Taking Stock / Leumi's economists vs the dictators
Not a day after we finished writing the column on the "dictatorship of relativism" in the capital market, more proof of its sway began to arrive.
Dozens of companies have filed prospectuses to raise money, despite their unimpressive financials and all-too-brief record of profits. Why would anybody buy their securities? Because relative to the alternatives, they look good. And then yesterday a Bank Leumi customer sent us a copy of a brief analysis by the bank's economists.
The report was Leumi's Analyton, the weekly offering of the bank's investment department. It also lists portfolio recommendations by the bank's equity research corporation, National Consultants, or N.C.
Leumi's portfolios, known as the Leumi Index, are of two types: conservative and speculative.
Leumi is very proud of its investment portfolios, which, it claims, outperform the market over time, and are based on the thorough research of N.C.
Last week the bank's analytical department advised the investment managers at the branches to expand the component of Yeter broad-market stocks in the speculative portfolio.
The Yeter index consists of all the smallcap companies on the Tel Aviv Stock Exchange, which don't make it to the TA-100 index of the 100 biggest companies.
Whence their affection for the Yeter? Are they taking advantage of the steep drops in share prices? Did some new economic information arrive, or did developments arise that affect mainly the biggest stocks among the smallcaps?
Better with Yeter
Apparently not. They suggest increasing the proportion of broad-market stocks because their share prices have been rising, because the public's interest in them has been waxing, and because if you don't want to miss the Yeter boat, you'd better get on board.
Thus spake the economists of Bank Leumi: "We shall continue to increase the weight of the Yeter stocks in the speculative portfolio. The Yeter stocks continue to outperform the other indexes."
We get the idea. We at Bank Leumi buy what everybody else is buying, because what rules the market is the dictatorship of relativism. True, the Yeter shares are becoming more expensive in absolute terms, but that doesn't matter. What matters is their prices relative to the rest of the shares.
Okay. Now only one question remains - which Yeter shares should we buy? Oops, um - that's a tough one because most of the Yeter shares don't get analytical coverage at Leumi, for the simple reason that until now they were perceived as not warranting the effort. In most cases, barely a share changes hand all day, many hardly make any money, in all too many cases the proportion of floating stock is tiny, and the owners don't like sharing with the general public, be it control or anything else.
But that is history, because the market is hot hot hot and the Bank Leumi economists must bow before the altar of relativism. Yeter stocks are hot and if you don't buy, you may find yourself lagging behind the rivals.
Invest in what?
So how are they responding to the challenge? Are the Leumi analysts changing horses and starting to cover more Yeter stocks?
Don't be silly. Who has the time, the resources or the desire to start recruiting analysts and sending them up and down the land to burrow into financial statements, meet with managements and issue weighty analytical theses about piddling little companies that nobody's ever heard of, and that won't be around come the next high tide anyway.
Also, analytical coverage and scrutiny of small companies, their balance sheets and their markets is purely bad for business on the stock exchange. It uses up precious time that could be spent in snapping up all Yeter shares that happens along, before they shoot up and (sigh) require yet another upward adjustment of the Yeter component in the speculative portfolio.
Instead of hiring analysts, Leumi's economists devised a much more creative solution, as they reveal to the bank's advisers in last week's Analyton: "N.C. covers only a small selection of Yeter stocks, so some of the Yeter shares entering the portfolio will not be covered ones. The risk level in these stocks will be higher ... so investment in these securities should be limited. The proportion of uncovered shares shall not be more than 15 percent of the speculative portfolio. The process of increasing the weight of uncovered shares shall be gradual."
In English: We have no time, the market is boiling, we're starting to stuff client portfolios with merchandise of unchecked quality, it's risky stuff so we're doing it gradually and these unknowns shall not comprise more than 15 percent of the portfolio.
And cross your fingers, pray, light candles, do a rain dance or do whatever you do in your ethnic group to drum up luck, because at this moment in time we can't find a better way to choose good stocks for you.