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Government Wants to Control the Water; The new "Oil"

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Cross Currents In Water World
Jocelynn Drake, Option Advisor 06.19.08, 6:00 PM ET

It surrounds us, fills us and we are entirely dependent upon it for our survival, yet water is probably one of the most overlooked sectors within the market.

The ISE Water Index (HHO) has enjoyed an impressive rally this year, while the world remains focused on the rising price of crude oil and the flagging performance of the dollar. The ISE Water Index is composed of companies engaged in water distribution, water filtration, flow technology and other water solutions. The index has tacked on nearly 5% since the start of 2008, easily outpacing the S&P 500 Index’s (SPX) loss of 7.7% during the same time frame.
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The ISE Water Index has been buoyed by solid support from its ascending 10- and 20-day moving averages for most of 2008 and is now hovering close to its all-time high of 95.19. In fact, the index has climbed steadily higher since it was created in January 2006, gaining more than 36% along the way.

One company definitely worth watching within the ISE Water Index is Flowserve. The company makes pumps, valves and mechanical seals, and it is the world's largest provider of pumps for the chemical, petroleum and power industries, selling its products and services to more than 10,000 customers around the globe.
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Flowserve shares have been in a strong uptrend since late January and have gained roughly 40% since the beginning of 2008, climbing along the support of their ascending 10- and 20-day moving averages. But this is just a small part of the security’s long-term uptrend that started in March 2007. The equity is currently consolidating into support at its 10-week moving average, which it could use as a springboard to launch it higher.

However, investors are quite skeptical of the shares. The Schaeffer’s put/call open interest ratio (SOIR) stands at 1.27, as put open interest easily outweighs call open interest among June and July options. This preference for put options indicates that investors aren’t expecting the shares to rally much higher during the near term. What’s more, this ratio is higher than 89% of all those taken during the past 52 weeks. In other words, short-term speculators have been more pessimistically aligned just 11% of the time during the past year.

Furthermore, Wall Street has yet to jump on this outperforming security. According to Zacks, only four brokerage firms following the firm and not one of these gives it a "buy" rating. Any upgrades and/or fresh coverage from the various brokerage firms could help to give the shares a boost. To take advantage of a rally in the shares, investors should consider the stock’s July 135 call.
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Another strong security within the HHO is Danaher. The company has a professional instrumentation group that produces environmental and electronic testing technology. It offers product identification equipment and consumables; motion, position, speed, temperature, level instruments and sensing devices; liquid flow and quality measuring devices; aerospace safety devices and defense articles; and electronic and mechanical counting and controlling devices.

Since mid-March, Danaher has trekked higher, creating a series of higher lows. What’s more, the stock has reclaimed the 80-level, which is also home to the security’s rising 10-month moving average. The trend line has carried the stock higher during the past several years along with its 20-month trend line. It appears that the shares are now poised to resume their long-term uptrend.

Much like Flowserve, options players have taken a bearish stance toward Danaher. The put/call open interest ratio for the security stands at 1.03, as put open interest outweighs call open interest. This ratio is also higher than 83% of all those taken during the past 52 weeks. Meanwhile, six of the 17 analysts following DHR rate it a "hold," leaving the door open for potential upgrades. A July 80 call would allow a trader to benefit from a bounce off support at the stock’s long-term support.

Not all is well in water world. Aqua America is a utility holding company that provides water and wastewater services through its operating subsidiaries to about 2.8 million residents in more than a dozen states, including Florida, New Jersey, New York, and Pennsylvania. In addition, Aqua America provides water or wastewater services to Philadelphia and in 23 other counties in Pennsylvania, or about half of the company's total customers. Despite providing these indispensable services, the stock has been in a steep downtrend under its 10- and 20-week moving averages since late September. In fact, during this time frame, the stock has shed more than 28%.

Investors, however, are extremely optimistic about Aqua America’s prospects. The Schaeffer’s put/call open interest ratio for WTR stands at 0.35 and is lower than all but 7% of the readings taken during the past 52 weeks. Should the optimists grow weary of the stock’s downtrend, they could close out their long positions, creating more selling pressure on the shares. There is also ample room for downgrades, as five of the eight analysts following WTR rate it a "buy" or better. Any downgrades for WTR could spell trouble for the shares.

One final concern comes from short sellers. Roughly 15.2 million WTR shares have been sold short, accounting for nearly 12% of the company’s total float. If these short sellers decided to add to their winning positions, it could create a fresh round of selling pressure for the shares. To take advantage of the stock’s steady downtrend, traders should look to the stock’s September 17.50 put.


