Portfolio Soaked with Profits

One of the most valuable commodities on the planet is water. Safe, drinkable water is difficult to find in many places on earth. Demand is surging for nature’s most important resource. Kevin Kerr explains…

What do you think is the most important commodity in your life? Yes, oil is important, but not as important as staying alive – after all, you can survive only about a week without water, right? Just look around. How much water do you personally use in a day? And think about how much water you don’t even realize you use. Water is something we take for granted, and it’s a growing crisis that’s beginning to hit traders’ radar screens.

Reports from the World Health Organization show an epidemic problem: A staggering 2.6 billion people – 40 percent of the world’s population – do not have even the most basic sanitation, and more than 1 billion people still drink unsafe water. This can cause a range of diseases and even death. The world is just one natural disaster from a lack of clean water. One example of the devastating impact of nonpotable water was the tsunami in Asia. Many thousands of deaths could have been prevented had there been fresh water supplies.

Water pushed through hydroelectric dams is one of the world’s most efficient and harmless forms of electricity generation. Water is also vital in sanitation, manufacturing, drinking, and more. The water industry is very complex. The list of related companies is long, from water suppliers and bottlers to technology and equipment firms.

Think there’s no real way to play water supply and demand? Think again. The explosion of the world’s population and the dwindling supply of fresh water on the planet are sounding alarm bells for the greatest commodity play of all time. Make no mistake: Water is an increasingly vital commodity. And that hasn’t gone unnoticed by worldwide capital markets.

Very few people know about the Dow Jones U.S. Water Index. This index lists only 23 companies, mainly utilities, but rest assured that there are many, many others. Surprisingly, many experts contend that the way to play water isn’t just through U.S. utilities. Worldwide, the utilities are considered overvalued to some extent.

Even though the utilities are expensive in the United States, one country that offers even better opportunity due to pent-up but exploding demand is China. China’s population of 1.3 billion is more than one-sixth of the world’s total. The sheer numbers are staggering.

And while not everyone there drives a car, everyone does drink water.

Here’s a list of water crisis facts, provided by Summit Global Management:

– The World Health Organization says that 60,000 children die each day from lack of water and/or dirty water, by far the largest health problem in the world.

– Only 20 percent of the world’s population currently enjoys the benefits of running water.

– Every year, according to the World Bank, the amount of global water polluted equals the amount of water consumed: Fresh water is disappearing at an alarming rate, especially when compared to the rising world population.

– Since the turn of the last century (1900), the U.S. population increased 200 percent, while per capita water usage shot up 500 to 800 percent, depending on the region.

– It takes 1,000 tons of water to produce 1 ton of grain; agriculture consumes 75 percent of the world’s fresh water. The World Water Council says we will be 17 percent short of necessary water to feed the global population by 2020.

– Users of the most water in California, in decreasing order, are alfalfa growers, cattle ranchers, cotton farmers, rice farmers, and the city of Los Angeles.

– In the United States there are 58,000 water utilities, 90 percent of which serve less than 4,000 homes and have operating budgets of less than $2 million.

– About 500,000 tons of pollutants pour into U.S. rivers and lakes each day.

– California accounts for 20 percent of all irrigation and 10 percent of all fresh water use in the entire United States.

Opportunities exist in the United States, if you pick the right players. The U.S. water infrastructure, much like the oil refinery situation, is falling apart. The Environmental Protection Agency (EPA) and others estimate that up to $1 trillion will have to be spent to upgrade U.S. water infrastructure over the next few years. That work will fall into the hands of only a few key players in the water market, and the rewards for the shareholders of those that are chosen could be substantial.

It’s unclear as I write this which players will be on top in the next decade; some may not even exist yet, but will be born out of necessity. As I mentioned earlier, the best thing to do is to keep an eye on China, as their need for water will be the most immediate. Take, for example, the grain situation in China in summer 2006. Severe drought afflicted China’s poor western region and underscored how vulnerable the country’s critical ecology was despite its growing wealth, raising concerns among some big commodities traders that China might need to import massive amounts of grain.

A report by the United Nations Food and Agriculture Organization warned in 2006 that some parts of key provinces lost half of their winter wheat crops. Some areas experienced massive food shortages that were on the verge of epidemic.

