To Our Clients, Colleagues and Friends:

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· The credit card business is one, tough business.  The industry mailed out 612 million solicitations in September and typically mails about 6-7 billion pieces a year. The industry-wide response rate was 40 bps last month, and fully half of the offers included a 0% teaser rate. At the Bank of America, 93% of their mailings offered a 0% teaser rate.

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· In our last report we wrote about how it was important to “Know when to hold ‘em, know when to fold ‘em.”  We incorrectly credited the lyrics to a song by Jimmy Buffet and received about 30 e-mails telling us that it was actually “The Gambler” by Kenny Rodgers. We also got a few messages saying it was neither Kenny Rogers nor Jimmy Buffet but had actually been written by Warren Buffet.  Some of our clients are very funny people.

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· One of the most useful ratios is the Efficiency Ratio, It essentially measures how many pennies you spend to generate one dollar of revenue, so a lower number is the better. The banking system averages around 55%, and we have yet to really come up with a typical ratio for the mortgage industry. You should track this ratio monthly, looking for trends and setting goals.  Just divide all costs by all revenues.   If you have, say, $100,000 of revenue and $61,000 of costs, then your efficiency ratio is 61%.   If the number is over 100%, you’re obviously losing money. The lower the ratio, the more profitable you are.

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· The stock market can sure be cruel.  Countrywide’s stock was up 24% in 2006 and is down 75% in 2007.  Remember Sovereign Bank?  They were up 23% last year and are down 50% this year.   Here are a few others, but don’t forget the so-called survivors bias.  The industry has done much, much worse overall when you factor in companies like New Century which are gone and are no longer part of tables like the ones below.

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                                                                         2006 returns       2007 return

Bank United     + 5.2%     -71.5%

Downey Savings           + 6.1%    -52.2%

D.R. Horton  (a homebuilder)   -25.9%      -48.0%

Flagstar Bank   + 3.1%    -53.4%

First Fed of Santa Monica   +22.8%    -46.7%

Fannie Mae   +21.7%    -45.9%

MGIC   – 5.0%    -59.8%

PMI   +14.9%    -70.1%

Washington Mutual   + 4.6%    -64.7%

Indy Mac   +15.7%    -83.5%

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The REITS that just own MBS are generally doing much better.

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Annaly   27.1%     26.0%

MFA Mortgage    34.9%     10.0%

Capstead Mortgage   42.9%     51.2%

Anworth Mortgage   30.3%    -14.2%

Redwood Trust   40.8%    -41.8%

Thornburg Mortgage   -4.1%    -58.3%

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· Here’s an interesting statistic we got from Keefe, Bruyette:   In 2001 Alt-A plus subprime represented only 9% of total originations for the year.  In 2006 these two categories represented 33% of the market.  And just as day follows night, 2001 ultimately led to the annus horriblus of 2007. 

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· Ever wonder how Putin has turned around the Russian economy? He may not really have much to do with it. In 1998 when Russia defaulted on its debt and was, essentially, bankrupt, it was producing six million barrels of oil per day, with oil going for $9 a barrel.  Production has increased to 10 million barrels a day, but the so-called Russian Miracle is largely because oil has moved from $9 a barrel to $90 a barrel.

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· Our clients who are profitable have slashed overhead and had massive layoffs. Those who are still losing money have a simple problem: They haven’t cut overhead enough. It’s that simple. Look at Countrywide. Their loan volume is off about 60% – but their workforce is down a mere 14%.  Sure, they’ve had to beef up their servicing department, and sure, much of their losses has to do with setting aside loan-loss reserves, but they still need to cut staff.  What about you? Have you really cut enough positions?  If you’re losing money, you haven’t cut enough.  Period.

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· Some moron named Kevin Shelton robbed a bank last week in Sarasota , Florida and immediately went into a nearby hair salon.  He slapped down a $50 bill and demanded hair extensions and a manicure, wanting to disguise himself from the cops.  He told the stylist that he wanted to look like Johnny Depp.  

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· We just saw House of Sand & Fog, a harrowing movie about a foreclosure and the effect it has on the woman who lost her house and the family that bought it in the auction.  This 2003 movie received an Oscar nomination.  We highly recommend it.

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· California Congresswoman Mary Bono just married Congressman Connie Mack from Florida . Congressional writers have an annual poll of the most intelligent Congressman, hardest working Congressman, etc. And a few years ago Mary Bono was voted ” Member of Congress We’d Most Like to see in a Swimsuit.”   Funny.

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Joe Garrett and Corky Watts

Garrett, Watts & Co.

http://garrettwatts.com/