--- Quote from: Route24 on July 11, 2008, 04:28:29 pm ---I have more info on this here:

--- End quote ---

Great! Thanks, I thought I'd add a little more from that thread to help tease people over there.

H.R. 2421: A Wolf in Sheep’s Clothing
By Linda Runbeck, 2/6/2008 9:25:26 AM

Property owners should not underestimate the vast “takings” that would occur if a bill pending in Congress is enacted. The bill, called the Clean Water Restoration Act (H.R. 2421), authored by Rep. James Oberstar, is a wolf in sheep’s clothing.
Seizing All U.S. Water

From Bathtubs To Baptismal Fonts, Congress Moves To Give the Corps of Engineers Control Of All U.S. Waters Land Rights Network American Land Rights Association

Don't think you're safe if you're off the water grid. Under this legislation, the government can come on your land and suck your well dry, confiscate your barrel of rainwater, or even the bottles of water in your refrigerator. No water is safe from them. They may even try to claim the very water circulating in your body as under their control.

Investing in Water

Investing in Water: Bottoms Up!
A Daily Reckoning White Paper Report  (Sign up FREE today!)
By Dan Denning & Chris Mayer

A "watershed moment" has arrived!…Literally. One of the most dynamic and profitable themes for the rest of this decade will be investing in water. Purifying, filtering, transporting, storing and bottling water will become increasingly important global businesses.

Three months ago I wrote to you from Colorado, on the edge of the Great American Desert. This month, I'm writing to you from another arid region, Australia. Yes, there's water in the tropical north. But most of the Australian landscape is as dry as Carry Nation.

Investing in Water: Water Is Taken For Granted

Americans seem to believe. We often take it for granted. But most of the world's residents do not…and for good reason. 97% of the world's water is non-potable salt water, which leaves only 3% that could be consumed by humans…and most of that "water" is trapped in glaciers and icecaps.

Clean, fresh water is not nearly as plentiful as most

In mid-December, the premiers of Quebec and Ontario, along with the governors of eight U.S. states, signed a pact that will ban all large-scale water diversions from the Great Lakes basin. That will prevent fully 20% of the total fresh surface water of the Earth being exported by pipeline to thirsty states like California, Arizona, or Nevada. The eight states that border the Great Lakes - Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania, and Wisconsin - have seen the future. And the future is that fresh surface water is going to be more and more valuable as it gets more and more scarce.

Investing in Water: EFT's

Investing in water has never been particularly easy. But it just got a little easier.

PowerShares has come out with a new exchange-trade fund (ETF) based on water stocks. It's called the PowerShares Water Resources Portfolio (PHO). According to the prospectus, "The index seeks to identify a group of companies that focus on the provision of potable water, the treatment of water, and the technology and service that are directly related to water consumption."

There are a couple of things you should know about PowerShares ETFs that make them different from other ETFs on the market. But since my friend Dr. Steve Sjuggerud beat me to the punch on the virtues of PowerShares compared with other ETFs, I'll let him explain:

"PowerShares actually started out by asking, 'What would the customer want?'

"As the customer, I want broad exposure to a sector (maybe 30 stocks). Don't mess with it too much, please. But if you must mess with it, please kick out the 'dogs' every once in a while, and don't just passively sit by and watch them go to zero.

"And please don't load up on overpriced stocks simply because the market value of these stocks has gone up. I don't want the fund to buy more and more of what's already become super expensive. PowerShares fulfill both of these objectives…

"Each PowerShares sector ETF actually contains 30 stocks. And most importantly to me, no stock can make up more than 5% of the portfolio. So the biotech PowerShares, for example, couldn't possibly have two stocks make up two-thirds of the assets. Simple stuff. But great stuff.

"Thankfully, the dogs can also be kicked out… stocks that appear attractive (based on quantitative measures) can be let in…and the super-expensive stocks will still never make it to more than 5% of the portfolio. That's because instead of holding a fixed portfolio, the PowerShares portfolio changes quarterly based on dynamic underlying indexes, called 'Intellidexes.'

"PowerShares allow me to invest in sectors the way I want…where all 30 stocks in the fund actually affect the performance, which is exactly the diversification I expect from investing in exchange-traded funds."

