 17.43 19.13 Energy 46.30 50.92 17.37 33.81 Financials 22.79(21.24) 7.52 13.69 Health Care 23.31 24.48 26.53 29.03 Industrials 21.28 21.18 14.16 15.44 Information Technology 17.35 16.13 15.05 19.84 Materials 15.97 8.10 4.70 9.96 Telecommunication Services 8.27 8.22 8.36 8.51 Utilities 11.67 12.25 11.93 13.12 Operating Earnings Relative to the other sectors, the financial sector suffered the most last year  Operating Earnings fell nearly 200% in 2008  Actual earnings per share fell 108% Potential Growth The S&P 500 index projects a rebound of the earnings in the financial sector in 2009 to 7.52 and 13.69 in 2010. This increase signals a projection that inflation could set in within the next two years. 7/21/200911S & P 500 Financials Sector

12. Earnings Valuation EPS Prior to the recession, performance from EPS has been relatively stable during the past decade. After the start of the banking crisis, the EPS flow has followed the market trend ROE ROE has been volatile during the past decade but has been downward sloping on average. EPS ROE 7/21/200912S & P 500 Financials Sector

13. Valuation Analysis Price/Book and Price/Earnings Ratios The P/B ratio has shown a decline in the sector within the last two years.  The reason behind this decline can be tied to the banking crisis  The first quarter of 2009 has shown projections of a possible growth in the financials as the recession comes to an end. The increase can be attributed to FASB 157 as banks start to correctly value their assets Price/Book Forward P/E 7/21/200913S & P 500 Financials Sector

14. Economic Indicator The Federal Funds Rate has dropped to.15% This low rate shows that the government is attempting to stimulate the market and promote banks to lend more money in attempt to combat the recession. Effects from the change in the Federal Funds Rate are slightly lagged.  The first quarter of 2009 shows the first sign of a rebound within the financial sector (partly due to the increase in revenue from the low federal funds rate) Federal Funds Rate Financial Sector Index Value 7/21/200914S & P 500 Financials Sector

15. Relevant Facts Top 15 issuers of general purpose credit cards for 2008 based on outstandings 1. Chase - $183.32 billion 2. Bank of America - $166.32 billion 3. Citi - $106.74 billion 4. American Express - $88.02 billion 5. Capital One - $60.08 billion 6. Discover - $49.69 billion 7. Wells Fargo - $36.36 billion 8. HSBC - $29.97 billion 9. US Bank - $18.53 billion 10. USAA - $17.48 billion (Source: Nilson Report, March 2009) 7/21/200915S & P 500 Financials Sector

16. Relevant Facts Cont’d According to data from the U.S. Census Bureau, there were 159 million credit cardholders in the United States in 2000, 173 million in 2006, and that number is projected to grow to 181 million Americans by 2010. (Source: Census Bureau) As of March 2009, U.S. revolving consumer debt, made up almost entirely of credit card debt, was about $950 Billion. In the fourth quarter of 2008, 13.9 percent of consumer disposable income went to service this debt. (Source: U.S. Congress' Joint Economic Committee, "Vicious Cycle: How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the Recovery," May 2009) 44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months —- more than any other source of financing, including business earnings. In 1993, only 16 percent of small-businesses owners identified credit cards as a source of funding they had used in the preceding 12 months. (Source: National Small Business Association survey, 2008) 7/21/200916S & P 500 Financials Sector

17. Relevant Facts Cont’d Ranking of U.S. banks' reputations 1. Washington Mutual -- 64.04 2. SunTrust Banks -- 63.56 3. Wachovia -- 61.22 4. National City -- 58.83 5. Wells Fargo -- 57.38 6. US Bancorp -- 54.18 7. Bank of America -- 50.94 NOTE: Rankings were part of a survey of 600 of the world's largest companies. (Source: Reputation Institute Global Pulse survey, June 2008) = JPMorgan Chase = Wells Fargo = PNC 7/21/200917S & P 500 Financials Sector

18. Relevant Facts Cont’d Cuomo v. The Clearing House Association 6/29/09 – States can regulate nationally chartered banks Goldman Sachs Reports Record Earnings 7/14/09 – $4.93 a share, up from $2.09 billion, or $4.58 a share, a year earlier JPMorgan Chase’s earnings beat expectations 7/16/09 – 28c/share versus expected 4c/share CIT in talks with Goldman and JPMorgan Chase 7/17/09 – Financier of small and middle market businesses need funds CIT Receives Bailout 7/20/09 – From private sources Hudson City Earning 7/21/09 – Up 18.2% to $0.26 versus expected $0.25 Wells Fargo Earnings 7/22/09 7/21/2009S & P 500 Financials Sector18

19. Potential Causes for Downside More Bank Failures Deeper Recession – e.g. Double-dip Recession Low Investor Confidence Federal Funds Rate Increase Increased Regulation Credit Card Defaults Due to unemployment Lack of Dividends Toxic Assets 7/21/200919S & P 500 Financials Sector

20. Potential Causes for Upsides Systemic recovery—high beta Less competition for those left = more market share Potential privatization of Social Security savings Increased savings trends Purging of toxic assets 7/21/200920S & P 500 Financials Sector

21. Recommendation Keep financials services underweight In the short term, returns will poor. Financial services will not out perform the market, however, once the credit crisis and other issues are resolved, then returns will increase Currently risk outweighs reward. We feel that a systemic rebound can be experienced in other sectors without as much risk. We are bullish long term, however for the short term, we are bearish. We recommend leaving the financial services at 440 basis points underweight 7/21/200921S & P 500 Financials Sector

22. Financial Sector Questions?? 7/21/200922S & P 500 Financials Sector