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Stars and Stripes and European News

When I was a kid, they used to call June 14 Flag Day.  Well, the bulls ran their own pennant up the pole on Thursday, with both the Dow and the S&P 500 closing at their highest levels in a month.  Spot gold, in late New York trade, was also quoted near a one-month high at $1624.60 an ounce.

Europe is uppermost in investors’ minds right now, of course.  But we’re getting conflicting signals from “over there.”

On the plus side—and this is what seemed to be driving the stock market—it was reported that private polls show the pro-Europe parties ahead in the run-up to Sunday’s Greek legislative elections.  The Athens stock index leaped 10% Thursday.

In Spain, though, the news wasn’t quite so happy.  Yields on 10-year Spanish government bonds kissed the 7% red-alert threshold before retreating ever so slightly to 6.92% at the end of the session.  Spain isn’t Greece, either.  Madrid is mired in a financial crisis of far greater significance to the world economy.

Over the next few days, we’ll see what new rabbits the world’s central banks can pull out of their hats.  Meanwhile, the rally I called for Tuesday is unfolding, but with more stops and starts than I had hoped.  No sign yet of 1350 on the S&P.

That raises an important question:  If the bounce to date has been so erratic and weak, should you hedge against another downturn?

For most long-term investors, extensive hedging isn’t necessary.  Bonds and cash, in adequate amounts, plus a little gold or other precious metals, will provide all the cushion you need.

However, some may be more heavily exposed to the equities than the 51% guideline I suggest in a model portfolio.  In addition, some folks with a trading mindset simply want a chance to make money (on the short side) when the market is going down.

If you find yourself in either of these latter categories, you might consider taking a modest position in the “double bear” fund I wrote up in the June issue, ProShares UltraShort S&P 500 Fund (NYSE:SDS).  My reading of the charts still leads me to believe the market will gain a bit more ground today or Monday, so I would place a limit order to buy SDS on a dip.

Set a stop 5% below your entry point.  If stocks rally far enough to take out your stop, the European crisis (at least this chapter of it) will probably have passed.

In other developments, Canadian oil-and-gas producer Enerplus (NYSE:ERF) announced Tuesday it’s cutting its monthly dividend payment in half, to 9 cents per share (Canadian) from 18 cents per share previously.  I’ve been expecting a reduction, although I thought it might not come until year-end.

Obviously, a dividend cut is never a welcome event for shareholders.  In this case, however, ERF’s move will help the company accelerate a strategic shift toward production of oil and natural-gas liquids, which command higher prices than natural gas.

Chopping the dividend will also enable ERF to preserve its strong balance sheet during this period of depressed energy prices.  When prices for the underlying commodities (especially natgas) bounce back, I expect ERF to raise its dividend again.

The new rate, which I view as sustainable over the longer term, results in a generous current yield of 8.3%.  Accordingly, I’m reinstating my buy rating for the stock.  Suitable for aggressive income investors only.  We’re tracking ERF as a Niche Investment outside the model portfolio.

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