The cause was lack of water supplies – an ongoing and growing problem in China. In some villages and cities the major water sources have reportedly dried up by more than 70 percent, according to the UN agency’s global information and early warning service. China was the fourth-largest destination for U.S. farm products in 2006, overtaking the European Union, with purchases of $6.8 billion, according to the U.S. Department of Agriculture.

It seems ironic that millions of Chinese are potentially facing food and water shortages, even as the nation’s economy is growing by leaps and bounds. That growth clearly comes at a price worldwide, not just in China.

Speaking of prices, we continue to pay an ever-higher one for our energy. The boom in mining, drilling, foresting, and other resources sectors has a downside, too – a negative effect on our environment. From greenhouse gases and strip-mining to deforestation and drilling in Alaska, the commodities boom is not without casualties.

Energy and mining are on the top of the list when it comes to harming the environment. Just ask anyone who lived in Alaska when the Exxon Valdez disaster occurred. The ecological implications were daunting. Drillers and the oil majors are spending more and more to protect the environment, partly for public relations and partly because they have to. However, measures are being taken in some sectors to stop the destruction – and this is also providing an opportunity for investors.

Various companies that do cleanup and reclamation are set to do well as an ecology-conscious world demands that we be good stewards of the environment at the very same time we are searching for resources. Investing in these companies is a way to further expand a winning portfolio.

The commodities markets are always in flux, and it’s important to keep up with new markets and new opportunities. Always study the markets you want to enter – take an interest in them. One of the most important things in this business is to be interested in what you are trading. Otherwise, trading becomes a chore. Be passionate about the market you choose to follow, but never let emotions cloud your judgment.


Kevin Kerr
for The Daily Reckoning
April 23, 2008

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

The above was taken from Kevin’s book, A Maniac Commodity Trader’s Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls "the last bastion of pure capitalism on Earth." Whether you’re a novice or an experienced trader, Kevin’s down-to-earth, clear-cut guidance will make you savvier, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you.

"Let Rome in Tiber melt…"

Rome did melt into the Tiber. The place was invaded by barbarians…the population sank from over a million to under 100,000. And when the city was "rediscovered" by tourists with a sense of history in the 17th century…there were goats grazing amid the ruins of the ancient city.

There are people who believe that power, progress, and wealth are always on a rising slope. Let them come to Rome!

Roman property was a sell for a period of probably a thousand years…from the peak of Roman power, around 100 AD, down to its nadir, sometime after the Renaissance.

We have come to Rome on your behalf, dear reader. We poke through its dusty ruins looking for the future. There are more ruins to come, we think…

(Oh, the labors we undertake for your sake, dear reader. Last night, trying to get in the spirit of the place, we drank nearly a whole bottle of wine from Abruzzo. Today, we will go with a Tuscan variety…)

But let us first look at the news:

"Does the US matter any more?" The question comes to us from the head of research at Societe Generale. Looking at the data from the International Energy Agency in Paris, reported in this space yesterday, he noticed that now China, Russia, India and the Mideast use more oil than the USA. What’s more, energy use in America is going down…while it is skyrocketing in those other countries. Thanks largely to growing demand in the emerging markets…and the falling value of the U.S. currency…the price of oil hit a new record yesterday – at $118.

The United States matters less and less to the oil market – but is still very important, of course.

We have guessed that the United States of America is a sell. Its money, its paper, its property, its labor, its stocks, its industries, its debt – sell them all.

We don’t mind saying so…still, we don’t like to hear the foreigners say it. A man may have noticed the swelling with his own eyes; still he doesn’t like to hear a stranger say his wife is getting fat. So when the Financial Times comes out with an article saying the same thing, it sticks in our craw.

At least the FT is nice enough to use a euphemism. Instead of seeing the United States on its knees, it sees the "end of unipolarity." As we all know, when the Soviet Union threw in the towel in 1989, the US was the world’s undisputed hegemon. America was on top of the world – with no real competition. It was a "unipolar" world, as the FT would put it. The stock market boomed. The dollar rose. America’s chest swelled with homegrown pride and the entire world’s credit. And by the late ’90s, President Clinton summed it up: "things couldn’t get better," he said.

