Europe’s Three Magicians

by Richard Band | July 30, 2012 1:30 pm

Friday’s wrap:  Smoke and mirrors?  Perhaps.  But the financial markets still love the show.  Last week the ECB chief, the German chancellor and the French president all shouted together that they’re going to save the euro[1] (“whatever it takes”).  Stocks dutifully jumped, with the S&P 500 closing at its highest level since May 3.

Our forecast remains on track:  Over the next few months, stocks should continue to rally back up to the April highs (1419 on the S&P) and modestly beyond.  However, there’s still plenty to keep us cautious about the longer term.

The upcoming fiscal cliff, for example.  The looming entitlements crisis.  The anemic pace of economic growth (underscored by the latest Q2 GDP report[2], which showed a measly 1.5% annualized rate of expansion).

In short, we’ll play the equities game for now, but ever more cautiously as prices rise.  Be prepared to hear more sell signals from me in the weeks ahead.

In company news today, Newmont Mining (NYSE:NEM[3]) posted lower Q2 profits and trimmed its 2012 gold-production forecast[4] to a range of 5 to 5.1 million ounces, from 5 to 5.2 million previously.  While this isn’t a huge change, it continues the disappointing pattern set by other major gold producers lately: higher costs, lower production, lower profits.

I’m hopeful that a bounce in bullion prices during the second half of the year will fatten NEM’s bottom line.  Indeed, it appears that the Midas metal (see chart[5]) has just broken out — on the upside — from a pennant formation dating back to the May low.  I foresee bullion challenging $1,800 an ounce by late September.

Even so, given the operating setbacks the miners have experienced recently, I’m taking a more conservative view of the shares’ upside potential.  NEM still rates a buy, but I’m lowering my limit to $46.  From today’s close, I think the stock should be able to generate a total return of 25% or more in the coming year.  We’re tracking NEM as a Niche Investment.

Among the members of our Incredible Dividend Machine, Washington Real Estate Investment Trust (NYSE:WRE[6]) surprised investors today by reducing its payout[7] for the first time in the trust’s 52-year history.

Much as I dislike dividend cuts, I agree with management’s view that shareholders will ultimately benefit as the trust channels more capital into property acquisitions, development projects, improvements to existing assets or debt retirement.

The new quarterly rate of 30 cents per share (down from .43375 cents previously) appears very safe, representing less than 65% of the trust’s estimated 2012 funds from operations.

What’s more, management expressed willingness to raise the payout as soon as earnings growth justifies doing so.  We’re retaining WRE in the Machine.

  1. they’re going to save the euro:
  2. Q2 GDP report:
  3. NEM:
  4. trimmed its 2012 gold-production forecast:
  5. chart:
  6. WRE:
  7. reducing its payout:

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