The Garrett, Watts Report (Dec. 22, 2009)

To Our Clients, Colleagues and Friends,

A client wrote that she appreciated our wishing everyone a Merry Christmas and not the generic Happy Holidays. I’m Jewish and believe me, I’m not offended when people wish me a Merry Christmas. Really. If you want to be politically correct and wish me Happy Holidays, go ahead, but please don’t do it on my behalf. I like the Christmas spirit! I like Salvation Army people dressed as Santas, I like Christmas parties, I like the lights on people’s houses, and I like Christmas trees. Even if you don’t celebrate Christmas, you can still like everything about it.
We recently read that the FDIC’s 2010 operating budget will increase 55% from 2009, mostly due to bank failures. The receivership funding component of the 2010 budget will be $2.5 billion, up from $1.3 billion in 2009. And all you people looking for jobs, we can’t think of a better place to look!
We tell people that we’re not forensic accountants, but we can smell a rat when we see one. We once were reviewing some audited financials, and, hey, it sure looks like the font on the Audit Opinion is different than the font on the balance sheet and income statement! These creeps also had the exact same number, down to the dollar, for loans held for sale in 2007 and in 2008. A coincidence? We don’t think so! A quick call to the audit firm confirmed our suspicions, and for all the magic possible through Adobe and scanning and all that stuff, we were still able to spot the fraud pretty easily.
If you’re a person “of a certain age”, next Sunday is a very important date. It’s the 62^nd anniversary of Howdy Doody’s first appearance on television! Assuming Howdy was, say, 6 years old then, that would make him 68 today. Weird to think of him collecting Social Security and maybe taking medicine for his cholesterol.
We love movies, and there’s nothing quite like a great movie. But we finally came face-to-face with the reality of why books will never be replaced by movies. We’ve read The Great Gatsby 3-4 times over the years, and we consider it one of the two great American novels. Maybe the single great American novel. Anyway, since reading it last, we rented the movie version starring Robert Redford as Jay Gatsby. We liked the movie, but it kind of ruined the book when we re-read it recently.
If you remember the scene where Nick Caraway first meets Gatsby, you remember conjuring up your own image of the man. The image in your mind would have been different than anyone else’s, as we each had our own picture of what he looked like and how he came across. Each reader lets his own mind give him a mental picture of the way he stood, his clothes, his smile, his sense of detachment, the longing for Daisy in his voice. Reading allows you to weave your own imagination into the scenes and characters of a book, but if you see the movie, Gatsby will always be Robert Redford for you. Redford was actually perfect in the role, but isn’t something lost when you can no longer bring your own imagination to bear when reading a book? Movies, sadly, eliminate your ability to use your own imagination and weave your own magic.
The Drug Wars in Mexico are devastating that country, and apparently, marijuana is a major part of the cartel’s business. So here’s an obvious idea: Instead of spending billions fighting drug lords, instead of the drug lord’s corrupting politicians everywhere, and instead of 5,000 people being killed every year in this war, why not legalize marijuana in Mexico ? Wouldn’t that be a huge blow to the illegal drug business there?
When F. Scott Fitzgerald mailed in the manuscript for The Great Gatsby, he wrote his publisher, Max Perkins, “I think my novel is about the best American novel ever written.” Isn’t that a wonderful thought? Can you imagine doing something so exquisitely perfect that you could say something like that?
We just received the Wells Fargo 2010 calendar, but, um, like, the stagecoach driver for April is African-American, and one of the stagecoach drivers for October sure looks like a woman. We appreciate that Wells is politically hip, but please, did Wells really have African-American and female stagecoach drivers in the 1800’s?

Here’s a wonderful video that anyone Jewish will love and that everyone can laugh at and enjoy: http://www.youtube.com/watch?v=w1uZ_W7atDE
A number of you wanted to know how to contact DataQuick to learn more about their Collateral Valuation product. They’re at DataQuick.com (that’s a hard one) and the person to contact is Heidi Russell ([email protected]). Valuations are still an issue, and we like their product.
You know how all stocks trade above, below, or right at their tangible book value? Citigroup trades at about 80% of tangible book value, Bank of America trades at 130% of book.
We were doing a FOCIS-plus in Southern California the other day, and we were at a restaurant that had a Christmas-y fake snow scene. And it was 80 degrees out! Everyone here in Northern California loves to make fun of Southern California , but we love it down there. How can you not love a place where it’s 80 degrees in late December?
In 2003 we did tons of Broker-to-Banker conversions, and then it died around 2005 or so. Interestingly, we’re back doing it again. Probably because of all the new compliance issues that will be affecting brokers soon.
There are lots of good metrics to help you measure your performance, but if you want to do a real quick check on your productivity, take the number of units you close each month and divide it by the number of salaried employees. Well run companies close at least eight units per employee, and the top performers are at 12 or better.
Paul Tuttle, the intellectual founder of Modern Hedging Theory, has a very interesting blog at http://unfundedliabilitiesandclasswar.blogspot.com/. It’s always compelling reading. In his recent posting, he points out that Vallejo , California spends 74% of its budget on public safety, the City Manager of this fairly small city earns more than $400,000 a year, and the average firemen is paid $170,000. Proving that there are no free lunches, the City had to file for bankruptcy earlier this year. And Paul also points that the City Council dealt with their fiscal crisis by cutting services rather than cutting salaries. How do idiots like this manage to get elected???
Detroit is the poster child for troubled cities, and along with the demise of the auto industry, some blame has to be aimed at the City Council for agreeing to onerous pay packages for city employees. A general rule-of-thumb is that with benefits, an employee costs you 30-35% above his base salary. But in Detroit , union employee benefits cost 68% of their base wage! Please note that we don’t blame the unions. Their job is to get the best possible deal for their people. We blame the City Council for not standing up to these unions! By the way, they have a great new Mayor in Dave Bing who totally gets what needs to be done there. Perhaps there’s hope for Detroit after all.
You all know what benchmarking is, right? It’s taking really successful companies and trying to mimic their performance numbers. It used to be easy for mortgage bankers when you could look up the metrics for North American Mortgage, Countrywide, American Residential, Arbor Mortgage and maybe a 5-6 other public entities which did SEC filings you could access. Now, it’s hard to think of a single mortgage banking company (we don’t count mortgage REITs) to benchmark to.
This is why a big part of our FOCIS-plus Reviews is showing clients what their peers are doing, and making it possible to see how they’re doing compared to more successful companies. In our reviews around the country, we see certain consistent metrics among the most profitable companies, and, sadly, we see consistent patterns among the struggling ones. Our clients seem to find it pretty useful to find out what they’re doing differently, what they’re doing wrong, and what highly successful companies are doing that they’re not.
You know the Franklin family of mutual funds? Their parent company (with the too-clever symbol BEN) just raised their dividend by 5% and agreed to pay a one time $3 a share dividend. Rising dividends are, of course, a vote of confidence by the Board that earnings, capital and liquidity are strong. We’re not recommending stocks here, but Franklin has raised its regular dividend every year since 1981. With that record, their own stock has probably outperformed lots of their mutual funds.
If you haven’t prepared your budget for 2010, you still have a week or so! And not having one till mid-January is better than not having one at all. Some of you won’t believe this, but something like 9 out of 10 of the highly profitable companies we see have a budget that they monitor performance against. Show us a company struggling, and we guaranty you that 9 out of 10 of them don’t have a budget. This isn’t exactly benchmarking, but there is definitely a correlation there.