With global markets reeling and investors completely having lost faith in the financial system, the question needs to be raised whether Israel will turn into safe haven for investors fleeing financial turmoil. The Shekel continues to strengthen against the USD and many Israelis have been sending money back to Israel in droves.

But I can’t imagine that in this era of a truly global economy with global interdependence, Israel will remain largely unaffected by the surrounding turmoil. It just doesn’t make sense. It’s important to note that the Israeli banks have had some exposure to sub-prime as well as both Lehman Brothers and Wamu. While Israeli banks are know for their stinginess in lending money to ‘main street’, they tend to lend money no questions asked to the 10 powerful families the control the local economy. The question is how will these families be able to weather the storm. I hate to think of what will happen if they are unable to pay back their loans. We have started to see that with tycoon Arkady Gaydamak, basically offering his businesses at fire-sale prices in order to raise cash, and one local bank, Mizrachi, actually made a credit call on him.

According to Globes, Former PM and current opposition leader Benjamin Netanyahu, says that Israel needs to take strong steps to avoid falling into economic slowdown. The article says, “We must prepare for a severe slowdown.” He goes on to detail some measures that could be taken to avoid the meltdown. “In order to create rapid growth and use the crisis to strengthen the Israeli economy, we must cut taxes, implement economic reforms, and streamline government work. If we do this, when the global economy recovers, Israel will be in better shape.”

Investors should keep an eye on how the local government reacts to the growing nervousness over the economy. Any missteps could send Israel into an economic downturn that rivals what we see in Europe and the US.

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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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With prices of Israeli stocks that trade in the US getting nailed along with the broader market, the potential exists for a pick up in M&A among these companies. But a problem exists. It’s not about what price a company may or may not want to pay to buy a company, rather, there is a technical problem. Will there be any investment banks left that can bank the deal? With the demise of Lehman Brothers, by far and away the busiest investment bank in Israel, and the constant rumors of other large US investment banks on the verge of collapse, who is going to be able to fill the void, penetrate the local market and do the deals?

The last time the market experienced a bursting bubble, back in 2000-02, when the hi-tech bubble burst, Israel had an exodus of investment bankers, and as a result, little in the way of M&A took place. Two large firms stayed during that crisis, Lehman and Citigroup. The impact was devastating and it took a few years before we had an upswing in M&A. Let’s hope that the current crisis isn’t deja vu all over again.

Please see our Disclaimer HERE.

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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With shares in financials and hi-tech getting crushed, I think we are about to see a new trend develop. You’re probably thinking that I will suggest something along the lines of re-branding. Nope. While we did that, I am talking about a change much less cosmetic and much more fundamental. Taking publicly traded companies private. Today’s NY Post (no new revelations on A-Rod/Madonna so I decided to look at the business section) has an interesting report on struggling investment bank Lehman Brothers (LEH) trying to figure out a way to go private.

“According to sources, talks internally centering on privatizing Lehman have gotten very serious consideration after a blistering onslaught of rumors and questions about the firm’s solvency have caused the venerable bond shop to shed more than 79 percent this year.”

Lehman isn’t alone. Israeli hi-tech firm BluePhoenix (BPHX), whose shares have been nailed as well, has mentioned that they are thinking about going private as well.

For companies this is a great situation. They can go private, reset the cap-tables, retain employees- who are currently holding options that even a deep sea diver would have trouble recovering- by issuing new options. Then they can focus on stabilizing their business, getting back to profitability, and then in a few years after this current crisis is a memory, go public in a ‘much anticipated’ IPO. Ultimately, the companies will be back trading at pre-bear market levels. Senior management, who share much if not all the blame for the current debacle, will come out smelling like roses, as their stock will be worth hundreds of millions of dollars.

Sounds good. So who loses? You guessed it. The same people who always get left holding the bag. The INVESTORS. You see, they are the ones who bought into Lehman at $75 a share 12 months ago, and will be lucky to get $15 on a deal of some sort. They heard analysts beat the drum on BluePhoenix at $22 about 9 months ago, and decided to invest, only to cringe every time they hit refresh on Yahoo finance to see if the stock has held the $4 level.

Going private may be a great solution for a company to weather the current market malaise and return to health. Unfortunately for investors, it will be another in a long line of recognized tax losses.

Aaron Katsman, IsraelNewsletter.com

Disclosure: Author’s fund has a position in  BPHX. He has no position in any other stock mentioned as of 7/15/08.

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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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