Five for 2008 -- CMO

Unlike my first two picks, Capstead Mortgage has done well in 2007. It should -- it's almost a pure play on the spread between short- and long-term interest rates. Under our economic outlook discussed in an earlier post, the Fed will be almost forced to continue to cut to keep the financial system from major dislocations. That will reduce CMO's cost of funding its government-guaranteed mortgages, boost its spread and inevitably, the dividend (as a REIT, it must pay out most of its income). Since there's scarcely a chance that the Fed will raise rates, the only real risk for the next few months is headline risk -- if people get too scared of ARMs, CMO will go down with the rest of the financials, even though the actual credit risk is low.

Capstead Mortgage Corporation operates as a real estate investment trust (REIT) in the United States. It primarily invests in real estate-related assets, which include residential adjustable-rate mortgage securities issued and guaranteed by government-sponsored entities. Capstead Mortgage has elected to be treated as a REIT for federal income tax purposes and would not be subject to federal income tax, if it distributes at least 90% of its REIT taxable income to its shareholders. The company was founded in 1985 and is headquartered in Dallas, Texas. (From Yahoo)