Trends I'm Watching

Water Crisis Hitting Rich Countries

Trend: Effective management of water resources will be a high priority for some cities and regions as the weather patterns shift.

GreenBiz News describes a WWF report detailing how rich countries have been mismanaging their water resources and what measures can be taken to improve water management.

Link: GreenBiz News | Water Crisis Hits Rich Countries, Says Report

Water crises, long seen as a problem of only the poorest, are increasingly affecting some of the world's wealthiest nations, warns WWF ahead of World Water Week.

The global conservation organization's report, Rich Countries, Poor Water (PDF), is one of the first comprehensive overviews of water issues in the developed world.

The report shows that a combination of climate change and drought and loss of wetlands that store water, along with poorly thought out water infrastructure and resource mismanagement, is making this crisis truly global. The report highlights impacts of water problems in countries such as Australia, Spain, Japan, and the UK, and the US.

In Europe, countries on the Atlantic are suffering recurring droughts, while water-intensive tourism and irrigated agriculture are endangering water resources in the Mediterranean. In Australia, the world’s driest continent, salinity is a major threat to a large proportion of its key agricultural areas.

Despite high rainfall in Japan, contamination of water supplies is an extremely serious issue in many areas. In the United States, large areas are already using substantially more water than can be naturally replenished. This situation will only be exacerbated as global warming brings lower rainfall, increased evaporation and changed snowmelt patterns.

Some of the world’s thirstiest cities, such as Houston and Sydney, are using more water than can be replenished. In London, leakage and loss is estimated at 300 Olympic-size swimming pools daily due to ageing water mains. It is however notable that cities with less severe water issues such as New York tend to have a longer tradition of conserving catchment areas and expansive green areas within their boundaries.

In Brazil, despite leading the world with its national water resources plan, concerns remain over some existing dam proposals. In India, much of its agriculture is under threat from rampant overexploitation of water resources. Elsewhere, China has raised international concerns over the scale and possible ecological and human costs of some of its massive water infrastructure plans.

The water problems affecting rich and poor countries alike are a wake-up call to return to protecting nature as the source of water. ...governments must find solutions for both rich and poor, which include repairing ageing infrastructure, reducing contaminants, and changing irrigation practices in the way we grow crops.

Clean-Tech Investing Rises Sharply

Trend: Higher energy prices and a growing awareness of the impact of pollution continue to increase interest in clean technologies.

GreenBiz News reports that Investments in clean technology by venture capital and private-equity investors has grown considerably. (The Cleantech Venture Network defines "clean technology" as technologies developed by biological, computational, and physical scientists and engineers that enable more valuable use of natural resources and greatly reduce ecological impact, although this may be only one of a technology's benefits. )

Link: GreenBiz News | Clean-Tech Investing Rises Sharply, Say New Studies

Clean-tech venture capital investing in North America realized its eighth consecutive quarter of growth, with a record $843 million invested in clean-tech in the second quarter of 2006, according to research by Cleantech Venture Network. The energy segment led the way with $594 million, a 69% increase over the $352 million invested in the previous quarter.

According to data, the $843 million in venture capital invested in clean technology during Q2 2006 represented a 64% increase over the $514 million invested in Q1 2006 and a 129% increase over Q2 2005. Clean-tech investments reached 13.4% of all venture capital invested in all categories for the quarter. In the first half 2006, energy investment tripled to $946 million, from same time last year.

Another study, by New Energy Finance, found that global venture capital and private equity investment in clean energy companies rebounded strongly in the second quarter of 2006 after a slow start to the year. More than $2 billion is estimated to have flooded into the sector, three times the amount invested the previous quarter and more than double the figure for the same quarter in 2005.

Particularly noteworthy, said New Energy Finance, was the surge in Private Investment in Public Equity, or PIPEs, and the rush of enthusiasm for California's solar sector.

PIPEs have been around for a decade, but Q2 2006 saw them take centre stage in the clean energy industry. The quarter saw $556m in PIPE investments, compared with just $21m the previous quarter and $28m in the same period in 2005. Traditionally, PIPEs were a fund-raising last resort for public companies, but small- and micro-cap companies increasingly use them to fund expansion without going to the effort of a full secondary offering.

According to the Cleantech Venture Network, clean tech surged ahead of the two previously dominant venture investment categories, telecommunications and medical, during the most recently reported quarter. It now ranks third behind biotech and software, indicating its shift into the mainstream, said the group.

GM's newest assembly plant is green

Trend: Manufacturer's are building green plants to reduce energy, water, and material costs.

