Taking Stock / Cold, Cold, Cold, Red Hot

Friends, please stand in line.

No, don't push or yell, don't shove. There is enough for everybody. We have bonds, we have notes bundled with options, we have straight bonds, we've got stocks, we have giant units, and over here we have some special merchandise from interested parties. No need to push, every day there's a new offering.

In short, come'n'get it - securities issued by holding companies, real estate firms, exporters, companies sporting low ratings, high ratings or no ratings at all. Relax, stop hitting that nice gentleman with your shoe, there's plenty for all.

Yes, we mean you, and you. It may have escaped your attention but in the last couple of months, you've been buying securities on the Tel Aviv Stock Exchange, and in big amounts.

No, we don't mean only those speculators who are getting back into stocks - we mean every man, woman and tadpole in Israel who has deposits in mutual funds, insurance policies, portfolios or training funds, all of which have been trolling the stock market for ever-increasing amounts of bonds and shares.

One has to ask why Israel's institutional investors are pouncing on the shares and bonds that the interested parties are selling. Are prices still low? And one has to ask whether the banks hawking the stuff aren't in a state of conflict of interest as major lenders to the companies. Is the economy really rebounding?

But those aren't the really interesting questions, because we already figured out that cheap today can mean expensive tomorrow and cheap means expensive anyway. The moment interest rates drop, the market figures the risk premium is falling, and anyway Yossi next door made 50 percent a month on his market investments! Tempting stuff indeed.

No, the really interesting question is why the TASE shifted from gloom and doom to zoom and boom in the space of a few months. It's why high-tech stocks that were anathema mere months ago are suddenly the darlings of the TASE again, rising 200 percent on tremendous demand. It's why nobody would lend a penny more to the highly leveraged real estate developers six months ago, but today lenders are lining up.

One possible explanation might be that the financial conditions have changed dramatically. The U.S. gave Israel a long-term cheap lifeline in the form of $9 billion in loan guarantees, which changed the face of the capital market and lowered interest rates across the board.

Another possibility is that Israel's capital market is a tiny, shallow little puddle that can alternately boil and freeze in the space of seconds. Two mutual fund managers and an insurer burp and the TA-100 index jumps 10 percent. The treasury slightly scales back its bond issues and long-term paper soars 10 percent. What can be done about that untenable situation?

Feel the heat

You could spank the mutual fund managers, insurers and all those managers of other people's long-term money. You could tell them to stop thinking only about their behinds and next month's yield report, and to start thinking about our pensions. Bad managers, bad!

That never worked, though. Managers come and managers go - it's like revolving doors at some of these institutions, and their incentive mechanisms aren't the kind to induce consideration of the long term.

Thinking of flooding the floor with shares of privatized companies? The idea keeps coming up over the last decade, but it's been proved fallacious. No privatization has stopped the stock market from inflating like a toy balloon.

Maybe there's a simpler solution, to take that silly little puddle and pour it into the ocean, to turn the Israeli marketplace into a part of the international financial sphere, to abolish the preferential tax on domestic investments that induce local investors to prefer local stuff.

If tax on Israeli and foreign investments were flattened into a single rate, Israel's investment managers would have to explain their choices, clarify why they chose Israeli stocks or bonds over the tens of thousands of alternative investment vehicles around the world. If the tax rates are equated, Israel's companies will have to compete for attention with tens of thousands of issuers elsewhere too.

It sounds sensible. Tax experts and economists think it's a good idea as well. But it is the nightmare scenario of the TASE, the banks and the treasury, too. None of them, or Israel's companies for that matter, want to cool down the raging stock market. On the contrary, the hotter it runs, the better they feel.

That may explain why the treasury decided two weeks ago to eschew taking advantage of the roaring market, and calm on the financial and currency markets, to equate taxation on local and foreign securities.

So come on, ladies and gentlemen, get into line nicely, there's enough for everybody.