June wasn’t kind to the stock market. In fact, the S&P 500 had its worst month since September 2002 and its worst June since 1930.

So far, July hasn’t been much better.

End result: The S&P 500 is now back below 1300, the same place it was at in the beginning of 2006. In other words, it has given up all the gains made throughout 2007.

In fact, the S&P 500 was at the very same 1300 level as far back as 1999. In between were massive rallies, sure. But over the last eight years, the market has basically gone nowhere.

You can see why I continue to think select dividend-paying shares are the perfect way to get paid while the market idles in neutral and interest rates remain insultingly low.

For your core income stock portfolio, I continue to recommend hanging on to those positions and riding out the turbulence. Remember, dividend-paying stocks have performed better during past bear markets than non-dividend-paying shares. [Editor's note: For more information on how dividend shares have done during past bear markets, see Nilus' special report "Why Dividends Will Almost Always Make You Money."]

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And as I mentioned two weeks ago, I also think strategies like dollar cost averaging work very well for putting new money to work in the kind of market we have right now.

Because, ultimately, I think the stock market will work through this bear market and resume its rise eventually.

Despite a massive drop and rally, the S&P 500 has been flat for the past eight years …

However, I also realize that you may want to take out some insurance against further market declines in the shorter term. And that’s why today I want to give you three ways to protect your portfolio against additional weakness …

Strategy #1: Protect Your Capital Appreciation Plays with Stop Loss Orders.

Stop loss orders are instructions that tell your broker to sell your shares should they reach a predetermined price level.

For example, if stock XYZ is trading at $10 a share, you might give your broker a stop loss order of $8. Then, if XYZ hits that level, it will automatically be sold at the best price possible.

Please note that I did not say it will be sold at $8! While stocks with a lot of liquidity should get unloaded very near a stop price, there is the chance that the market will move down so fast that your order will get filled at a lower price than you specified.

Concerned about that possibility? Then place a stop limit, which is a very specific order telling your broker what range of prices you’re willing to accept on the trade.

Note: I do not recommend stops for your long-term, income-generating investments, provided you believe the company is still viable and the dividend is reasonably secure.

That’s because if you’re constantly getting stopped out of positions, you will lose the current income, which is the real benefit of buying and holding dividend stocks.

However, choppy markets call for defensive measures when it comes to your shorter-term positions, especially if capital appreciation is the main goal.

You can even employ stops in your profitable positions as a way to lock-in gains in the event of a market decline. Simply raise your stop loss as the profits pile up.

Strategy #2: Consider Inverse Exchange-Traded Funds to Hedge Your Income Positions.

Essentially, these work in the same way as traditional ETFs, giving you an all-in-one-shot way to invest in a particular sector or market. However, they come with an interesting twist — they’re designed to go up when that sector or market goes down.

More and more of these inverse funds are coming on the market. There are now inverse funds for everything from the Dow to real estate shares. There are even double inverse funds that will do the opposite of their targeted market times two! One such fund is the Rydex Inverse 2X S&P 500 ETF (RSW). If the S&P 500 falls 1%, this ETF should rise 2%.

The danger of an inverse ETF, especially a leveraged one, is pretty obvious — you will lose money fast if the market starts heading back up. This is why I’m not advocating selling your long positions and plowing the money into inverse funds.

Rather, I’m saying that a small position in an inverse ETF can be used as a way to cushion the effect of a down market on your overall portfolio. In other words, you could make money from the inverse fund to offset the paper losses the rest of your portfolio is experiencing.

Best of all, your dividend-paying positions would continue to throw off income the whole time. Assuming you’re using a broad-market, regular inverse fund, every dollar you place in the ETF will roughly counteract one dollar’s worth of your “long” portfolio.

Strategy #3: Diversify Your Portfolio With Alternative Assets.

I’m talking about things that aren’t really correlated to stocks or bonds.

Instead, they often move in the opposite direction. Gold is the classic alternative investment, and it’s been on a tear lately.

Reason: The yellow metal is viewed as a safe haven from other markets as well as inflation. If you want to add some gold, you can either buy bullion or an exchange-traded fund such as the SPDR Gold Shares (GLD), which holds physical gold in trust for its investors.

Keep in mind that there are also other more advanced ways to insulate your portfolio from weakness, especially strategies involving the use of options. Guys like Mike Larson are experts at using these instruments to not only help protect against downside but also to bag big gains when individual stocks and ETFs get pummeled.