ENN (Environmental News Network) describes GM's newest assembly plant which implements many environmentally-friendly building practices.

Link: ENN: Environmental News Network [[Today's News Full Story ]].

General Motors Corp. on Thursday showed off its newest assembly plant, a "green" facility that collects rainwater from the roof to flush toilets and was built with one-fourth recycled materials.

The plant outside Lansing will make the Saturn Outlook, GMC Acadia and Buick Enclave crossover vehicles starting later this year. Officials, who billed the auto plant as the world's most environmentally friendly, estimated GM will spend $1 million a year less on energy than in a typical plant.

The GM plant has a reflective roof to reduce heat absorption, saving costs to cool the building. It also has 800 lights in the assembly area, half that in a typical plant.

About 80 percent of the waste generated during construction, or nearly 4,000 tons, was diverted from landfills. Rainwater is collected from the roof and used instead of potable water to flush toilets.

Non-manufacturing use of water is 45 percent lower than normal, saving 4.1 million gallons every year, GM said.

Overall, the 2.4 million-square-foot facility is expected to save more than 40 million gallons of water and 30 million kilowatt hours of electricity in its first 10 years of operation. About 3,000 workers will be there during full production of the crossovers, which have many of the attributes of sport utility vehicles but are built on a car platform.

Agriculture Uses 93% of Water Consumed

Trend: In the near future, products and services for using water efficiently will become a major industry.

Agriculture uses a huge amount of water, especially to produce meat, according to NOW magazine.

Source: NOW Magazine - Water: Saving the Planet One Drop at a Time

According to a 2004 FAO report, 3 per cent of the world's water is used by cities, 4 per cent by industry and 93 per cent by agriculture. This sector pays minimal water bills and is responsible for jeopardizing ecosystems by altering the flow of rivers and damming waters for irrigation."

"To produce 1 kilogram of boneless beef, according to a definitive 2004 UNESCO study on the "water footprint of nations," it takes 6.5 kilograms of grain, 36 kilograms of roughage (coarse grains and pasture) and 155 litres of drinking water. Since the grains and roughage also require water, there's enough to float a destroyer before a steer gets to the slaughterhouse. One hamburger, according to the UNESCO report, embodies 2,400 litres of water, the unsung source that does it all for you. "

via: Treehugger: Water: Saving the Planet One Drop at a Time

Investing in Tomorrow's Liquid Gold: Water

Trend: The amount of water for personal consumption is small and declining while the world's population continues to expand.

Daniel Pink at the The Trend Desk on Yahoo! Finance describes the long-term view of investing in water.

Link: Investing in Tomorrow's Liquid Gold: The Trend Desk - Yahoo! Finance

Oil dominates the world economy. But get ready. There's a new liquid in town -- one that could prove to be an equally potent source of both geopolitical conflict and entrepreneurial activity.

By 2025, water will become the most serious resource problem in the world economy, according to the Center for Strategic and International Studies, a Washington think tank. The problems are twofold, researchers say.

First, the supply of water and the demand for it are rarely in the same place. For example, China has about 21 percent of the world's population but only 7 percent of its water.

Second, an astonishingly small amount of the world's water is actually usable. Water pollution is already the single largest cause of sickness and death worldwide. Indeed, CSIS's Global Strategy Institute says if all the water on Earth were compressed to a single gallon, only four ounces would be fresh water. Of that four ounces, only two drops would be readily accessible.

Human beings already use one of those drops. But about 92 percent of that single drop goes to agriculture and industry; just 8 percent goes to cities, towns, and municipalities. Think about that: For every gallon of water on the planet, only 8 percent of one drop is available for drinking, bathing, and other personal consumption.

As the world population rises -- particularly in China, South Asia, and parts of Africa -- the potential for calamity and conflict soars. But where danger exists, so does opportunity.

Water may be one of the richest investment opportunities of the next few decades. Any company that can improve desalinization techniques, find methods to transport water from where it's located to where it's needed, or figure out other ways to expand the useable water supply from less than a drop to, say, three or four drops might become the Shell or BP of H20.

In an excellent research report last month, UBS Investment Bank spells out the perils and promise of this emerging opportunity. The report notes the considerable uncertainty surrounding water investment but recommends four equipment and services stocks that are providing the "picks and shovels" in the pursuit of the new liquid gold. They are: Air Products and Chemicals, which does water treatment; Nitto Denko, a producer of separation membranes for refining and condensing water; Guangdong Investment Limited, a water utility; Pall Corp., which designs and manufactures filtration products.