Steve makes all the important points. You get the diversification of an ETF across a basket of stocks. But you also get a little more active management from the changes that the PowerShares team makes in the index. The dogs are ditched. And with no stock making up more than 5% of the basket of stocks, you are not vulnerable to an index crash prompted by the decline of a single stock.

Investing in Water: Higher Costs But Higher Gains

The only drawback of the PowerShares method is that you will incur higher brokerage costs and taxable gains because the fund is actively managed. But for the better diversification and performance, your total return on the fund should be much higher, even after the additional costs.

And if there's a downside to the diversification, it's that you'll end up owning small pieces of stocks that seem only peripherally related to the water theme. For example, General Electric (GE) makes up 0.85% of the index. But a full slate of water utilities are also included among the holdings, with other water treatment and service companies rounding out the rest of it.

The intrepid investor may prefer to review each of the 35 particular holdings and construct a smaller portfolio of key water stocks to own for the next 10 years. But for the simplest way to be "long water" in 2006, this is it. The stock just launched in mid-December.

By the end of 2006, water will not only be a major geopolitical theme, but also a major investment
theme…Drink up!

Dan Denning, Editor Strategic Investment
For The Rude Awakening      

Investing in Water: Blue Gold
By Chris Mayer

A gallon of crude oil costs $1.45 [$3.45 corrected]. A gallon of Evian costs $11.91. This simple observation led one successful investor to assert that oil is undervalued.

We see things a little differently…Oil may be undervalued, but NOT relative to drinking water. In fact, the truth is exactly the opposite.

Investing in Water: An In Demand Resource

For most of the world, clean drinking water is a far more precious commodity than oil.

While water largely covers this hardscrabble little planet of ours, less than 3% of it is fresh water. And the presence of pollution and disease has made much of that water undrinkable. Unlike with oil, no amount of technological wizardry can replace water.

Water resource enthusiasts, such as money manager John Dickerson, know these facts well. He is familiar with all of water's charms - but the biggest is the simple scarcity of clean water.

There are few industrial countries in the world feeling that scarcity more acutely than China. Its water needs are more critical than its much ballyhooed power needs. I did not fully appreciate this until I visited China myself and talked to Chinese business people. Even Chinese officials - prone to covering up or understating the extent of problems - sound alarmist when it comes to water.

One official recently said China's problem is "more serious and urgent than [in] any other country in the world." China's rapid industrialization has outpaced its water infrastructure, which is on the verge of collapse. As Minister of Water Resources Wang Shucheng noted, "The price of China's economic boom is being paid in water." Two-thirds of China's 600 largest cities don't have enough water; half of these cities have polluted groundwater. Less than 15% of China's population has safe drinking water from tap. The recent spill in the Songhua River, widely covered in the media, only worsens the problem.

For further perspective, consider this: China has about as much water as Canada, but a population 40 times as large. On a per capita basis, China's water reserves are only about one-quarter of the global average. Worse, the distribution of people and water creates its own logistical obstacles. Nearly half of China's population resides in the northeastern provinces, where only 14% of the water resources are located.

These facts provide endless challenges for the Chinese. Water shortages are a serious threat to China's booming economy. It costs billions each year in lost output. Plus, water efficiency in China is way behind that of developed countries. As Dickerson says, for an equivalent amount of work, "China uses approximately 7-15 times more water than do developed countries, and with usable water supplies steadily diminishing, will not their competitive position also begin to erode?"

The Christian Science Monitor in December 2004 contained a provocative article suggesting that we could see a cartel of water-exporting countries emerge over the next decade, in a style not unlike the Organization of Petroleum Exporting Countries. "Water is blue gold; it's terribly precious," Maude Barlow, chairwoman of the Council of Canadians, told the Monitor, "Not too far in the future, we're going to see a move to surround and commodify the world's fresh water. Just as they've divvied up the world's oil, in the coming century, there's going to be a grab."

Whether or not you choose to believe Barlow, it is clear that the demand for clean water is real. In an attempt to avert crisis, China plans to build hundreds of new water treatment plants. But for now, bottled water is the preferred choice - even among the Chinese, at least among those who can afford it. When I was in China, bottled water was nearly everywhere. As the Monitor points out, consumption of bottled water nearly quadrupled between 1997-2002.

So how to play it?

Investing in Water: Two Companies To Watch

There are several interesting companies working on the water crisis in China. I'll run through two of them below. These are not the only companies engaged in solving China's water resource problems, but they were two of the more interesting stories I found. The largest water company in the world is Veolia Environnement, of France, and, oddly enough, a spinoff of entertainment giant Vivendi. Veolia has a 20-year deal to provide water to Tianjin as well as a bundle of other water and waste management contracts throughout China. Veolia currently serves over 14 million residents in China.