Bottom line: While I always suggest you take a longer term view of the market, and not let the day-to-day movements get you down, I also want you to know that there are plenty of easy ways to build additional protection into your portfolio without compromising your income-generating positions.

Best wishes,

Nilus

P.S. If you want to know which dividend stocks can hand you great income while the market trades sideways, check out my Dividend Superstars newsletter. You can subscribe today and get 12 monthly issues for just $39!

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This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

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Siemens Slashes Jobs; Southwest Cozies Up to Canada; VMWare Axes CEO; Office Depot Drops on Dismal Sales; Oil Drops $10 in a Week; Fed’s New Lending Restrictions; Anheuser Busch Sues InBev; ConocoPhilips Strikes Deal with Abu Dhabi

• Siemens AG (ADR: SI) announced yesterday (Tuesday) that it would eliminate almost 17,000 positions to prepare for a global economic downturn. The Germany-based industrial giant hopes to achieve $1.9 billion (1.2 billion euros) in cost savings by 2010. Chief Executive Peter Loescher said Siemens needed to be faster, more efficient and have a leaner administration if it hoped to compete, Reuters reported.

• Southwest Airlines Co. (LUV) and Canada-based WestJet Airlines Ltd. yesterday (Tuesday) announced a marketing alliance that is planned to go into effect in 2009. “This gives WestJet exactly what they need in terms of growing their trans-border flights,” Chris Murray, an analyst at CIBC World Markets Inc. in Toronto, told Bloomberg News. “The deal would make sense for Southwest to build its service into Canada, too.”

• Shares of VMWare Inc. (VMW) plummeted yesterday (Tuesday) after the software maker announced it would not meet 2008 expectations, and as a result, replace Chief Executive Officer Diane Greene, an original company co-founder, Reuters reported. VMWare stock dropped $13.00 to close at $40.19.

• Office Depot Inc. (ODP) stock took a hit yesterday (Tuesday) when the office supply retail firm announced North American sales dropped 10% in the second quarter, causing earnings before taxes and interest to be 200 basis points lower than expected. Full earnings for the period will be released July 30. Shares declined $3.29 to close at $7.12.

• U.S. light crude fell more than $6 to as low as $135.14 a barrel yesterday (Tuesday), its lowest level since June 26. Crude oil has now fallen about $10 a barrel since hitting a record high of $145.85 hit last week.

• The U.S. Federal Reserve will issue new rules next week aimed at protecting future homebuyers from dubious lending practices, The Associated Press reported yesterday (Tuesday). The rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower’s income.

• Anheuser-Busch Cos. Inc. (BUD) is suing InBev NV after calling the Belgian brewer’s takeover attempt an “illegal plan and scheme” to acquire Anheuser “at a bargain price,” Reuters reported. The suit seeks an injunction to stop InBev from furthering its consent solicitation to replace Anheuser’s board until certain alleged false and misleading statements are fixed.

• ConocoPhillips (COP) has signed an interim agreement with Abu Dhabi National Oil Co. to develop the Shah Gas Field in Abu Dhabi, Thomson Financial reported. Under the terms of the agreement, the companies will share the cost of engineering and design and project mobilization for the field’s development. Abu Dhabi National Oil will have a 60% interest and ConocoPhillips will have a 40% interest in the project.

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By Jason Simpkins
Associate Editor

Merrill Lynch & Co. Inc. (MER) has raised its annual infrastructure-spending estimate for emerging markets by 80%, as developing countries try to keep pace with fast-growing economies and large cash reserves, BusinessWeek reported.

Investment in infrastructure, which the firm sees as the long-term solution to inflation, will rise from $1.25 trillion to $2.25 trillion annually over the next three years. And China, the Middle East, and Russia will account for 70% of infrastructure spending.

The report from Merrill Lynch pointed out that Xstrata PLC (OTC: XSRAY) recently predicted emerging markets would spend $22 trillion on infrastructure in the next 10 years.

“That estimate is among the highest we’ve seen,” the report noted, “with an implied run rate of $6.6 trillion over the next three years.”

