Taking Stock / The Upside of Failure

One of the surest signs of a boom is how the market reacts to news. When the market is roaring, it takes every piece of information as good news - its bias is positive.

If economic growth was reported to be decelerating, or unemployment growing, analysts would say it suggested an an interest rate cut, which would be good for stocks. If the data showed the economy to be accelerating, peering through rose-colored glasses they'd say it promised higher corporate profits, which would be good for stocks.

The other day we got a lovely example of bad news with a positive spin from the private sector. Delek Group, which is on an investment drive, has been re-rated by Maalot.

Among other things, Maalot's analysts pointed to Delek's failure with Starbucks. The cafe chain's spectacular flop in Israel led Yitzhak Tshuva's company to write off millions of dollars. Delek's fiasco was especially excruciating because Israel is now the only place in the world where Starbucks - which sells coffee worldwide and is arguably one of the greatest marketing success stories of the past ten years - failed and folded up operations.

This week Starbucks even had the temerity to take on the finicky, sniffy, hostile French market, yet here in Israel with one of the most highly developed cafe cultures, it got badly burned.

The Starbucks operation may have been a mere sideline for Delek, which can boast success in energy, car imports and oil, and the chain's failure did not necessarily attest to any shortcoming in the investment group's management. But Maalot related to the affair in an intriguing way: "The Starbucks closure in March 2003 was a positive step, since it was not synergetic to that of the group's core business". Did the chain make or lose money?

We have to wonder - if Starbucks had become Israel's leading chain of coffee shops, if it had crushed Arcaffe and Aroma, would Maalot have still insisted it derogated from Delek's rating because of the absence of synergy? Or would Maalot have suddenly remembered that coffee shops, like Delek's convenience stores at its gas stations, are simply another form of retailing?

Would the analysts have pointed out that rival energy groups Sonol and Paz are also launching retail chains? Maybe the whole issue of "synergy" depends on profits and losses, not its actual affiliation with the "core business". Will Maalot downgrade Delek because today it bought shares in Matav Cable Systems from the Dankners, because cable isn't synergetic with its core business either?

Or will they note that Delek got the shares dirt cheap, so it's actually a "good move"? Who knows. What's sure is that when the mood is upbeat, when stock markets are on the rise, then stinging failures like that of Starbucks Israel can suddenly beam with a positive demeanor.

Be prepared

Three months ago, the heads of Tel Aviv Stock Exchange met with representatives of the banks at the offices of Meir Sheetrit, the second minister at the treasury. The topic was whether to end the distorted taxation of capital gains - just 15 percent on Israeli securities and 35 percent on foreign ones.

The timing to equalize the two taxes seems perfect. The Israeli stock market is booming, the fiscal situation is stable and there's no fear of capital flight from the country. But the TASE chiefs managed to frighten the minister, painting scenarios of capital abandoning the market and stocks and bonds crashing.

Their threats were particularly effective since Finanace Minister Benjamin Netanyahu regards the remarkable performance of the stock exchange as testimony to his own achievements. Asked why they were pressing to defer equalization of the tax, which they know to be necessary, the bankers and bourse men said their systems need time to prepare.

Like Boy Scouts, be prepared! Sure. But exactly what is this "preparation" that is needed? Who needs to get ready for what? Investors decide where to invest based on reward and risk calculations. The bankers et al failed to elucidate further.

Then last week the treasury said it would bend on investors' behalf - tax on gains from foreign securities would remain 35 perecent as before, but the bite on "baskets" of foreign securities would be only 15 percent, like the tax on local investments.

What sense does that make? Why block investors, by higher tax, from investing in whatever securities they please, while allowing them to invest in "basket" units of foreign securities? It makes no sense, except from the narrow perspective of local market players who want to launch new investment instruments in Tel Aviv that would give investors access to foreign securities.

Ergo, when the banks and stock market see a threat to their monopoly over investments liable to only 15 percent tax, they start to kick. But when they see a chance to make earnings from trading in and issuing instruments for investment in foreign markets, then suddenly taxation can be equalized. The essential need for "time to prepare" suddenly vanishes.