Another company is Watts Water Technologies, which has been doing business in China since 1995. The company produced valves used in China's Three Gorges Dam project on the Yangtze River. In November, the company increased its commitment to China by acquiring Changsha Valve Works.

According to Watts, Changsha is "a leading manufacturer of large-diameter hydraulic-actuated butterfly valves for thermopower and hydropower plants, water distribution projects and water works projects in China. This acquisition strengthens Watts' position in the fast-growing water market."

There are two problems here. First, neither company does all that much business in China. Veolia's contracts bring in only a small fraction of its more than $30 billion in sales. Watt's China revenues represent only 3% of sales at this point. This is a common drawback in looking at publicly traded water companies (excluding micro-caps).

If you want more concentrated exposure to China's water crisis, it seems impossible at this point. The other problem is that none of these companies strike me as being particularly cheap. Still, they remain interesting companies to watch - we may get a chance to own them at excellent prices down the road. And as the Chinese water crisis unfolds, it may become clearer as to who and where the winners in this struggle will be. One thing seems certain:

Clean drinking water will remain more precious than oil - especially in China.

Invest in the coming global water shortage

By Jon D. Markman

Ten years ago next Monday, a massive earthquake rolled under the Japanese city of Kobe at dawn, toppling 140,000 buildings, causing 300 major fires, killing more than 5,000 people and leaving 300,000 homeless.

To help cover the story for the L.A. Times, I left my wife to care for our 10-day-old daughter and 2-year-old son and flew into the city with a small team of Los Angeles-based trauma doctors and nurses. We found a surreal, smoking ruin of a city with roads twisted like coils of rope, high-rises tilted at Dr. Seuss angles and thousands of middle-class families jammed into dingy, ice-cold rooms in the few public buildings left standing.

Just as in the tsunami zone of South Asia this month, the immediate health danger, besides a possible outbreak of disease, was a lack of fresh water. More than 75% of the citys water supply was destroyed when underground pipes fractured. As much as they desired pallets of drugs, food, blankets and tents sent from throughout Japan and abroad, the Kobe survivors coveted -- and needed -- clean, bottled water for cooking, drinking and bathing.

Both incidents are a stark reminder that water is our most precious resource. Because it is seemingly ubiquitous in the United States, it is taken for granted. Massive snowstorms in California this month have loaded up the snowpack that provides water there, and rains in the Southeast are filling reservoirs in that part of the country.

The rest of the world, however, is not so fortunate.

Not making any more water
There is no more fresh water on Earth today than there was a million years ago. Yet today, 6 billion people share it. Since 1950, the world population has doubled, but water use has tripled, notes John Dickerson, an analyst and fund manager based in San Diego. Unlike petroleum, he adds, no technological innovation can ever replace water.

China, which is undergoing a vast rural-to-urban population migration, is emblematic of the places where water has become scarce. It has about as much water as Canada but 100 times more people. Per-capita water reserves are only about a fourth the global average, according to experts. Of its 669 cities, 440 regularly suffer moderate to critical water shortages.

Although not widely appreciated, water has been recognized by conservative investors as an investment opportunity -- and it has rewarded them. Over the past 10 years, the Media General water utilities index is up 133%, double the return of the Dow Jones Utilities Index ($UTIL). Over the past five years, water utilities are up 32% -- clobbering the flat returns of both the Dow Jones Utilities and the Dow Industrials ($INDU). One of waters key long-term value drivers as an investment, according to Dickerson: Demand is not affected by inflation, recession, interest rates or changing tastes.

Virtually all of the U.S. water utility stocks are regulated by states and counties, which makes them pretty dull. Governmental entities typically give utilities a monopoly in a geographic region, then set their profit margin a smidge above costs. Just about the only distinguishing factor among them are the growth rates of their regions and their ability to efficiently manage their underground pipe and pumping infrastructure. Among the best are Aqua America (WTR, news, msgs) of Philadelphia, Southwest Water (SWWC, news, msgs) of Los Angeles; California Water Service Group (CWT, news, msgs), based in San Jose, Calif.; and American States Water (AWR, news, msgs) of San Dimas, Calif.

In a moment, Ill offer a couple of potentially more impactful ways to invest in water, but first lets look a little more broadly at world demand.