Estimated Infrastructure Spending For the Next Three Years

Region	New Estimate	Previous Estimate
China	$725 Billion	$400 Billion
Middle East	$400 Billion	$225 Billion
Brazil	$225 Billion	$100 Billion
Russia	$325 Billion	$195 Billion
India	$240 Billion	$110 Billion
Turkey	$65 Billion	$50 Billion
Source: Merrill Lynch, Money Morning Research

China and the Gulf states, each with enormous cash reserves from trade surpluses, will be the two leading infrastructure investors according to Merrill Lynch.

China’s $78 Billion Reconstruction

Infrastructure spending in China hit the ground running in the past few years as the nation prepared to host the 2008 Summer Olympic Games. Beijing has already spent $40 billion on infrastructure, including a new airport terminal and subway lines, in preparation.

Unfortunately, the Olympic torch relay, which was meant to signify the country’s readiness for the Games, paused from May 19 to May 21, to mourn those killed in the massive earthquake.

Now, Beijing will be footing the bill for another massive infrastructure push - this time to rebuild much of the country, which will cost an estimated $78 billion. Of course, Chinese infrastructure companies are up to the task and well prepared for a sharp rise in demand for their products and services.

“It’s a sad thing,” Ma Chunji, the head of Sinotruk, the nation’s top truck manufacturer told the International Herald Tribune. “But it will stimulate demand.”

“Beijing planned originally to readjust the speed of growth and compress the size of infrastructure projects, and that would have affected us,” he added. “Now we face a positive.”

Obvious beneficiaries of the rebuilding effort include vehicle makers like Sinotruk, as well as cement and steel producers.  In fact, Chinese industrial-production output rose 16% in May from a year earlier after gaining 15.7% in April, according to the nation’s statistics bureau.

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Baosteel Group Corp., China’s leading steel producer was a big reason for the increase as it stepped up production of many specialized steel products for the rebuilding effort.

Baosteel finished its second batch of medical stainless steel on June 30th. So far, the company has produced a total of 33 metric tons of the specialized steel to be used in quake relief work and sent to relevant medical apparatus plants.  Baosteel will also construct 10,000 square meters of buildings of color coated steel sheet for the city of Dujiangyan.

Beijing may also use the reconstruction effort as a chance to upgrade many of the country’s antiquated transportation and communications systems.

“Traditional communication systems have been seriously damaged in the earthquake, making us rethink the whole communications system,” Fok Tung Ling, chairman of the wireless equipment vendor Comba told the International Herald Tribune.

Xi Guohua, a senior industry regulator told the IHT that authorities are working on “combining the sky and earth,” building a wireless system with optical cable.

Also, a railway-building boom, similar to the one that took place in the United States in the 19th century, could arrive sooner rather than later.

That’s welcomed news to China Railway Group Ltd. and China Railway Construction Corp Ltd., which will be among the biggest winners, according to Barron’s.

Total investment in China’s railway sector is soon expected to reach $200 billion, with both companies well positioned for a big piece of the new business, as they control approximately 85% of China’s railway infrastructure market, Barron’s said.

Middle East Oil Oasis

In 2007, the six nations of the Gulf Cooperation Council - Saudi Arabia, Kuwait, Bahrain, Omar, Qatar and the United Arab Emirates - earned $381 billion from oil exports and that was before oil prices rocketed up to over $145 per barrel before dropping back to its current level of $135 per barrel.

The cumulative earnings of the Gulf States will reach into the trillions if oil remains over $100 for several more years.

There’s already an estimated $2.4 trillion in construction projects either underway or under development in GCC countries. And $1.4 trillion of that is earmarked for projects in civil construction.

Saudi Arabia, the world’s largest oil producer and exporter has put its petrodollars to work, embarking on a massive $460 billion construction program. According to the National Commercial Bank (NCB), Saudi Arabia has formally announced 576 separate projects, 70% of which are already well underway.

“These investments are inspired by the Kingdom’s ambitious strategy to tackle the country’s most chronic social and economic challenges; rising unemployment and the need to create more than five million new jobs by the year 2020, declining living standards and overall wealth of the population, and the unbalanced regional economic development,” the NCB told Emirates Business.

In fact, as Emirates Business reported, Saudi Arabia has opted to curb steel exports to its Gulf neighbors after soaring demand resulted in shortages that left the nation unable to complete its own slate of massive building projects.

Meanwhile, Dubai is funneling $82 billion into an aerospace project that includes plans for the world’s largest airport. And that’s just part of the $300 billion in construction-and-development projects currently underway in Dubai.

