Friday, September 19, 2008

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Financial: Rolling into Israel

by Reb Akiva at Mystical Paths

In the US, everyone is taking a deep breath and those who play drops in the market are busy scooping up some quality paper at bargain basement prices. Warren Buffet, the master of this model, is out scooping up whole companies. And as fast as the market fell, the market rises. But this is not a market bubble, the market is merely reacting to peoples action trend of the day. Since those with cash have called a market low and opened up their pockets, the market soars.

In Israel, while the credit leverage is lower and the banks have little direct local mess on the mortgage side, everyone in the world bought into those save nicely yielding insured US mortgage banked securities. We see the first impact of it today, with Israeli Bank Leumi filing a lawsuit against bankrupt Lehman Brothers...

(Ynetnews) Bank Leumi filed a NIS 370 million ($105 million) damages suit against fallen American holdings giant Lehman Brothers, Thursday, with the Tel Aviv District Court...

Not quite as hopeless as it sounds, the suit requests a freezing of any Lehman assets in Israel for possible payment. Unlike the US, Israelis are more familiar with financial system shenanigans and therefore react much faster...

(Haaretz) The global hysteria has reached Tel Aviv. As Morgan Stanley scrambles for a buyer and the credit markets freeze up, redemptions from savings vehicles in Israel have soared. From Tuesday, the public has withdrawn NIS 4.9 billion from savings funds.

"They're in a panic. People want their money. They're hysterical," said the manager of a big mutual fund Thursday. "They're breaking savings funds. They've lost their faith in the financial system."

Thursday Israel's mutual funds sector alone saw NIS 1 billion taken out, on top of NIS 2.5 billion in redemptions on Wednesday. Nor are investors showing the love for other avenues. Provident fund managers estimate that a quarter billion shekels were taken out each day this week. The withdrawals aren't as strong at pension funds, if only because the money in them isn't accessible without paying a hefty penalty: tax of 35%...

Israelis don't expect the government to bail them out, and there is no nice FDIC like system creating an appearance of security guarantee. The worry in Israel is not a local mortgage sector problem, the Israeli system has always had high down payments and low leverage. It's a question of how much local mutual, investment, and pension funds are invested in US and UK mortgage bundle instruments.

But there is a local real estate problem coming to Israel. With the mortgage bubble, many overseas Jews took some of that easily available home equity and used it to buy a place (for vacation, investment, or retirement) in Israel. With demand soaring prices soared as well. This led to the interesting phenomena of average Israelis being priced out of the market in high demand areas, while the use pattern sees those areas with an effective population drop as those properties are vacant part or much of the year.

Anyway, back to the problem. While these purchases may have had a high initial down payment (say 30%), with faltering economy's back 'home', will the owners be able to maintain an Israeli property? Especially if it's a vacation home. It's my belief we'll initially see many of these properties first return as rentals, then when that floods the market quickly placed up for sale - with an associated drop in value due to the number of sales - and possibly abandoned due to inability to pay.

The percentage of such homes at risk is small compared to the US market, but this same percentage already had a major impact on Israeli housing prices and the incentive to build. It's reversal will have a similar impact.

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