The "There are not making it any more water" Scam

An unbeatable argument used in the historic Florida land (swamp) sales scam in the thirties was "They are not making any more land". Therefore, it was implied, price can only go up. The same argument is now being used for selling water mutual funds. Obviously, it is a scam.

Let see how it is done.

MSN published an article titled: "Fresh water’s getting scarce, and it has no substitutes. For investors in companies that can supply our increasingly thirsty planet, that spells opportunity.By Jon D. Markman

"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. "

Up to here, it is all wrong. May I say - the author intends to confuse the reader. There is no absolute water scarcity. Anywhere. The problem may be drinking water, but that can be and is being made all the time by reverse osmosis and it costs only 0.5 US$/cu.m. (0.0005 $ per liter). Let continue to see if something merits consideration:

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 water’s 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.

(Well, this is true. You always have to say something true to sell your lie.)

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.

(The continuation is another big chunk of hyperbole of the global, existencial need for water. Which is totally irrelevant to the subject - water utilities companies. )

In a moment, I’ll offer a couple of potentially more impactful ways to invest in water, but first let’s look a little more broadly at world demand.Aquifers in India are being sucked dryThe tsunami has focused attention on water demand in South Asia -- and it’s 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 world’s 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."

(After a long rethorical fly in a totally irrelevant part of the sky, the author lands on Earth: the plodding uninteresting water utility stocks).

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.

(Well, we will have to wait to see the vibrant consolidation. In the meamwhile, they are plodding ahead. Now the author points out some individual companies related to the water industry. Some of them are interesting, some of them not, but I would not say they are specifically water stocks. They are general fluid control industries. Good, solid, established, conventional companies. Nothing special).

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 othe benefit to water investing: When these companies say they’re going to do a dilutive deal, it’s not something to worry about. "

( Oh, how gullible he thinks we are?? 355% in 5 years? It is indeed very attractive. But it is a scam. I could go and select 10 stocks in any industry that went up 355% in the last 5 years. It is easy, since it is a selection based on past performance. What I cannot do and neither the author is to select 10 firms in the water industry that will go up even 50% in the coming years. It is much more difficult to predict the future than the past...)

Now the nice part: PrintDickerson 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. . . .

(The article is a strange mix of fashionable ecological rethorical bla bla about the worldwide crisis of water, which God stopped making a time ago, and how the Chinese, the Indians, and the Africans are suffering ... and some comments on the real plodding regulated water utilities industry. And it ends in recommending some solid, conventional, fluid mechanics companies, whose relation to the water industry is marginal at best. It is like talking half an hour about the terrible famine in Niger and how important food is, and recommending some stock like Caterpillar, which only a totally ignorant person may imagine profiting from African famines. Truth seems to be that there is no water industry to be invested in, at least, at this moment in history. )

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Post Scriptum: I searched who the guru Dickerson was and it appears that he is the owner of Summit Investment. His investment credo is extremely conventional and conservative - and I like it very much. His website proclaims:

"We are more business appraisers than stock analysts, scrutinizing the fundamental characteristics of a company - balance sheet, market value of assets and liabilities, potential catalysts - to determine its true value. We only invest if we can identify an exploitable difference between the market price of a company's securities and the amount a well-informed, discriminating businessperson would realistically pay for the entire enterprise. We will not invest at the appraised value, only at a significant discount."
- John I. Dickerson, President

