Posted on 06/15/2008 7:57:27 AM PDT by TigerLikesRooster
Buying into 'the petroleum for the next century'
ROB CARRICK
Friday, June 13, 2008
Looking to jump into an investment in a scarce resource with lots of upside potential? There's a clear case to be made for water.
Oil and gas, metals and fertilizers and food are still going strong, while investors have only recently started to talk about water. And yet, water has much the same imbalance between supply and demand as traditional resources. The investment dealer Goldman Sachs recently described water as the “the petroleum for the next century.”
Mutual funds and exchange-traded funds focusing on water have been around for a year or so and the early results vary widely. The one certainty is that water stocks haven't yet enjoyed anywhere near the rally that energy, metal and fertilizer stocks have.
The basic argument for investing in water is scarcity, starting with the fact that just 2.5 per cent of the world's water is fresh. Goldman Sachs says consumption of fresh water is doubling every 20 years. The World Water Council says about 1.1 billion people lack access to clean drinking water, and 2.6 billion lack adequate sanitation.
Here in North America, the council says we use about 350 litres of water a day per capita in residential areas, compared with 200 litres in Europe and 10 to 20 litres in sub-Saharan Africa. Meanwhile, the North American water infrastructure is decaying. The American Water Works Association says much of the water network in the United States will need to be replaced in the next 30 years, and the estimated cost of replacing old pipes comes in between $280-billion (U.S.) and $400-billion.
You may have heard how rising global demand for food has sent the price of fertilizer and agricultural commodities soaring. But water is part of the equation, too. One thousand litres of water are needed to produce a kilogram of wheat, while an equivalent amount of beef requires 13,000 litres.
The scarcity argument in favour of investing in water stocks suggests the potential for gains on par with oil and metals. But while water ETFs have done well lately, it's probably not wise to invest in them with a quick score in mind.
“As time goes on, water will become more and more of a scarce commodity,” said Brent Woyat, a portfolio manager at Raymond James in Vancouver who has put clients into an ETF called the PowerShares Water Resources Portfolio. “It's more of a long-term theme, separate from the other commodities.”
There are now about five ETFs focusing on indexes of water-related stocks, including the PowerShares fund. Canadian Imperial Bank of Commerce has issued a couple of series of principal-protected notes that invest in water stocks, and there's also a mutual fund in the sector called Criterion Water Infrastructure.
This fund's attributes are its wide availability, its global diversification and its use of currency hedging, which means investors get the returns of the underlying stocks without distortions caused by currency fluctuations. Fees come in at 2.55 per cent for the widely held Class C version, which is high in comparison to the water ETFs that are listed on the Toronto, New York and American stock exchanges.
The PowerShares Water Resources Portfolio is the choice of not only Mr. Woyat, but also Larry Berman, chief investment officer of ETF Capital Management in Toronto. Mr. Berman cites this ETF's liquidity – it generates by far the highest trading volumes among water ETFs – and its mix of big and small corporate names. The management expense ratio is 0.7 per cent, which is somewhat pricey for an ETF but still far lower than mutual funds.
The underlying index for this ETF is the Palisades Water Index, which has top holdings that include URS Corp., an engineering firm with expertise in water infrastructure projects; Tetra Tech, which is a consulting and engineering firm; and Valmont Industries, which makes irrigation equipment.
Stocks like these highlight how investing in water can be different than other commodities, where you can buy directly into companies that explore for and produce energy, metals and fertilizers. “Water falls into the commodity space, but it's also infrastructure,” Mr. Berman said.
Companies in the water business can be broken down into the following sectors: utilities, which are regulated suppliers of water to homes and business; treatment, which focuses on producing clean, drinkable water; distribution, which refers to companies that supply pipes, pumps and valves; monitoring, or water analysis; and resource management, which includes consulting and engineering firms that specialize in water projects. There are also diversified industrial conglomerates – General Electric is a prime example – with divisions in the water business.
Several stocks can be found in most of the various water funds and ETFs, including Veolia Environmental, a French conglomerate that gets about one-third of its revenue from water treatment. Veolia was mentioned in a recent Forbes magazine column by Ken Fisher that was headlined: “A stock for eco-nuts; If you are a greenie, buy Veolia Environment. If you aren't, buy it anyway.” Other water stalwarts include Itron Inc., which supplies water meters, and Danaher, a diversified U.S. industrial firm with expertise in water purification.
Suggestion: Forget about picking individual stocks and instead find an ETF or mutual fund to give you broad exposure to water. The usual ETF selection criteria apply: fees (as low as possible), liquidity (you want an actively traded fund) and the makeup of the underlying index (broad diversification is what you want).
