The MSCI EAFE iShares (EFA) is an exchange-traded fund that is based on the Morgan Stanley Capital International EAFE Index. The EAFE Index covers stocks from much of the globe, with the fund holding nearly 800 non-U.S. securities. 

EAFE stands for "Europe, Australasia Far East." The fund essentially holds companies that are centered in Europe, Asia, Australia and New Zealand (it does not hold North or South American stocks). The national stock markets this fund covers include: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. It does not include any stocks from Africa or Latin America.

Like all foreign funds, the dollar's fluctuations have an impact on the fund's value. The dollar's recent weakness has contributed to the fund's strong performance in early Q4 of 2004. Remember, a weak dollar means that the stocks that you hold, which are valued in foreign currencies, will command more dollars when they are sold. A weak dollar is good for dollar-based foreign investors. Unfortunately, although I am very long-term bearish towards US currency, it is probably stretched for the short-term and late-comers to this rally could be buying not only an overbought set of global stock markets, but an oversold US dollar. A dollar rally coupled with a fall in stocks would aggravate losses in EFA.

As I noted above, the fund is fairly well diversified. It holds shares in nearly 800 companies, with the top 10 holdings accounting for less than 19% of the funds value. Only BP PLC, formerly British Petroleum, comprises more than 2.50% of EFA, at 2.64%. Of the top 10 holdings, only two -- Nestle (NSRGY.PNK) and the Royal Bank of Scotland (RBSPF.PNK) -- do not trade as American Depositary Receipts (ADRs) on the New York Stock Exchange. They are not at all liquid, and many brokerage firms prohibit trades in Pink Sheet issues. (An ADR is a way that a foreign company can permit its shares to trade in the United States. Those that trade on the NY Stock Exchange must file regular financial reports with the SEC.)

It is worth noting that EFA is heavily weighted to Financial Services firms (26.76%). If the Fed keeps increasing interest rates, then other central banks may follow suit, thus flattening yield curves across the globe. Flat yield curves will cut into bank and brokerage profits. Furthermore, continued rate hikes may slow the global economy, thus sending stocks lower later in 2005.

The other large sector weightings are consumer discretionary (18.36%), industrials (9.58%) and energy (8.63%). The latter two are already past their prime, given our place in the business cycle, and the overburdened consumer is likely to soon give up the ghost as well. The outlook for EFA, especially in the medium-term and long-term, is not particularly rosy.

HOW TO MAKE MONEY IN EFA THIS YEAR
EFA is overbought in both the daily and weekly time frame. It is showing substantial momentum divergences at current prices, both on the daily and weekly charts. However, there is still no sell signal and price patterns, based on the Elliott Wave Theory, still allow for a move to $155-$165 in the next couple of months before the fund turns very sharply lower. For now, buy dips to the $145-$148 range.

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