The Garrett, Watts Report (January 9th, 2010)

To Our Clients, Colleagues and Friends,

• Here are some companies and their market caps.  We tried to pick only those which didn’t exist, say, 25-30 years ago to show how the American economy is constantly coming up with new and better ideas, creating wealth, growth and jobs.

These five alone have a combined market cap of $931 billion! And don’t forget Amazon ($60 billion), Dell ($28 billion) and even Salesforce.com ($9.3 billion).  How can you possibly despair for the future when you look at how good we are at re-inventing the world?

• Are movie theaters a dying business?  Maybe, but last year, moviegoers paid $9.8 billion on movie tickets, more than the $8.1 billion spent on video rentals.  If the moviegoers spent $9.8 billion on tickets, we calculate that they spent another $247 billion on popcorn and soft drinks.  Can you believe paying $7 for a small bag of popcorn?  Or $6 for a Snickers bar big enough to feed a family of four?

• How did your stocks do last year?  Here is how some stock markets did around the globe:

Venezuela came in with a gain of 57%, but strongman Hugo Chavez is busy destroying free markets there, and they may not even have a stock market in 4-5 years.  Given all the turmoil in Pakistan , it was a surprise to see that their stock market was up 60%.

• Remember all those people who panicked last year and sold their stocks?  Since March, the S&P 500 is up 65%.
• The Wall Street Journal just reported on a University of California study involving more than 250,000 participants which discovered ”impressive benefits of being happy.” Are we missing something here, or was there ever any doubt about this?

• Craig Cole reminded us that Union Bank traces it roots to 1864 and is considered the first commercial bank incorporated in the West. Union Bank started as Bank of California, and you can check out their website (unionbank.com) which has a bunch of their history.  Like Wells Fargo, Union Bank has a very cool museum, and only half a block from the Wells museum in downtown San Francisco .
• And for all the banks that have been around forever, how about American Banker?  This daily newspaper (which we’re addicted to) was founded in 1836! Wasn’t Martin Van Buren President then, or maybe Andrew Jackson?  
• Speaking of dead people, this past Friday would have been Elvis Presley’s 75^th birthday. Had he been alive, he’d probably have eaten the whole birthday cake himself.  If you forget about Fat Elvis, he was an interesting amalgam of musical styles.  He was influenced deeply by blues, country and gospel, and his crazy gyrations on stage were pure Cab Calloway and Jackie Wilson.  Watch some old Jackie Wilson videos and you’ll see where Mick Jagger and Elvis learned all their moves.
  

• Ever wonder what the FDIC does with all those loans they take back when they seize banks and sell off their deposits?  The FDIC just sold a portfolio of $1.0 billion of distressed commercial real estate loans, 70% of which were delinquent. A REIT named Colony Capital paid $90 million for a 40% ownership, and the FDIC provided financing for the rest.  Essentially, the REIT and the FDIC formed a joint venture on the deal.
• Did you know that there are more Israeli companies listed on the NASDAQ exchange than all companies from the European continent combined?  Israel probably has more entrepreneurs relative to its population than Silicon Valley .
• In 2009, there were only 31 banks that increased their dividends, two of which increased it twice during the year!  But there were 203 banks which cut their dividends and 55 which eliminated them all together. If you like dividends but don’t want to own common stocks, there are some great yields in bank preferreds.
• With HUD moving toward a minimum $2.5 million net worth to do FHA loans, it’s believed that this will disqualify 70% of all current lenders. HUD estimates that about 40% of all currently approved lenders have less than $1.0 million net worth, and that’s a long ways from $2.5 million.
  
• We get confused ourselves occasionally as to which regulators supervise which types of banks.  The attachment is our little cheat sheet.
  
• We saw a list of the colleges whose football teams ranked #1 since 1936, and you had all the obvious ones.  Alabama and Notre Dame had won eight national championships, followed by Oklahoma and USC (7), Miami , Nebraska , and Ohio State (5) Minnesota and Texas (4) and so on. The only interesting ones were Brigham Young (1984), Syracuse (1959) and Maryland in 1953.  We wandered around the University of Maryland campus last year and thought it was spectacular.
  
• Let’s say you have a very nice community bank with $200 million of assets, but you’re losing $75,000 a month. If you can increase your net interest margin by, say, 50 bps, that will give you an additional $1.0 million of annual income, or $83,000 a month, and you’ll be in the black. So here’s the big question: Do you achieve this by (a) trying to get an extra 50 bps in yield on your loans or by (b) lowering your cost of deposits by 50 bps?  A matter of indifference?  No way, Jose.  If you go for higher yielding loans, you are going after riskier loans.  In our mind, trying to reduce deposit costs always beats chasing yield in your loan book. Look no further than those banks that failed due to higher yielding subprime or Alt-A loans.
  Higher yielding loans almost always imply higher risk. And while lowering your deposit costs can be hard work, it’s always worth it.
  
• Here are some of the nominations you sent in for so-called novelty songs. In many cases, there was no known title, so we just got an opening line.  A number of you submitted Louie, Louie, but we’d put that in a different category of party songs. Besides, no one really knows what the lyrics are.
  

The last one is interesting, and while it’s ostensibly about inter-tribal dating, it’s actually a warning against going swimming within two hours of eating.  Running Bear had been noshing on acorn nuts, and his girlfriend from an enemy tribe was gorging herself on knishes, and when they swim out to meet in the middle of the “raging waters”, just like that, they both drown.  The two Indians had completely ignored their parents’ warning that you’d drown if you went swimming after lunch unless you waited two hours.That’s about it.  Keep your costs down and your credit quality up.  And stay warm.   See you next week sometime.Garrett, Watts & Co. Who Regulates Which Types of Banks   <<< Today’s bonus “Helping lenders increase revenues, control costs, and better manage risk.”Joe Garrett   (510-469-8633)Corky Watts   (408-395-5504)
Mike McAuley    (281-250-2536)