Israeli Investors Buy at the Sound of Cannons

CIBC also recommends Ness Technologies (NSTC); the IT business solutions provider is currently trading at 17.2 times its 2006 projected earnings, significantly lower than the 20.9 average industry.

Merrill estimates that the Israeli economy hasn't been significantly damaged by the confrontation, although prolonged fighting could lead to a fragile market. Merrill recommends export-oriented companies such as Israel Chemicals or telecommunications companies such as the cellular company Partner Telecommunications (PTNR), which could profit from high cell-phone usage.

Farhi closely follows the investment trends of foreign institutions in the Israeli market, and he notices that on the first two days of the war, large foreign investors were actually the ones doing the heaviest buying on the exchange, while Israeli private investors were "dumping like crazy." Now, Farhi says, the foreigners are taking a wait-and-see approach, maintaining their portfolios but not increasing positions that much.

Earlier this week, Israel's Defense Minister Amir Peretz made it clear that the Israeli government will continue attacking Hezbollah sites in Lebanon for as long as it takes to reach its objectives. "We don't have any intension of stopping the battle without reaching a significant change in the positioning of forces," Peretz said. "Hezbollah will no longer sit on the border, and there is no way Hezbollah would be allowed to continue to arm itself on our border."

Peretz added that Israel would adhere to U.N. resolutions if foreign forces are placed along the border and its kidnapped soldiers are returned.

"We are not going back to settle in Gaza, nor are we going to occupy Lebanon all over again. We have other ways to operate without sinking into the Lebanese swamp," he said.

Meanwhile, ground combat has begun; four Israeli soldiers and two Hezbollah guerilla men were killed on Thursday. The Israeli army is reportedly preparing for a wider ground operation, already recruiting reserve battalions and streaming infantry units to the northern border.

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