ETF Expert

About 25 years ago, I was gearing up to spend my summertime in Taiwan. The stock markets there were an exciting place to "speculate." Investors around the world weren't even allowed to participate just yet… you had to "know somebody."

Around the same time, the Talking Heads put out a movie called, "Stop Making Sense." I always seem to link the music of the Talking Heads, as well as the lyrics of some of their hit songs, with my bull riding days in Taiwan. Back then, the Chinese (Taiwanese) stock market's incredibly irrational bullishness in the mid-80s had stopped making much sense… what little I knew about it.

Today, even in a deep recession, it's hard to fathom the level of terror that has rippled through even the "smartest" investments. For example, the health-care segment grew its earnings in the apocalyptic Q4 of 2008. In fact, there are companies with extraordinary fundamentals in the form of low debt, sales growth outlook and dividend yield, particularly from the pharmaceutical giants.

Consider this ValueExpectations.com table. Of its 12 constituents, 6 can be found in a pharma fund like S&P Pharmaceuticals (XPH).

Forget about sense and sensibilities, though. Fears of government taxation of future pharma profits, fears of stock assets of any kind, fears of dividend slashing, fears of fear itself… even earnings growers with positive guidance aren't enough to help out a diversified pharma fund at this wrinkle in time.

Let's be real… the markets have stopped making sense on many levels. Contrarian put/call ratios aren't telling you what they did for decades. Volatility (VIX) spikes above 30 have been meaningless since the systemic breakdown last September. Fundamental value might scream bargain, but so what? Low P/E ratios, M3 money supply, low P/B ratios… at best, the patient investor willing to wait 10 years may be richly rewarded.

Nevertheless, we're living in a time when the markets fall 20% in a matter of weeks. Even breakouts above 50-day averages, and a few above 200-day averages, have failed to hold up. Nothing is perfect in a "Stop Making Sense" marketplace.

Still, if investing is about taking some smarter risks, the S&P Pharmaceuticals (XPH) could prevail. All you would need is the mildest of catalysts that sparked a rally in stock assets.

There are other areas of value… depending on how one defines the term. In my recent analysis of Morningstar recommendations and grades, technology stocks had a definitive edge over all other segments. (See "Morningstar Grades and ETFs: Tech and Health Care Showing the Most Promise.")

Perhaps a cynical way to look at technology investing at the moment is to take note of UltraShort Sector Funds. In the abyss that was February 2009, double short funds made a killing, such as UltraShort Consumer Goods SZK (24%), UltraShort Materials SMN (32%) and UltraShort Financials SKF (45%).

The least successful ultra-short, double-the-inverse strategy? UltraShort Technology (REW) only made 10%. Hey… that's still better than losing approx -6%!

That said, it seems to be clear that technology isn't the overpriced dot-com segment that it was in 2000-2002. There's value in a Microsoft trading with a single digit P/E ratio.  There's value in semiconductor companies collectively trading at a price-to-book of just 1.3, perhaps giving rise to some of the more recent buying patterns of Spider Semiconductors (XSD).

And yet, the straightforward scoop is that Mr. Market has an ailing heart. He needs angioplasty; no, he needs a quadruple bypass.

Assuming the surgery is successful, you might expect good things out of the aforementioned value ETFs. Just don't hold your breath… and stay true to your sell discipline.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

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.