Mr. Woyat has about 5 per cent of client portfolios in the water sector, but suggests caution for investors who want to jump in now. “If I were to enter the market, I'd probably wait for a bit of a pullback. The way [water ETFs] are trading, they could be riding on the coattails of other commodities.”
If you do put water ETFs in your portfolio, recognize that you're making a speculative investment that adds risk to your portfolio. “You're getting into these to basically chase a story,” said Richard Kang, an investing industry consultant who blogs at The Beta Brief (thebetabrief.com). “Don't get into it as a diversifier.”
Nope, a farmer does not have a nice crop until it is harvested, before that the only thing he is selling is hope.
If an oil company drills a nice well, but it will take a few years of course to drill it all, and meanwhile they want to drill another nice new prospect, and so they sell forward about 1/3rd of their production, is that not doing business in the real world?
No, he is selling something that does not exist, in the real world that is fraud.
Do you not see how banning that will result in less corn being planted and less oil being drilled?
NO, the government controls the amount planted, they pay people to plant they pay people not to plant, all by crop plans and access to government insurance and disaster programs, you don't play they don't pay, etc. the free market in corn is hog wash of the highest order.
less oil being drilled?
More hog wash, oil companies will drill no matter what it is their business.
The difference between the two prices is the value the farmer created.
You said he has "nothing".
I am ending this conversation with you because, with all due respect, you are an absolute know-nothing on the subject. I don't argue about chemistry, because I don't know nothing about it. Unfortunetly, people like you argue about finance and economics while not knowing anything about it.
They can’t afford to downgrade the bond insurers. The house of cards would take another hit. They will keep them rated at AAA until their losses make it apparent even to Joe6Pack. They will keep up the Charade as long as they can. This after the ratings agencies both simultaneously formally announced they “accidentally” made math errors rating MBS. It is a Ponzi scheme. As long as everybody agrees to look the other way, they all will.
Sorry, posted to wrong thread. This was about the monolines...
Ignorance becomes you, that is why you like play business instead of the real thing. If you take a look at the price of western farms, every one tells the amount of government money the ranch receives each year and it it is considered part of the value of the property.
Some historical information, you can look up the current figures: Direct government payments to farmers are expected to total $18.5 billion in 2006, down from the forecast $23.0 billion in 2005, but more than the $13.3 billion in 2004. Direct payments under the Direct and Countercyclical Program (DCP) in 2006 are estimated at $5.2 billion, a modest reduction from 2005.
Countercyclical payments are forecast to increase from $4.1 billion in 2005 to $5.3 billion in 2006. Increases in payments to wheat and soybean producers are expected to off-set declines in payments to corn and cotton growers. More than half of the payments in each year go to corn producers.
Marketing loan benefits, including LDPs, marketing loan gains and certificate exchange gains, are expected to be down from to $4.1 billion in 2006 from $6.2 billion in 2005. The expected declines in marketing loan benefits to rice, corn, sorghum and cotton more than offset the increase in payments to wheat and soybean growers. About 68 percent of marketing loan benefit payments go to corn producers.
So do get back to me when you learn something about the government's farm crop subsidy's and it's consideration on farm values.
Ans I said the farmer had nothing to sell until he harvested his crop. That is the real world.
>Ans I said the farmer had nothing to sell until he harvested >his crop. That is the real world.
So are you saying that a piece of land with a 75% complete building is no more valuable than the same land with no building on it? Well, that is what you are saying.
Oil companies are not in a mad dash to set up and refine more oil. Congress is not pushing through legislation to allow us our own oil. Nobody that would be in a rush is in a rush. That speaks volumes about oil.
Air, too.
There is a supply... there is a demand.
Or is the utopia you live in a place where you can pick a private water utility to provide water to your tap?
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If you haven't had a problem bathing, washing your laundry, drinking water, etc... up until now, your insinuation that governmental control of water will result in shortages... rings quite hollow.
From the dawn of human history until this very day, water supplies have been controlled by governments. Yet you would insinuate that this creates disaster?
Land grant holders in some of the original 13 colonies had Riparian rights as well, the right to the water in a stream adjacent to their property, and the right to everything on the bottom of and in (and under) that stream as well, or to the center of the channel if there was property owned by womeone else on the other side.
It is only since the 1960s that those riparian rights have been repealed and and water rights siezed or ignored by government, because to control the water is to control the land, especially in cattle country.
Riparian rights did not mean that you could erect a dam, and divert the water leaving everyone downstream with nothing. THEY also have riparian rights.
True, that.
Pretty tough to contain all the water in a navigable waterway (although the going definition of a navigable waterway is one which will float a log), and really tough to do in tidewater, too.
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