Aquifers in India are being sucked dry
The tsunami has focused attention on water demand in South Asia -- and its a good thing, as it was already reaching critical status in rural areas. Several decades ago, farmers in the Indian state of Gujarat used oxen to haul water in buckets from a few feet below the surface. Now they pump it from 1,000 feet below the surface. That may sound good, but they have been drawing water from the earth to feed a mushrooming population at such a terrific rate that ancient aquifers have been sucked dry -- turning once-fertile fields slowly into sand.

According to New Scientist magazine, farmers using crude oilfield technology in India have drilled 21 million "tube wells" into the strata beneath the fields, and every year millions more wells throughout the region -- all the way to Vietnam -- are being dug to service water-needy crops like rice and sugar cane. The magazine quoted research from the annual Stockholm Water Symposium that the pumps that transformed Indian farming are drawing 200 cubic kilometers of water to the surface each year, while only a fraction is replaced by monsoon rains. At this rate, the research suggested, groundwater supplies in some areas will be exhausted in five to 10 years, and millions of Indians will see their farmland turned to desert.

In China, the magazine reported, 30 cubic kilometers more water is being pumped to the surface each year than is replaced by rain -- one of the reasons that the country has become dependent on grain imports from the West. This is not just an issue for agriculture. Earlier this year, the Indian state of Kerala ordered the PepsiCo (PEP, news, msgs) and Coca-Cola (KO, news, msgs) bottling plants closed due to water shortages, costing the companies millions of dollars.

In this country, shareholder activists already are lobbying companies to share water-dependency concerns worldwide with their stakeholders in their financial statements.

Water, water everywhere, but . . .
The central problem is that less than 2% of the worlds ample store of water is fresh. And that amount is bombarded by industrial pollution, disease and cyclical shifts in rain patterns. Its increasing scarcity has impelled private companies and countries to attempt to lock up rights to key sources. In an article last month, the Christian Science Monitor suggested that the next decade may see a cartel of water-exporting countries rivaling the Organization of Petroleum Exporting Countries for dominance in the world economy.

"Water is blue gold; it's terribly precious," Maude Barlow, chair of the Council of Canadians, told the Monitor. Not too far in the future, we're going to see a move to surround and commodify the world's fresh water. Just as they've divvied up the world's oil, in the coming century, there's going to be a grab."

Besides the domestic water utilities listed above -- and similarly plodding foreign utilities such as United Utilities (UU, news, msgs) of the United Kingdom, which sports a 6.9% dividend yield, and Suez (SZE, news, msgs) of France -- investors interested in the sector can consider a number of variant plays. None are extremely exciting, but my guess is that, over the next few years, some more interesting purification technologies will emerge, along with, perhaps, a vibrant attempt at worldwide industry consolidation.

One current idea is Tennessee-based copper pipe and valve maker Mueller Industries (MLI, news, msgs), a $1 billion business with a trailing price/earnings multiple of 15 that is still not expensive despite a 47% run-up in the past year. Its leading outside investor is Berkshire Hathaway (BRK.A, news, msgs), the investment vehicle of legendary investor Warren Buffett.

Another is flow-control products maker Watts Water Technologies (WTS, news, msgs), which is a little richer at a $975 million market cap and a trailing P/E multiple of 19, but is still owned by several leading value managers, including Mario Gabelli.

And possibly the most interesting is Consolidated Water (CWCO, news, msgs), a $160 million company based in the Cayman Islands that specializes in developing and operating ocean-water desalinization plants and water-distribution systems in areas where natural supplies of drinking water are scarce, such as the Caribbean and South America. It currently supplies water to Belize, Barbados, the British Virgin Islands and the Bahamas, and it has expansion plans. It is the most expensive, but it may also have the greatest growth prospects. Of all of these, it is up the most over the past five years, a relatively steady 355%.

Of course, there is one other benefit to water investing: When these companies say theyre going to do a dilutive deal, its not something to worry about.

Fine Print
Dickerson runs a hedge fund in San Diego strictly focused on water investing, the Summit Water Equity Fund. . . To learn more about Southwest Water, click here. . . . To learn more about California Water Service Group, which runs systems in New Mexico, Hawaii and Washington State, as well as California, click here. . . . To learn more about American States Water, click here. . . To learn more about Mueller, click here, and, for Consolidated Water, click here.

Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at [email protected]; put COMMENT in the subject line. At the time of publication he held positions in the following stocks mentioned in this column: Coca-Cola.


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