Taking Stock / It's Hot in the Valley Again

"I have no doubt that we're in a bubble again. If the momentum persists, we're sure to see things from the past cropping up again. The first indications were analysts' recommendations that sent share prices spiking, a stream of people asking what to buy, and rising interest in unknown small-cap shares." (Udi Gelbard, chief executive of CIBC World Markets' Israel office, in an interview with TheMarker Magazine this week.)

We have no doubt that if anybody can spot a bubble, it's Gelbard, given that he's been running the world's biggest trading room for Israeli shares on Wall Street for ten years and then some.

He's seen it all. He watched Geotek soar in value to $1 billion, attracting thousands of overexcited Israeli investors, only to go broke. He's seen IIS reach a $300 million market capitalization, only to wind up delisted. He was there when Gilat Satellite Networks raised half a billion dollars overnight, only to wind up crashing to bankruptcy proceedings.

Since the Tel Aviv Stock Exchange tamely trips along behind Nasdaq, Gelbard's outfit has a finger on the Israeli market's pulse, too. And when Gelbard is feverishly searching for people to man the desk, that says it all.

Don't get us wrong. When Gelbard says that he sees signs of a bubble, he isn't saying there's a crash around the corner. Far from it. That's the last thing he wants to happen. And he's too experienced to make forecasts like that anyway. "After fifteen years on the job, if there's one thing I've learned, it's that I don't know when a bubble starts and when it ends. The bubble that may have begun in the last few months could last for years, and the fact that a lot of share prices look expensive doesn't mean that they won't go on climbing."

The atmosphere in Gelbard's trading room is not substantially different from what we found in Davos two weeks ago, at the World Economic Forum that convenes in Switzerland (or elsewhere) every year. Two years ago, the participants were basically in a state of post-crash catatonia. Last year, they were in panic after the Enron affair. This time around, they seemed rejuvenated.

Aside from George Soros, who warned that Bush is destroying the American economy, it was hard to find people shaking in their boots. Even the pessimists were predicting a great year for the U.S. economy and financial markets in 2004. Their pessimism mainly boils down to fears that the tremendous deficit Bush is running will blow up in America's face come 2005, but as for this year, it's cheer practically from sea to shining sea.

And when the bulls stampede, shares are rising and the pipeline gets clogged with issues taking shape, you can't mix up the market with bad news. Because in a bull market, all news is good.

The good news

Just ask Idan Ofer. A year ago he was grousing to cronies in Davos about the tremendous sums he was showering on Tower Semiconductors, about the tremendous risk in its endeavor, and the fears of the banks financing it. This year he's griping again: The day before he flew to Switzerland, the underwriters of Tower's reissue (CIBC, or Gelbard & Co. in New York) dragged down the share price by 20 percent.

Idan, we suggested, aren't you getting a little carried away? If we had said a year ago that Tower stock would rise 300 percent and you would raise $80 million in an equity offering, you would have been the happiest of men.

He smiled but didn't answer. He doesn't like the press.

Yet the press suddenly likes the chipmaker from Migdal Ha'emek. The other day, Tower published its financials for both the fourth quarter of 2003 and for the year, yet few reports mentioned the basics, namely how much it earned or lost last year.

The answer is: $115 million. That is what it lost in 2003. Not a piffling amount for a company boasting shareholder equity of $230 million. And $46 million of that loss was in the fourth quarter alone.

A year ago, the press wouldn't stop talking about Tower's red ink and its $500 million debt to the banks. Today, nobody seems to care.

This time around, the press seems fixated on Tower's sales, its backlog, the semiconductor market and management's "strategic" tales and forecasts. The headlines were made by management's forecasts of sales growth in the first quarter of this year.

The losses, explained analysts, were "technical." Mere matters of bookkeeping, not of interest to investors when the market is frothy.

Naturally, Tower could succeed. The market might welcome it with open arms, and one day it might even make money. But the company's record over the last ten years, and the sector's history, indicate that the risks are immense.

What is certain is that we are entering an era when delving into the financial statements and balance sheets of companies like Tower is passe. Uninteresting, irrelevant, old-fashioned. What matters is the dream! The future! The market potential, the forecasts! And these are looking rosier than ever before.