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The 10 A.M. news opened with another item on Iran and its nuclear ambitions. The second item was that Israeli stocks were about to break their all-time record.

Crisis be damned: By the closing yesterday, despite losing steeper morning gains, Israeli shares reached record heights. The benchmark TA-25 index of blue-chip stocks broke through the 1,237-point level last attained in November 2007, before the global meltdown precipitated by America's property bubble. But at least some investors suspect share prices won't stay at these lofty heights: Speculation that Israeli share prices are in for a fall also surged yesterday (see box).

The Tel Aviv Stock Exchange had been closed since last Thursday due to the Passover holiday. Yesterday had been investors' first chance to react to developments in world markets. Yet nothing there, certainly not the latest news regarding Tehran, explains yesterday's developments on the trading floor. Nor does the fact that Israel is being led by the most right-wing government in its history, or the tensions with Washington. Israel's biggest trading partners (meaning, the main targets for Israeli exports), Europe and the United States, are far from declaring themselves out of the woods. Moreover, the consensus is that Israeli interest rates are going to climb, which is ostensibly bad news for shares, in that higher interest rates render risk-free investments more attractive.

Just a year and a half ago, the TA-25 - comprising the 25 biggest companies listed on the TASE - had wilted to a low of 592 points as the financial crisis rocked the world. That was then. This is now.

So what happened? Why are Israeli stocks skyrocketing?

Analysts point at the fact that no Israeli banks were seriously affected by the troubles in the west, where banks collapsed like dominoes thanks to overextension to bad borrowers and speculation in high-risk derivatives. Moreover, Israel resumed economic growth before the rest of the west, generally speaking. And, as analysts at Meitav brokerage point out, there were those gigantic discoveries of natural gas off Israel's shores, which fired up energy-sector stocks and helped fuel general optimism. "There's no question that the gas contributed significantly to the gains by the stock indexes," said Ron Eichel, Meitav's chief strategist.

The statistics tell the story

But mainly, the element most affecting investors is the low interest rate. It may be fated to climb, but right now the central bank's overnight interest rate is a mere 1.5%. Investors who want any kind of respectable returns (despite the risk) have no alternative but to opt for shares. They're taking money out of safe-harbor assets such as bank deposits, government bonds and money-market funds, and are putting the money into stocks.

The statistics tell the story. According to Meitav, during the first three months of 2010, the general public invested NIS 7 billion in mutual funds that invest in stocks. That's the highest influx into the mutual fund sector since 2007, which was a boom year for the stock market.

Bond funds and mixed funds - mutual funds that specialize mainly (if not exclusively) in bonds - also did beautifully in the first quarter, raising NIS 8.6 billion.

Not only did the public stampede for mutual funds, they also heaped money on portfolio managers and invested by themselves.

Are stocks too high?

Well, are they? That's probably a yes. Market forces are presently pricing financial assets very high and risks are being discounted.

People are not taking into account that while the economy seems to have stabilized, it did so at a relatively low level of activity. Secondly, while Israel's companies by and large reported good profits for 2009, their gains were fueled largely by economizing, and by capital gains from assets, not by expanding business.

The one thing that's crystal clear is that the consumer binging that characterized the era before the meltdown hasn't resumed. Consumers don't have the money anymore. The finance sector can't party on while the economy at large remains sick. At some point the two will have to start walking in tandem.

Meanwhile, yesterday the benchmark TA-25 index gained 0.4% to close at 1,239 points. The broader TA-100 index inched up 0.2%, also having lost bigger morning gains, and ended the day at 1,161 points. Total turnover in shares and bonds was average, at NIS 1.6 billion.

Among the stocks that stood out was the dual-listed drug company Perrigo, which gained 2.3% on two announcements of legal settlements regarding two generic drugs, one a foam to treat acne and the other a foam to treat scalp conditions.

Other big gainers among the large-caps yesterday included technology company NICE Systems, which makes recording technology, for security purposes among others. Its stock gained 2.8% on turnover of NIS 30 million.

Alternative energy company Ormat Industries gained 2.2% on volume of NIS 11 million. Food company Strauss Group lost 1.6% against the trend, on thin turnover.

Shares of Bank Hapoalim gained 0.9% on turnover of NIS 73 million, and drug company Teva Pharmaceutical Industries advanced nearly 1% on turnover of NIS 132 million.