Taking Stock / Bubble, Bubble, Toil and Rubble

1. Shmuel Lev, a veteran market prowler, used to say the Tel Aviv Stock Exchange is like a small pot. A few minutes on the gas and it boils over. Zvi Lubetsky, who's been on the market more years than he likes to admit, says the stock market is too small to handle the amount of money in the financial system: any institutional investor moving an inch in either direction rocks the boat, triggering gains of 20 percent before you can blink.

The TASE isn't exactly boiling over, and the total infusion in the last two months is just a few hundred million shekels. But yes, it is a small pot, and it can heat up very fast.

2. Never before have so many businessmen and bankers prayed so hard for share prices to rebound. Three years of recession and credit crunch have created bone-cracking pressure that threatens their very survival.

The recent wave of gains has eased the strain, reinflated the value of their collateral, reduced the pressure to write down the value of their assets, improved the financial ratios stipulated in loan agreements and, mainly, restored some hope that soon enough, they'll be able to resume selling paper to the public for dollops of cash.

3. How soon can that be done? Not so quickly, as the deadline passed yesterday for the offer by Shlomo Eliahu, who hoped to sell a 6.6 percent interest in the Israel Phoenix Assurance Company. His son, Israel Eliahu, didn't trouble himself to deny it. Last week he told Haaretz that the purpose of the sale was to raise cash to reduce loans taken to buy shares in Bank Leumi over the last two years.

Shlomo Eliahu is highly leveraged. He hoped to take advantage of the market's reawakening to sell assets and reduce his debt burden. The difference between him and most of Israel's leveraged tycoons is that he bought the Phoenix shares he now wants to sell at prices significantly below their market value. Selling them will generate a handsome profit.

Most of his peers will be forced to swallow major losses if they divest assets, which is why they're clinging to their goods like glue, as long as the banks allow it.

4. TASE data were impressive on Sunday. The Maof-25 index surged 4 percent to touch on 400 points, completing a 15 percent gain from the start of 2003. The volume of trade climbed to NIS 530 million, double the daily average. Major stocks advanced by as much as 8 percent.

But to predict the market's behavior over, say, the next two months, you need to take a longer perspective. The Maof-25 index is just 2.5 percent over its level of a year back. In May 2002, in case it slipped your mind, the market mood could have curdled milk. Nobody was talking about an economic breakthrough.

In other words, the main driver of the recent gains on the stock market is primarily the fact that stocks tanked over fears of financial crisis.

5. The factors easing those fears were anticipation of U.S. loan guarantees, the treasury's economic program, and the coalition victory in Iraq. All three factors acted to reduce Israel's risk premium, inflation expectations, and short- and long-term interest rates on the capital market.

Although stocks made the headlines, the more significant development behind the share gains is the steep ascent of bond prices, while their mirror-image - lending rates - dropped.

Unlinked government bonds have jumped 10 percent since 2003 started. Their yields to redemption (interest) fell by 2 percent. Such abrupt movements in nominal interest rates almost automatically engenders a spike in share prices.

6. Spikes in share prices should, however, be broken down into components. It transpires that 15 percent of the Maof index's yield over the last year was generated by five stocks: Teva Pharmaceuticals, Agis Industries, Israel Chemicals, Elco Holdings and Makhteshim Agan Industries.

Their common denominator is that all rely on export markets. Without the far-reaching five, the Maof-25 index would be at 350 points.

7. Economists, analysts and portfolio managers at the banks, which rule much of the roost in the local marketplace, have been evincing increasing optimism of late, as share prices climb. Speculators and market traders, on the other hand, sound much more cautious and can be found pacing the corridors muttering, "The market has risen much too fast. Unhealthy, unhealthy."

If anything, their pessimism is a good sign. It indicates that most haven't stocked up on stocks and are going green with envy as the market gets away from them.

On the other hand, the bankers' optimism is meaningless. They never made a penny predicting the direction of stocks or any other market, only from the momentum itself. As the public hankers after shares, bonds or goes to and fro between shekels and foreign currency, the banks rake in commissions. All they have to do is ensure that the public scurries between assets as much as possible.