Market trends are hypnotic, giving us false hopes that the increases or decreases we experience are inevitable and somehow justified. We hoped that broad and diverse ETFs could save us from the volatility of the market. Most have followed other equities up and down. Many of us believed that gold, pressing for $850 an ounce, could not be stopped. Our friends told us that $900 or $1000 gold was just around the corner. We believed. It is now below $800 and still moving south. Crude oil, similarly, with strong demand and short supply, was destined to top $100 per barrel only three weeks ago. It is now wavering around $93, or below, and will probably go lower. The same dashed hopes occurred with uranium, when we believed that $136 a pound was just a road sign for $200. Again, we believed that the supply and demand curves supported our enthusiasm. In the last few months the price fell by about 50 percent. One hardly hears the word “uranium” these days.

The latest and longest mesmerizing trend is the incredible surge of foreign markets, especially emerging markets, especially Asian markets. The Wall Street Journal (December 24, 2007) points out that Asian bubbles are everywhere. MSCI Barra indexes for India and China are up 59.5% and 54.3%, respectively. The Shanghai Composite, has an astounding p/e ratio of 46.4 and the ETF tracking India’s Sensex is 26.4. The p/e ratios rank them first- and third-highest among a group of 22 major world stock markets.  Our passions overrode reason when we witnessed annual gains in prices of 100 to sometimes over 400 percent. Not only were we reaping harvests beyond belief, we thought that the global tsunami would carry this nation forward toward its rightful destiny.

But now cracks are forming in our wall of confidence. Many of the foreign markets are still bobbing upward, but the party is getting stale. We see the correlations between downturns in the U.S. market and wider global changes. Dryships are docking, so to speak, and one wonders if there are any safe havens at all.

Recently we saw equity markets drag around the world. China faded from its peak by 20.6%. The folks at Bespoke go so far as to tell us that China is in a bear market. Japan dropped by 16.7% from its peak, Hong Kong by 14.9%, and Brazil by 5.2%. All nations fell, leaving only a few looking relatively healthy – Germany, Australia, and Spain, for instance, with only small declines. Our portfolios are a mess.

Grim is grim. The proof of that is that ProShares recently issued new Short and UltraShort International ETFs that move in the opposite direction to the underlying emerging markets. You can now bet on the Asian market to fall, an unbelievable thought just weeks earlier. The tickers involved, if you want to check them out, are; EFZ, EFU & EEV The game is on.

Nothing remains constant. A few weeks ago Bernanke again lowered the Federal interest rate, and the markets became airborne. The U.S. market gained 3.53%, Germany 4.00%, China 5.612%, Hong Kong 9.34%, and so it went, nation by nation. New Zealand was one of the few not to pull it out. We should be grateful for the reprieve but exit plans are still in order.

The remaining unhappy thought is that almost all foreign stocks and ETFs representing emerging nations are overbought, even after recent declines. While still pushing forward, these funds are all overpriced relative to their underlying value. The situation is very much like that in California, where we all know that the big quake is coming – we can feel the tremors – but  we don’t know just when. So, we hide, hope, and hedge.

The vacillations of the mind are difficult to comprehend – a Ph.D. in Psychology offers little understanding. Alan Greenspan, the former Chairman of the Federal Reserve, has the perfect metaphor for these troubled times, when he said recently, “Euphoria takes over when the economy has been on the rise for a couple of years, fostering bubbles – and – these bubbles cannot be defused until the fever breaks.” Yes, to that.

The situation is not without opportunity. The concluding thoughts are these. Grim is not so grim when we expect things to get better. History cycles, and these things will get better. Second, the trends that excite us or depress us are usually based on greed and speculation. They confuse us because we mistake these short trends for megatrends, and they are not. Megatrends are more solid and express the long-term forces at work. Gold, oil, uranium, and equity markets bounce up and down, but we know that gold is one of the glittering oases in the long haul of things. Oil is draining from the ground faster than it can be replaced by alternative forms of energy, and it will become more expensive. Uranium will fuel our future, not coal, not natural gas, not wood, and it too will become pricy. Natural resources of all kinds are cycling upward. There are fortunes to be made. The demographic megatrends of population change are truly destiny in motion; they drive everything from energy use, healthcare, and entertainment, to the human pursuit of democracy and social justice. We cannot turn them at our will, but we can serve them as they contribute to our wealth.

Last Stand

If you still can’t stand being in cash, and if options and shorting the market do not fit your life style, you might think about long-term and conservative investments that seem to move with primary megatrends. Foreign ETFs, with a wide exposure to diverse countries may provide a fairly secure (1) foreign investment platform, or you might wish to invest in (2) Healthcare, (3) basic Utilities, or (4) Consumer Staples. Check these out before choosing.

1. iShares MSCI-Pacific ex Japan (EPP)                    $167.49           39.63%         Performance of  stocks

                                                                                                                         in Australia, N. Zealand

                                                                                                                                        Singapore

2. iShares DJ US Med Devices (IHI)                           $  59.60              20.04%         Performance of Dow Jones

                                                                                                                                        U.S. Select Medical Equip.

                                                                                                                                         Index

3. AT & T (T)                                                                $  38.21         20.04%             U.S. leading wireless &

                                                                                                                                         wireline co.

4. Consumer Staples SPDR Fund (XLP)                        $ 29.19          16.48%          Covers food, tobacco,

                                                                                                                                          pharmaceuticals, personal

Good hunting.