With the summer heat comes non-stop running of your air conditioning unit. As the price of electricity continues to move higher, many are faced with a question. Should we sit and swelter in our own home, or should we run the air conditioning even though we won’t be able to pay the bill? What if I told you that all people who pay for electricity are suckers! That’s what employees of the Israel Electric Corp. (IEC) think of you. You see, as a job perk they get free electricity. IEC employees get free electricity of 18,000 kilowatt hours, 3 times what the average Israeli family uses. And don’t think that they are careful with their usage. Average consumption by IEC employees is 14,000 kilowatt hours, twice the average rate of consumption. Boy am I glad that they use up most of their allotment.

Of course this perk is paid for by regular people, in the form of higher electricity rates. But that’s not all. Globes is reporting about some irregularities found in IEC books. “IEC has set aside more than NIS 1 billion ($300 million) in a special fund to cover the cost of free electricity to staff, The Public Utilities Authority (Electricity) believes. The regulator recently uncovered the fund during the course of an examination of the new basis for electricity tariffs, and after gaps were found between the sums IEC raised and its actual investments.”

The thought is that they created a fund with this money in the event that the free electricity perk is revoked, so that they will still be able to provide free electricity to their employees. This is just sick.

What can I say. I guess those of us paying electric bills really are suckers.

Aaron Katsman, IsraelNewsletter.com

Disclosure: Author’s fund has no positions in any stock mentioned as of 7/24/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Even with predictions of crude oil hitting $200-300 per barrel, the current drop in crude has it moving very quickly down to the $100 level. While investors have been focused on how the drop in oil will impact oil related stocks, I think they need to take a bit more of a Macro view and look at the impact on emerging market investing. The first country that comes to mind is Brazil. Brazil has been one of the world’s best performing markets so far this year, but a drop in crude prices may severely impact their market going forward as so much market weighting is given to companies in the oil industry.  To a lesser extant this applies to Latin America as a whole.

With crude prices dropping it wouldn’t be too surprising for other commodity prices to follow suit. So much emerging market economic growth has centered around the huge run up in commodity prices, as many of these countries are blessed with rich supplies of raw materials. Russia and other natural resource based economies like Australia, and even Canada could be in for a rude awakening if we get a continued drop off in commodity prices.

So which emerging markets will benefit? I think Israel is one. Blessed with little in the way of natural resources, but with an abundance of creative and entrepreneurial people, Israel will continue to produce cutting edge innovation that powers the technological revolution that we are in the midst of. I wouldn’t be surprised to see rotation in emerging market investments with natural resource based economies being under-weighted and countries that produce value added goods, be over-weighted.

Aaron Katsman, IsraelNewsletter.com

Disclosure: Author’s fund has no positions in any stock mentioned as of 7/23/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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What to do about the strong Shekel? That is a question I hear about 10 times a day form my clients. Everyone has been talking about the impact the strong local currency has had on the economy. The Bank of Israel has even attempted intervening in the currency markets, mostly with little success. So what to do? Let the free market work its magic.

Once again we see how market forces are able to correct short-term imbalances. Over the last week the US Dollar has surged more than 6% against the Shekel. Part of this was due to BOI intervention, but most of the impact has come from two large Israeli companies taking advantage of a strong currency to make very large foreign acquisitions.

Teva Pharmaceuticals (TEVA) $7.5 billion acquisition of Barr (BRL) and Koor Industries $900 million investment into Credit Suisse (CS) has sparked Dollar buying by these acquiring firms to complete the deals. According to a Globes article: ” Bank Leumi will provide Teva with $1.8 billion in financing, is expected to boost domestic demand for foreign currency. Capital market sources say that Teva has been buying dollars on a large scale in the past few days for the acquisition. In addition, IDB Holding Corp. Ltd.  subsidiary Koor Industries Ltd.’s announced that it plans to double its investment in Credit Suisse Group to NIS 3 billion, and has also been buying foreign currency for this purpose.”

We have also recently seen European companies buying up American firms, for the same reason. They also have a strong currency and want to get good deals. Be it Genentech (DNA) or Anheuser-Busch (BUD) while their price tags were massive, the acquiring firm actually bought these companies for a 20-30% discount in local currency. Now they need to go out and get the Dollars to complete the deal. This should help the greenback as well.

The lesson we can learn: leave markets alone, and let them do their thing, and ultimately, aberrations will work themselves out.

Aaron Katsman, IsraelNewsletter.com

Disclosure: Author’s fund has a position in TEVA as of 7/23/08.

Please see our Disclaimer HERE.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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As inflation rears its head around the world, Israel is no different from many other countries that have seen prices spike as of late.  Where Israel differs from the rest of the world is not in experiencing inflation, but how the economy is leveraged to it.

Let me explain: Israel suffered from bouts of hyperinflation during its 60 years of existence.  Most salient was the 1970s which saw double digit inflation throught the decade, culminating in 100+% inflation in 1979.  The beginning of the 1980s introduced stagflation and saw even higher inflation rates.

Here’s where the history impacts today’s Israel: in an effort to combat hyperinflation, Israel created an economy-wide phenomenon of CPI-linked debt.  This debt is not specific to a specific sector and according to a report produced last week by UBS’s Israel analysts, may compose over 50% of corporate debt, over 60% of the government’s shekel debt, and 60% of mortgages.

After the last couple of boom years 2005-2006, most of the corporate debt raised by Israeli firms is also linked to the CPI.  Merrill Lynch is out this morning as well with a study on the effects of higher CPI on Israeli firms.

The money line from the UBS report: However the spike in CPI in Q2 could affect the bottom lines of many Israeli corporates and we are concerned that a continued high inflation could continue to weigh on the profitability of many Israeli companies.

So, what’s an investor in Israeli firms traded in the U.S. to do?  UBS suggests underweighting those institutions with high CPI exposure.  The storm feared by analysts would play out with consumers being hit with rising prices in the market also being compounded with resets in adjustable rate mortgages that are linked to the CPI.  In turn, this could curb consumer spending which is playing a bigger and bigger role in GDP growth.

While Olmert clings to a feeble position in a government beset by scandal, UBS suggests that “the rise in CPI will also have fiscal implications as the Government could be squeezed by paying more on its CPI linked debts as well as collecting less corporate taxes.”

Zack Miller
IsraelNewsletter.com

(Another Globes article out this morning entitled ‘Ticking Bomb‘)

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