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Israel’s Emerging Market
The Smart Profits Report: Issue #477
Friday, November 30, 2007
Israel’s Emerging Market: U.S. Markets Deflate As The Tel Aviv Stock Exchange Rises 254% Since 2002
by Karim Rahemtulla, Investment Director & Marc Lichtenfeld, Senior Analyst, Mt. Vernon Research
As the calendar flips to December tomorrow, many investors will be thankful to get rid of a brutal November that has savaged the stock market. For the month, the Dow Industrials finished down 553 points (4%), the S&P 500 lost 64 points (4.1%), and the Nasdaq Composite shed 175 points (6.2%).
It’s hardly surprising really as November saw oil prices leap to another record high over $99 a barrel. This is putting untimely pressure on consumers, as gasoline and home energy costs are rising in the runup to Christmas. The Fed also significantly lowered next year’s GDP growth forecast - from the 2.5% to 2.8% range it projected in July to 1.8% and 2.5% now. There are plenty of other issues, too - from the hellish housing sector to the crushed U.S. dollar. And with the stock market lurching between strong gains and heavy, fear-soaked losses on a daily basis, investors’ heads are spinning.
Most are questioning their holdings - a natural reaction. Some are hedging their bets on a “Santa Claus rally” to bail them out - a pretty naïve approach. But there are things you can do to ease the pain.
And fresh from a trip to Israel’s emerging market, my colleague Marc Lichtenfeld will now show you one way to combat the situation…
Prosperity And Money In Israel’s Emerging Market
Sixty years ago, Israel was mostly swamps and deserts. But today, the progress is nothing short of amazing, with the development there probably rivaled only by India and China. Today, you can sit in a chic café, sipping your latté after putting in a long day of work at Google (Nasdaq: GOOG) or Intel (Nasdaq: INTC).
I just returned from two weeks in the land of milk and honey and it’s intriguing to hear the stories of those who have seen the changes.
For example, my father-in-law recalled how when he visited his brother in Israel in the 1970s, the family asked him to bring hard-to-find staples such as tuna fish. It was so scarce that the eight of them would share one can at a time. In the 1990s, things had become easier, but certain everyday items that we took for granted were still difficult to obtain and my wife would still send Levi’s jeans to her cousins.
So before we left the U.S. this time, we asked what we could bring with us. The response was surprising: “Nothing. We have everything now.” And they do - including a surging stock market.
As we wandered around Tel Aviv, the place has become a model of commerce, industry and creativity. From a glistening new shopping mall that sits at the base of a 52-story office tower to trendy boutiques filled with expensive merchandise, Israel is moving up - and fast. Want a small condo near the Mediterranean Sea? Prepare to pay Manhattan prices.
And it’s not just Israeli citizens enjoying the prosperity. Investors are thrilled with the performance and growth prospects in the Holy Land.
The Tel Aviv Stock Exchange Rises 254% In 5 Years
Over the past year, the Tel Aviv Stock Exchange General Index, which contains all the stocks listed on the exchange, has risen 19.2%. In fact, it’s risen every year over the past five years and has rocketed 254% since the end of 2002. The TA-25, an index of the 25 stocks with the highest market caps, is up a sizzling 27.8% over the past year.
These returns are coming in an economy that chalked up a 6.1% annualized GDP growth rate during the third quarter. Exports shot up 17.8%, beating the 13.1% average of the previous three quarters. It’s even more impressive that the third quarter figure came amid a recent 5% rise in the Israeli shekel versus the U.S. dollar. Exports are usually negatively impacted by a rising local currency.
With that kind of growth, inflation and interest rates must be through the roof, right? Wrong. Economists say the declining dollar (and rising shekel) should put a cap on rates. Despite the strong performance, inflation over the past 12 months was an acceptable 2.5% and is expected to be even lower over the following year.
How To Invest In Israel’s Emerging Market
Israel hosts many companies that are publicly traded in the United States. One of the biggest and most well-known is generic drug giant Teva Pharmaceuticals (Nasdaq: TEVA). But other Israeli firms include software maker Checkpoint Software (Nasdaq: CHKP) and multimedia tools provider NICE Systems (Nasdaq: NICE). They’re available as ADRs for American investors.
As for broader investments, mutual funds aren’t a wise option right now. The Amidex 35 Israel (AMDEX) is the only fund specializing in the tiny country, but it carries exorbitant fees, making it a poor investment choice.
Alternatively, the First Israel Fund (AMEX: ISL) is a closed-end fund that invests in stocks traded on the Tel Aviv Stock Exchange. It’s up around 27% year-to-date. However, it is trading at a 7% premium to net asset value.
Israel’s Emerging Market Carries Short-Term Risk
Of course, even if you only keep half an eye on the news, you’ll know that investing in Israel’s emerging market carries some short-term risk. Surrounded by hostile neighbors, Israel constantly has security issues. It only takes one crazy radical wearing explosives to shatter the peace and increasing affluence that Israel now enjoys.
But even when terrorists strike, Israelis continue to build and prosper. While the past year has been relatively quiet, bombings have occurred every year. If attacks increase, or war breaks out, you could see Israeli stocks impacted in a dramatic way. But the effects are likely to be short-term. Long-term, Israel has proven its resiliency and resourcefulness - and its stocks deserve consideration in the foreign portion of your portfolio.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
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Today’s Smart Profits Action Center
- America’s major banks continue to write off billions in bad debts. But contrary to popular media opinion, you can actually make money from this battered sector. This is something the world’s smartest, most successful know. Warren Buffett recently bought shares of Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC). And I just issued a recommendation on another bank in the December Xcelerated Profits Report issue. More details here.
- Many so-called experts are telling folks to run for cover from the “financial storm.” While you can’t prevent millions of other investors from panicking right now, a disciplined, diversified portfolio will certainly pay off in the long run. Do not panic and rush to sell like many others, as it may be an irrational, emotional decision and it’s not the way to make money. The way to make money is not to run away when a fear-ridden, slumping market gives you a chance to buy strong companies at bargain prices, so you can sell higher later on. And if your stop-losses haven’t triggered, don’t pull the trigger! Fundamentally sound companies usually rally back once the dust settles.
- When you own strong companies for less, using professional investment strategies, you’ll be in a much more satisfying position than most other ordinary investors - throughout both good times and bad. That’s exactly what the team of professional traders at the Xcelerated Profits Report does for investors. The editors have experienced market conditions like this many times before - and will use that experience to guide you through the current minefield. This year, they’ve locked in profits of 100%, 79%, 65%, 55% and 45%… and have current gains of 109%, 50%, 46%, and 45%. It’s the smartest way to invest. For more details, click here to continue.
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