Liquid Profits Flowing From Water-Based ETF (PHO)

Trend: China and India face water problems, which should benefit companies that provide pertinent products and services.

Investor's Business Daily provides some insight into water ETF (PHO).

Link: Investor's Business Daily: Liquid Profits Flowing From Water-Based ETF

Emerging markets aren't just clamoring for raw materials. They also need more water. And in the U.S., pipelines are aging and treatment facilities need repair.

"As supply lines become more strained, utilities around the world are going to be forced to raise rates and buy more equipment," said Jack Payne, chief investment officer at Michael Joyce & Associates.

Recently, his Richmond, Va., company started moving clients into PowerShares Water Resources. (PHO) "It's the only real way to get direct exposure to companies benefiting from supplying and producing fresh water around the world," said Payne. "It's an active, long-term bet on a sector that's just starting to become more in focus with investment managers."

Outperforms S&P 500

The ETF opened in December. It's up 19.5% vs. the S&P 500's 4.8% this year, through Tuesday.

"The early returns are nice, but there are some compelling fundamental reasons to be in this fund now," said Anthony Welch, a money manager at Sarasota Capital Management.

Parts of China and India face huge delivery and supply problems, he says. "Only 11% of India's households have access to piped water," said Welch. "By 2025, that number will more than quadruple."

As a result, India's water use should more than double. "Even in the U.S., which has nearly 100% access to clean water, a lot of the pipes in use are over 100 years old," said Welch, whose firm also invests in the ETF. "That's not too surprising considering this country is over 200 years old and about 700,000 water pipes run throughout the U.S. A lot of those are going to need replacing in coming years."

Based On Index

The fund is based on the 37-stock Palisades Water Index. Sectors are weighted according to long-term industry fundamentals by analysts at Dallas-based Water Tech Capital, the index's creator.

As of April 1, sector weightings were: utilities, 26.5%; treatment, 23%; infrastructure, 16.5%; analytical, 6%; resource management, 17%; and conglomerates, 11%.

Disclosure: I own shares of PHO.

Investing in Water – A Deeper Look at the ETF PHO

Trend: Well-targeted Exchange Traded Funds, such as PHO, can provide great investment vehicles for astute investors.

Russell Bailyn's Financial Planning Blog provides some insight into the water ETF PHO. He recommends investing in PHO, based on a long term, big pricture view. Excerpts below.

Link: Investing in Water? A Deeper Look into PHO.

The PowerShares Water Resources Portfolio (PHO) is up 17% so far in 2006, blasting past both broader market indexes and related sector indexes such as utilities, natural resources, and clean energy. In fact, the S&P 1500 Water Utilities Index rose 46% in 2005. Why the sudden interest in water? Let us explore news and statistics on the sector first and then discuss why PHO is the best way to play it.

PHO invests in environment-friendly companies such as the California Water Service Group (CWT) that both purify water and provide facilities and technology for water testing and inspection. They also look for companies that treat water for use in industrial processes. These companies do not operate exclusively in the West. China and the Middle East have a huge demand for pure water, both for industrial purposes and basic consumption. The ability to transport water greatly affects countries such as Israel, Jordan, and Lebanon where arid conditions make agriculture quite difficult. Finally, PHO recognizes the growing bottled water industry.

The PowerShares Portfolio is based on the Palisades Water Index, a quarterly rebalanced portfolio of 25 stocks created in 2003 by Elias Azrak of Hydrogen Ventures, LLC. The PowerShares Portfolio may vary it’s weighting on different stocks in the sector and maintains a 20% flexibility in straying from the sector when appropriate. Please note that while PHO is passive as compared to a mutual fund, the ETF tends to re-weight and switch holdings regularly with its rigorous rebalancing schedule. The intellidex system used by PowerShares tends to favor smaller capitalized stocks with aggressive growth rates rather than large-cap stocks.

Economists estimate $500 billion being spent in the next 25 years on research and infrastructure related to clean water initiatives. Another $100 billion is estimated for researching health concerns regarding pollutants which affect water and other natural resources.

via Seeking Alpha

Disclosure: I own shares in PHO.

Investing in Water

Trend: Clean, drinkable water will be in demand and scarce as populations increase and supplies get contaminated and/or depleted.

Jon Markman at MSN Money describes why water is a good long-term investment. Excerpts below.

