Picks for a More-of-the-Same World

 | Jul 12, 2013 | 3:30 PM EDT
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This week, I have found it increasingly difficult to have a conversation that doesn't involve Federal Reserve policy and the larger macroeconomic picture. I've been amused, at best, by the attention surrounding this week's Fed minutes and the ensuing stock-market rally. Although Chairman Ben Bernanke took care to change his tune in the press conference following the release, he did not say anything that he hasn't intoned on previous occasions. That is, if the economy improves, the Fed will stop or slow the quantitative-easing bond-buying -- and if the economy turns south, it will be inclined to bump up QE activities.

Under no circumstances will the Fed be raising short-term interest rates anytime soon. In his previous conference, Bernanke had floated the idea of stimulus tapering, and the market quickly shot that down. U.S. Treasury bonds fell, the dollar rose, stocks became more volatile and precious-metal prices collapsed. None of this fits in to the Fed's long-term picture, so tapering talk from official sources is bound to die off for a while.

The truth is that, in spite of the flood of news releases and information, not very much has changed as far as the economy is concerned. Things are better than they had been, but the situation still isn't great. The jobs picture is very cloudy, and getting cloudier, as employers increasingly turn to part-time workers in order to escape the costs of healthcare reform. Real estate does look somewhat better. But supply and price are getting distorted thanks to institutional buying and -- as Roger Arnold pointed out this week -- due to bank purchases of foreclosed properties.

The recent bump in long-term rates has slowed mortgage applications to a crawl, and there are signs that the housing market is not in the sort of wonderful shape that many had hoped. Based on my economics-by-walking-around analysis, it seems signs are emerging of overbuilding in certain regions of the country, most notably in the Sun Belt areas that had been the hardest hit in the decline. Many folks are counting on housing to be the great job creator that saves us all, but I have a sneaking suspicion that those people are in for a disappointment.

On the plus side, the credit problems of banks are slowly but surely working themselves out of the system. Slow new-loan demand has actually been a plus for the banks, as these firms had needed time to heal their balance sheets. The backup in longer-term rates is also a plus, as this steepens the yield curve and allows banks to increase their net interest margins. Bank failures have slowed down, and we should now start to see a wave of consolidation that creates healthier, more profitable community and regional banks.

Yet all of this is just a lot of noise unless it creates some investable ideas. A huge takeaway from this week is that interest rates will remain low, and that means yield-stretching will continue. The intense need for income will continue driving money into the large funds and ETFs that seem to promise decent dividend payouts.

This, in turn, will continue widening the gap between large and small real estate investment trusts. Funds are likely to continue buying REITs with the largest market capitalization, and without regard to valuation -- and this stands to create a distortion. I suspect you could make a career here by shorting the large-cap REITs and ETFs against a portfolio of smaller-cap REITs such as Ashford Hospitality (AHT) and CommonWealth REIT (CWH).

That aside, the reality of weak global demand has created a massive selloff in materials and metals stocks. The truth is that, if the world does not end, even the central bankers will eventually muddle through and the economy will get better. You can make an enormous amount of money by figuring out which energy, mining and material stocks will survive. It may be a very bumpy ride, but take a look at such stocks as Pan American Silver (PAAS), Arcelor Mittal (MT), Cliffs Natural Resources (CLF) and Swift Energy (SFY). Given the shares' current depressed levels, I think people who buy now will be happy campers with fat account balances in 10 years.

You have to consider the smaller regional and community banks here, as well. If conditions remain depressed -- and if Roger is right about the looming pressure from the Consumer Financial Protection Bureau -- these shares will get cheaper and the pace of consolidation will accelerate as things get better, as loan quality improves and as demand picks up. Again, they will be subject to market forces along the way, but they will make a lot of money for shareholders over the next five to 10 years.

These names should do well against a backdrop that hasn't really changed.

In spite of all the news, press conferences and media hoopla, nothing about the big picture has changed. So you'd do well to focus on the smaller picture of safe and cheap. In this way, you can find yourself in the best position to profit when, at long last, the big picture truly changes.

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