He was right. They couldn’t. So, they got worse.

No nation can stay on top of the world forever. But when you have no competition, you can’t rely on others to bring you down; you have to find ways to destroy yourself. For that job, America found just the men it needed just when it needed them most – Alan Greenspan and George W. Bush. What these two men accomplished is probably one of the greatest feats in human history. They took the richest, most powerful country the world has ever seen and, in the space of only five years, practically ruined it.

First, says the FT article, the soaring price of oil had the effect of transferring trillions of dollars from the biggest oil user – the United States – to the oil producers, notably the Arab states and its former enemy, Russia.

Second, the federal government went from a budget surplus over $100 billion in 2000 to some of the largest government deficits ever recorded. Those, along with huge current account deficits equal to 6% of GDP, changed the United States from a chooser into a beggar – heavily reliant on foreign money.

The FT doesn’t mention it, but America’s spending spree had another important effect – it lit a fire under its new commercial rivals. Americans spent absurdly – which caused the Chinese to build factories, learn skills, and pile up a mountain of U.S. dollars.

Professor Paul Kennedy practically foretold all this when he noted that super-powers tended to "over-reach." But even he couldn’t imagine how much of this over-reach would be caused by so few people in such a short period of time. Alan Greenspan reached for the stars in the early 2000s. His emergency-level Fed rates triggered an explosion of spending, borrowing and leveraging…which has now blown up in our faces.

And the Bush Administration took on a war that has proved to be costly beyond anyone’s imagination. The total price of the war may come to $1 trillion or more – at a time when the United States already needs to borrow $2 billion per day.

Obviously, more prudent, more cautious leaders would have prevented these catastrophes. They would have read history…reduced expenses…raised interest rates…pulled back the troops…and saved money. But sensible leaders do not make history. Fools do. People reach for glory. Then, they over-reach.

"Oh, look," said Elizabeth on yesterday’s walk about. "This Piazza Navona is built around what used to be Emperor Diocletian’s stadium. I don’t know anything about Diocletian…"

"The only thing I know," we replied, "was that Diocletian prefigured Richard Nixon by about 19 centuries."

"What do you mean?"

"Diocletian was faced with high rates of inflation. He imposed price controls as a way of trying to control prices. Of course, they didn’t work. They never do. But Richard Nixon probably never read the history of Diocletian’s price controls. Otherwise, he wouldn’t have done such a stupid thing."

George W. Bush and Alan Greenspan, too, may have long arms…but they are short on history. Still, the pair seems to have worked a turnaround that history will record as one of the greatest ever.

After being on top of the world so recently, now…the United States slips and slides. The banks are in trouble…homeowners are in trouble…and the economy is in such trouble that the feds are now considering new emergency measures to rescue it.

From California comes word that foreclosures are running 327% ahead of last year. Drivers are cutting back on gasoline use – for the first time in U.S. history they have to compete with the Chinese for every gallon. They’re "feeling squeezed," says an AP report.

Americans now earn less than the French. How long will it be before they earn less than the Chinese? How long before Washington melts into the Potomac?

We don’t know…but we will do our best to be prepared when it happens.

*** "I love coming to Rome," said Elizabeth. "Everywhere you go, there’s something to see. Right around the corner is the church of St. Agnes. You know, they martyred her because she refused to marry one of the Roman aristocracy…who was pagan. The church is built on the site, it is said, where she was exposed. They stripped her naked and chained her on the spot. It was supposed to be a humiliating way to kill her, I guess. But her hair hung down and preserved her modesty. At least, that is what it says in the Christian legends. And so they tried to burn her…but the fire wouldn’t touch her. In any event, she died…and the street here, St. Agnes ‘Agone,’ records the place and the pain of it.

"I’ve booked a tour of the Vatican…and then a tour of the Vatican’s art collection. There’s a group of Americans who organize these things…it looks like a very good service."

"How long are these tours?" we wanted to know.

"Well, each one is about 4 hours. But don’t worry. I know what a Philistine you are…I only booked it for myself."

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning