The Garrett, Watts Report (December 12, 2009)

To Our Clients, Colleagues and Friends, 

• A friend recently asked what a Brooks Machine was.  She was told it was some sort of underwriting machine or underwriting process, but we’d never heard of it.  Have any of you?  Was someone pulling her leg? If you know about this, write us. Curious minds want to know.
• Remember 2007 when only three banks failed, and even 2008 when only 25 failed? We’re already at 130 this year, with two more Failure Fridays left. Actually, one of them is December 25^th, and it’s hard to imagine the FDIC seizing any banks on a Friday when the bank is closed, especially Christmas day. So maybe that means only one Friday left in which they can take down banks. Of course, there’s nothing preventing them from grabbing a bank on other days of the week, and they’ve done that occasionally.  Our vague recollection is that they did the Indy Mac seizure on a Thursday.
• Remember last issue when we showed that among the biggest banks, the Texas Ratio was best at BofA and Citigroup, the two banks that seem to worry people the most?  Here’s a rundown on the Tier 1 Capital ratios for the six biggest banks.

Notice how the BofA and Citi are the strongest here as well?

• Doesn’t it seem sometimes that picking stocks is like picking the winner of a beauty contest?  One of our favorite Keynesisms was his comment that if you’re trying to guess the winner, the idea was not to pick the contestant you thought was the prettiest, but to figure out whom the judges would think was the prettiest.  If you like picking stocks based on fundamentals, then you want to study every feature and aspect of the company.  If you’re into charts and technical analysis, you don’t care who looks the prettiest to you.  You just want to figure out which way the judges are leaning, i.e. what other investors are voting for with their stock purchases.  Does that make sense?

• We were talking to Don Brown at Secondary Interactive, and they now have what we would call a Data Detective that scrubs your pipeline daily looking for errors.  We were very impressed.

• We just looked at a portfolio of free standing properties for sale, all leased on a triple-net basis to the big pharmacy company, CVS. The cap rates ranged from 8.5% to 9.1%, and with such a good tenant, wouldn’t the cap rates have been half that a few years ago?
• We’ve been retained to find a Chief Financial Officer for a mid-sized mortgage banker in the San Francisco Bay Area.  If you know anyone interested, or even yourself, please have them send a resume to [email protected]
• If you’re looking for one iconic story that symbolizes the financial meltdown, look no further than the auctioning off of the W Hotel in Manhattan this past week.  Isthimar World Capital paid $282 million for it only three years ago.  The winning bid at the auction was, hold your hat, only $2 million. The new owner is responsible for $97 million in mortgages, so you could say that they really bought it for $99 million. But that’s still a long ways from $282 million.  But then, who wants to own a hotel where they can’t afford full strength light bulbs? 
• Did you know that best friends Sammy Davis, Jr. and Frank Sinatra both shared the same birthday, December 12^th?  If they were alive today, Sammy would be turning 109 and Sinatra would be turning 94. Maybe six months we read Sammy Davis Jr.’s autobiography, Yes, I can, and it was actually pretty interesting.  His conversion to Judaism was particularly compelling, and his writings about the racial discrimination he faced furthers our belief that America had its own form of Apartheid till not too long ago.
• We just saw the most powerful movie we’ve seen all year.  Brothers stars Toby McGuire as a Marine Captain who saw horrible things while a prisoner of the Taliban in Afghanistan . When he returns to his wife and family, McGuire’s performance will remind you in its intensity of Robert DeNiro’s character in Taxi Driver, and maybe Christopher Walken’s acting in Deer Hunter.   You’ll never again think of the boyish looking actor as Spiderman.  We predict he’ll get an Oscar nomination. 
• It seems weird, but we think the Wall Street Journal does the best sports reporting out there, bar none. Last week they took the average salary for all major league players last year and came up with the average salary by position.

It’s interesting that designated hitters are so well paid, considering how one- dimensional they are.  If DH’s are overpaid. We think a top reliever is way underpaid.  Your ace closer will appear in 70+ games and save maybe 35 of them.  Maybe the poorest relievers would have saved 20 of them anyway, but that still leaves your ace responsible for 15 wins.

• Have you ever wondered just what Charles Schwab’s Bank does with your money?  Of all 8,000 banks in this country, they rank #10 in terms of the percentage of their loan portfolio made up of Home Equity Loans. The Schwab Bank holds $6.7 billion in loans, of which a scary 45.7% are HELOCs.  Isn’t that an absurd concentration?

• Someone wrote us that Jim Morrison actually sang “Mr. Mojo’s Rising” and not “My Mojo’s rising” He also heard that the phrase is an anagram for Jim Morrison.  It’s clearly not, but people, let’s not over-intellectualize this.   Jim Morrison was arrested for “playing” with himself on stage, so when he say’s his Mojo is rising or Mr. Mojo is rising, either way, well, what do you think he’s referring to??

• If you’re looking for funny names, the U.S. House of Representatives sure doesn’t have many.  We just looked at a list of all 435, and there’s a Congresswoman named Bordello, but that’s about it.  Oh, there’s a Randy Neuberger ( Texas ) and a Howard Berman, ( California ) as in Neuberger, Berman but that’s real Wall Street trivia and would only be funny to a handful people if they were to co-sponsor a bill.
• Remember when Loan Origination Systems first started, and almost all processors refused to use them.  They wanted to stick with typewriters and white out.  Today’s struggle to go paperless reminds us of that, and just as we now take an LOS completely for granted, this will be the case eventually with being paperless. If you’ve read about Davy Crockett, Daniel Boone, or Lewis & Clark, you know that pioneers often get lost and discouraged early in their adventures. 
• We just read a WSJ interview with the CEO of Ryanair, the Irish deep discount airline.  He said, and he’s serious, that they’re thinking of having the last ten rows of the planes removed, installing handrails, and selling standing room flights for about $2.00. Sounds crazy, but maybe it make sense for a flight of an hour or less.   Um, what happens during turbulence?
• Last week we showed how cheap things had been in 1960. The ever-diligent Steve Zabel of Idaho First Bank calculated the price rise over the past 50 years.  By his calculations, the federal deficit has grown at an average 2.9% per year, the $.04 stamp has grown at a rate of 4.9%, That 1960 $0.29 gallon of gas has increased at 4.8%, a Chevy at 3.6%, and salaries at 4.8%.  It seems strange, but if the federal deficit is growing at a mere 2.9% per year since 1960, that means its growing even slower than the rate of inflation.
• This past Friday the list of Banks with Dumb Names was reduced by one. Solutions Bank failed, and get this, its $421 million in deposits got picked up by Arvest Bank for free. Arvest did not pay even $1 point to the FDIC for the deposits.
• If you live in Reading , Kansas , the main bank in town is called Tightwad Bank.

Garrett, Watts & Co.  Helping mortgage lenders increase revenues, control costs, and better manage risk.

• Joe Garrett         ([email protected])
• Mike McAuley      ([email protected])
• Corky Watts         ([email protected])