All That Glitters /On Africa Israel and Stocks for Poor People

For better or worse, it's back to business as usual on the stock market. Not everybody thinks so: Many a battle-scarred market vet insists that the current wave of gains has been fueled by interest rates being at a rock-bottom low. Their position is that asset prices are in for a sharp fall.

But you can't argue with the facts. Which are, that the benchmark TA-25 index passed the 1,000-point mark last week, returning to its level of August 2008. It's just 25% below its all-time high. Trading turnovers are high again and corporate bonds just won't stop rising.

The shekel has been appreciating, too. Fresh money is coming into the market as people despair of the meaningless return on bank deposits, and they're aiming at risky investments. Speculators are again trawling for opportunities.

Yep, it's back to business as usual, and if so, here are two stories and one analysis that explains both.

True, Lev Leviev and his company Africa Israel can't meet their financial liabilities because of the drop in property prices worldwide, as well as credit crunches in America and Russia. Yet players look at the real estate firm as an opportunity to make a killing.

Some are gambling on his bonds, believing that at the end of the day, some sort of arrangement will be reached. Others are betting on Africa Israel's stock. But there are two other sorts of cleverer financial strategies.

One: Short Africa Israel's series B9 bonds and, against them, buy longer-term bonds. That sort of long-short strategy is a rarity in local circles. It's based on the fact that B9s are trading at 70 agorot apiece, while longer terms are trading at 50 agorot. But logically, under any arrangement reached regarding Africa Israel's debt, there should be no difference between the sums received by the two types of bondholders. Therefore, the gap between the bonds' price is unwarranted. It's practically an arbitrage scenario, but there are differences.

For one thing, it's possible that B9 bondholders will get more money than the rest. (They were supposed to get NIS 550 million in November but Africa Israel said it wouldn't make the payment so as not to discriminate among its bondholders.) But a gap of a double-digit percentage isn't likely. The second problem is that it won't be easy to find anybody willing to lend you B9 bonds, which means, to assume the other side of the short transaction.

The second strategy is a variation on the first. Short Africa Israel stock and go long on Africa Israel's long-term bonds. Analysts say Africa Israel is worth precisely zero today because its net asset value is a tad below its debt. The fact that Africa Israel's share price reflects a market valuation of NIS 2.5 billion is purely bizarre.

But its bonds seem to be trading on the cheap: 50 agorot per each issued shekel. Through group companies Africa Israel has enough assets to return 90% of its debt. A strategy of short on stock and long on long-term bonds exploits both distortions and should benefit the investor if the company is liquidated.

But the strategy is a gamble on Psagot leader Roy Vermos holding firm in his negotiations with Leviev. If Vermos prevails and Leviev remains without any stock, or a minority interest, profit is assured. If Vermos folds and Leviev is not massively diluted, Africa Israel stock could gain more than its bonds, and you lose.

Another glaring sign that it's business as usual is the flurry of activity in oil exploration stocks. Everybody knows that Isramco and Delek Drilling found gigantic quantities of gas in the Mediterranean. Therefore, the huge increase in their market valuations reflects real value. But why did gas exploration company Ratio's participation units shoot up 13% last Thursday on giant turnover (for it) of NIS 21 million?

Ratio doesn't have much cash. It has found nothing. But it owns 15% of the rights in an area near Tamar, the seabed area where gas was found. That's it: The dream was enough to drive Ratio stock 500% this year. Casino days are back.

But wait a minute. Who exactly is buying Africa Israel in bankruptcy, Ratio on a dream, or shares in Modiin or any of dozens of smallcaps that swing wildly each day? Nifty day traders? Savvy investors with insider information?

Alok Kumar knows. In an article in the August edition of the prestigious Journal of Finance, "Who gambles in the stock market?", he examined the correlation between the investor's socioeconomic level and his tendency to choose a portfolio most like a lottery card - very high-risk investments with a small chance of very high profit.

Based on data from major American brokerages, Kumar found that institutional investors prefer conservative investments at high cost. But private individuals prefer riskier adventures. The more investors fit the profile of young men, poor, rural, Republican and Catholic, and the worse the economic situation in their home state, the more they tend to pick stocks with lottery features.

At the end of the day, the formula is simple. The more a person tends to buy lottery tickets, the more he will tend to pick risky investments for his portfolio, such as participation units in gas explorers like Ratio or shares in biotech or startup companies.

Are these people who treat investment in the stock market like a gamble right? Kumar found that everybody loses on the stock market versus the indexes, but people who buy stocks with lottery features lose more. To generalize, the lower the individual's income, the greater his loss on speculative investments is likely to be.

It's sad that the very people who can't afford to lose money are again the ones getting screwed on the stock market. It's their own fault this time, though. Why does it happen? Because for all the restraining influences of education, religion and social environment, they evidently can't resist the saying: If you aren't rich, all that remains is the hope of becoming rich.