Some other gargantuan infrastructure projects in the region include:

• King Abdullah Economic City, Saudi Arabia: $120 billion. The leading firm is Dubai-based developer Emaar.
• Silk City Project, Kuwait: $86 billion. The leading firm is Tamdeen Real Estate.
• Dubailand, U.A.E.: $60 billion. The leading firm is Tatweer.
• Al-Zorah, a $60 billion coastal city in the emirate of Ajman. The leading firm is Solidere International.

All of this money will eventually trickle down to the purveyors of raw material used in construction. That puts Rio Tinto PLC (RTP), BHP Billiton Ltd. (BHP) in an enviable position.

Both companies have secured a 97% increase in price they will be paid for their iron ore. Nippon Steel Corp., the world’s second-biggest steelmaker, recently accepted a record increase in iron ore prices from BHP that matched a doubling of prices Rio Tinto and Baosteel agreed to last month.

Their proximity to Asian markets also makes BHP and Rio a strong play for the burgeoning Chinese market.  China - which is both the world’s largest producer and consumer of steel - imported 383 million metric tons of iron ore in 2007, an increase of 56.8 million tons, or 17.4%, from the previous year, according to the China Iron and Steel Association.

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By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

One of the things people don’t understand about buying gold for diversification is that it doesn’t work all the time.

It works over time.

That means that you can’t simply switch from one asset class to another when the going gets tough and expect miracles. Nor can you expect higher returns.

And that’s the really cruel part.

Many so-called alternative investments, gold being the most notable, are being sold right now on the basis of recent high returns to salivating investors desperate to stop the bleeding in their portfolios.

No question, the yellow metal offers diversification; but near all time highs, its “protection” is debatable at best, when viewed against the harsh light of historical data.

Which is why, at the risk of receiving some very testy email, we have to point out that if you bought gold the last time it was this high, you’d probably regret it now. If you had invested $10,000 in gold in January 1980, the current value of your investment would be $10,600.

Now, compare that to the $279,000 you would have if you had invested that same $10,000 in the S&P 500 Index in January 1980 and you’ll see what I mean.

Does this mean that gold is worthless when it comes to riding out tough markets?

No. Not for a New York minute.

Gold remains a powerful hedge and one that every investor should think about… but for reasons that are not commonly understood.

You see, while gold has never been proven to be a statistically viable inflation protector, it has a significantly correlated 10 to 1 relationship with interest rates and bond prices which, as you know, react to inflation. Therefore, if interest rates rise by 1%, the face value of bonds should fall 10% but gold should rise by 100%.

Which suggests that 10% of the value of a bonds ought to be put in gold… as a hedge.

Here’s how such an example would work.

If we allocate $10,000 to this strategy, $9,000 would go into bonds and $1,000 into gold. If rates rise by 1% (as they’re likely to do and then some), the bonds should fall 10% to $8,100 and the gold should rise by approximately 100% to $2,000. Overall, my portfolio would be worth $10,100 (give or take), which is right about where we started.

That suggests a portfolio of bonds and gold is safer than either bonds or gold in isolation.

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Obviously, gold has been bid up substantially in recent months so the 100% rise we expect based on historical patterns may not be as extreme, nor may it rise another 100% from current levels, but the point remains valid - we don’t buy gold because it hedges bad times.

We buy it because gold protects the income stream we get from our bonds… particularly when the economy is facing severe inflationary pressures like it is now.

So how do we make our move and when?

Everybody has their own preferences for gold investing, including us. There are mining companies, bullion, coins and even jewelry. We prefer the SPDR Gold Trust ETF (GLD). There’s no delivery risk, it’s liquid, and you can buy and sell easily through any online brokerage. Plus, as so many residents who lived through Hurricane Katrina found out, you don’t have to worry about Mother Nature or hooligans stealing it either.

As for when to buy, now is probably a pretty good time. The U.S. Federal Reserve has only just begun to acknowledge the inflationary embers it’s been fanning for a long time. And, as usual, they’re dramatically underestimating the 9%-10% we’re feeling in our pockets. So, even if they don’t officially raise rates, odds are that the markets will anyway as traders cope with rising costs on their own.

Though, as you might suspect, there is a downside.

By taking part of the portfolio that would otherwise be placed in bonds and presumably generating income, this strategy dampens the returns we could potentially achieve with bonds.

But given gold’s protective qualities over time, we think that’s a good bet.

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