Source: MSN Money - 20 stocks that are running on water

A brand-new exchange-traded fund designed to track the performance of water stocks, the PowerShares Water Resource Portfolio (PHO) -- which tracks the PowerShares Palisades Water Resource Index ($ZWI.X) -- is up a whopping 15% so far in 2006.

In January of last year, I explained in a column (“Invest in the coming global water shortage” ) that a key attraction of water as an investment is that demand is accelerating and is not affected by inflation, recession, interest rates or changing tastes. You can live without steel. You can live without oil. You can live without gold. But try living without water, and you won’t last too long.

The problem is not that the world is running out of water.... No, the problem is that drinkable surface water is increasingly polluted due to the urbanization of rural areas and industrial farming, particularly in the developing world and China. And all the while, there are simply a lot more people who want a sip.

The United Nations, which will celebrate World Water Day on March 22, reports that the consumption of water worldwide is doubling every two decades -- twice the rate of world population growth.

If you think world conflict over oil has been bad, wait until you see major fights over water rights.

The best way to play water is probably through the companies that supply pollution-control, purification, pipeline construction and irrigation-control products, though there’s nothing wrong with owning a couple of successful water utilities as well.

TI's Green Dream in Texas

Trend: In a high-energy cost era, green factories can cost less to build and maintain than traditional factories.

In a column titled A Green Dream in Texas, Thomas L. Friedman describes how Texas Instruments built a factory to be very efficient by applying green principles (excerpts below).

Link: The NY Times

The most impressive project I’ve seen is by Texas Instruments, which is building a “green” chip factory here in Richardson, near Dallas. T.I. is keeping 1,000 high-tech jobs in Texas by building its newest facility – to make wafers used in semiconductors – in a cost-saving, hyper-efficient green manner.

T.I. always wanted to keep its newest wafer factory near Dallas so it would be near its design center and ideas could flow back and forth. But China, Taiwan and Singapore were all tempting alternatives, offering low wages, subsidies and tax breaks. So the T.I. leadership laid down a challenge: T.I. could locate its new wafer factory in Richardson, if the T.I. design team and community leaders could find a way to build it for $180 million less than its last Dallas factory, erected in the late 1990’s. That would make its cost-per-wafer competitive with any overseas plant’s.

Although the T.I. engineers initially thought it impossible, they pulled it off. Previous chip factories had three floors because of the complicated cooling and manufacturing process involved in making wafers. The T.I. design team came up with a way to build the Richardson factory with just two floors – a huge savings in mass and energy. T.I. also contacted Amory Lovins, the green designer who heads the Rocky Mountain Institute, and asked him to help it design other parts of the plant in a way that would lower its resource consumption, which, over the life of a plant, can exceed construction outlays.

Together, T.I. engineers and Mr. Lovins’s team designed big water pipes with fewer elbows, which reduced friction loss and let them use smaller pumps that save energy. Various passive solar innovations were built in, including roofs that use a white reflective coating to reduce heat. These, together with innovations in how air is circulated, cooled and recovered naturally, reduced total heat so much that T.I. was able to get rid of one huge industrial air-conditioner. Almost all of the waste from the building construction is being recycled. The urinals are all waterless.

International Securities Exchange Launches New Water Index

Trend: The future of water as a scarce resource gets more recognition by the investing community.

The Pollution Prevention Resource Exchange (P2Rx) News had this link to a new water investment vehicle.

Link: Stevens Publishing Corporation International

The International Securities Exchange recently announced the launch of the ISE-B&S Water Index, a new sector index option and benchmark for this emerging industry. The index was developed with Boenning & Scattergood (B&S), one of the oldest independently operated securities firms headquartered in the Mid-Atlantic region.

The ISE-B&S Water Index was developed in response to growing interest in water as a scarce resource and comprises companies in the water infrastructure, filtration, distribution, purification and treatment industries. The index currently contains 20 stocks that trade in the U.S. market, including such notable domestic industry participants as Aqua America Inc. and Watts Water Technologies Inc., as well as international companies that trade as depositary receipts, such as Companhia de Saneamento Basico do Estado de Sao Paulo. The index is the basis for cash-settled index options, which listed and began trading Jan. 5 on ISE under the symbol HHO.

ISE's index methodologies for the sector indexes are rules-based, making the rules for calculating and maintaining the indexes freely available to everyone, and thus, easily used to test the historic performance of the indexes.

Additional information about these indexes, including methodology guides, component lists and weightings, performance metrics and historical data is available on ISE's website, www.iseoptions.com, on the Products Traded / Index Options page.