ETF Expert

Morningstar's extensive fundamental analysis failed miserably in missing the impact and extent of the global credit crisis. Early in 2008, they ardently favored the financial sector as a terrific 3-year hold.

Granted, they still have 2 more years to see if U.S. banks will have been the best place for one's investing dollars. Yet 50% losses for financials in 2008 requires a great-deal of catching up over the next 24 months.

I wouldn't fault Morningstar for making those "calls." The problem lies in placing all of one's faith in a particular method of assessment; that is, Morningstar analysts are primarily valuation-based folks. They effectively ignore contrarian data, technical info, historical comps, Fed policy, oil prices and more. It's price-to-earnings, price-to-sales, price-to-book, price-to-cash-flow, price-to-something!

For me, all info has its place. I don't fall in love with one methodology… and I don't fall in love with any single investment. We may consider a purchase if it meets certain criteria, but we always have a plan to sell.

Nevertheless, there are times when "valuations" become a particularly compelling resource. Consider the table below: 

Morningstar Table 1/6/09

Major Benchmark	S&P 500 SPY	S&P Europe 350 IEV	S&P TOPIX 150 ITF
P/E Ratio	10.90	7.37	8.94
P/B Ratio	1.74	1.72	1.01
P/C Ratio	6.81	5.49	4.04
Dividend Yield	3.47%	6.94%	3.71%
Debt/Capital	32.86%	27.26%	26.86%

U.S. large company stocks in the S&P 500 SPDR Trust (SPY) trade for less than 11 times trailing earnings. The 70-year average is a P/E of 16, which suggests that U.S. stocks may be 30% undervalued. (It does ignore history such that, many point to bear market bottoms where P/Es hit 8.)

Yet the larger point here pertains to the international scene. The 2nd largest economy in the world vis-a-vis Japan(ITF) with a P/E below 9 and a price-to-book-value of 1? You break-up all of the 150 companies in the TOPIX, sell off their assets, pay off their liabilities… and that's what the companies collectively sell for? No premium for the businesses that they have in place?

I've said on many occasions, for months now, that Japan was particularly compelling. I spoke about large and small cap Japanese companies back in October, with the iShares MSCI Japan (EWJ) and the WisdomTree Small Cap Japan Fund (DFJ).

Europe may even be more intriguing for dividend-seekers as well as P/E enthusiasts. The iShares Europe 350 (IEV) is trading at a paltry 7.5 times trailing earnings. More fascinating, how does one ignore 7% dividend yields for a broad-based index of large companies? That's 2x the yield of the posted yield for the U.S. counterparts.

Investor confidence is badly damaged. Corporate profits are sinking. Employers are dropping employees. And while there's an under-current of hope for stock markets 2009, nothing figures to be a smooth ride.

Still, time alone will help all boats sail. And perhaps, once again, international markets will sail just a bit faster.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.