Summit stands apart from the confusing universe of advisory firms mislabeled as "value" investors simply because the securities they purchase are relatively cheap within a given industry. These firms are dependent on inherently unreliable estimates, including future earnings and the direction of entire industries, while their purchases are often overvalued by more objective analysis. Conversely, Summit's disciplined Discount to Appraised Value approach - refined through years of careful investing - remains faithful to the principles of value as originally set forth by Benjamin Graham and David Dodd in the 1934 classic Security Analysis. Summit finds value in a company when the market price of its securities is appreciably less than the intrinsic value of the operation as a whole. We identify these anomalies in U.S. and global financial markets through intensive proprietary research, advanced analytical tools, direct management communication and an extensive network of like-minded contacts. Our methodology often leads to small and medium-sized companies, which tend to receive little research attention from Wall Street and are usually undiscovered, unpopular or misunderstood. Summit builds client portfolios from the bottom up, one company at a time, carefully acquiring shares in the open market at prices that meet our Discount to Appraised Value criteria. We are an active management team, searching for (or helping to create) catalysts that may unlock unrealized values, but we are not over-active, often holding stocks for several years rather than risking our clients' futures trying to time the market. While providing significant upside potential, the greatest strength of our Discount to Appraised Value technique is that it promotes our goal of minimizing risk in every market environment. When a popular company enjoying high expectations falters, the damage to its stock is immediate and severe. Our approach generally leads us to companies with low investor expectations and depressed stock prices, which means negative developments cause little further price decline while positive events promise substantial reward.

Well, I could sign that. Hard work in the less researched universe of companies, special situations maybe, that is what I try to do. I presume Mr Dickerson was misused in this imbecile article on water. He probably was unaware that he was being quoted in the context of worldwide water scarcity environmental context.

The Stars Fund managed by Certified Astrologists

I shall do something no one has thought of before - an investment fund based on astrological advice. All the papers carry horoscopes and many manage their affairs with one eye on the stars. Heavens definitely rule the stock market, as they do everything else. Stock picking on the basis of how Jupiter is aligned with Saturn will yield equal or better results than indexing. Or those countless funds managed on ethical, ecological or green foundations, or political correctness (such as the Anglican Church's fund) or other esoteric guidelines.

A fund based on this idea will be automatically attacked and ridiculed in the media, it will attract controversy, and of course, some people will be tempted to try it. Most of the money is in the hands of aging widows who do believe in these things, they may buy the fund. Israel is full of smooth-talking TV astrologers and eytzes-gebbers (givers of advice in yiddish), some of them quite famous. I shall hire them as strategy advisors.

Mercury (the god of money and thiefs) is in ascent. My fund will be a sensation.

And that's not all folks. It is written in the Bible that the Pharaoh had strange dreams which were interpreted by Joseph, making the Pharaoh (and Joseph) owners of everything in Egypt including its inhabitants. That demonstrates that it can be done and it can be repeated. Give me your dream and I shall lucidly turn it into an investable financial instrument. My guide will be the Zohar, foundation of the Kabbalah, which in fact is a coded financial success self-help manual. Through the ages, Christians always suspected thus much. I shall show the truth of it and make it work for my investors, regardless of religion.

These funds will be no less sound than the PKN Aqua Plus Fund.

PKN Plus Aqua Fund Concept

A new mutual fund is being offered in Israel: the PKN Plus Aqua Fund, that will specialize in utility companies investment all over the world. The fund proposes to capitalize in the "vital" element, which is - to use their cliche - the oil resource of the future. Israel will be, so say many, the Saudi Arabia of the water business. The idea is that water is more precious than oil and investing a dollar in the fund will make one rich, fabulously rich, like a Saudi prince.

As a selling point, the fund may attract the money of fools, a specie in no imminent danger of extintion in Israel. The concept is based on iron logic: you can drink water but not oil, water is very scarce and getting scarcer (just read the papers), water companies will strike it rich, give your money to PKN to invest it for you in this invaluable, precious resource.

Before you dear reader are tempted to buy the new financial instrument, lets think what in fact offers this shiny new fund. Are the financial papers full of articles on water related stocks whose price is skyrocketing? Are water infrastructure related firms making lots of money and yielding big fat dividends? Are infrastructure related companies growing faster than the general economy? Is it a field where a technological revolution is taking place, creating new opportunities?

The answer, you will agree, is that nothing is happening in the water related field. In fact, it is difficult even to find a stock exposed to the water industry.

PKN will not specify in which stocks it is planning to invest the monies. There are two categories of water stocks: (1) managing firms operating a public utility or service, generally contracted by a municipal authority, (2) engineering companies building water infrastructure, generally for municipal or state authorities, or in the Third World, for the World Bank or the Interamerican Development Bank.

In Israel, water utilities were programmed to be privatized and 3 or 4 municipalities did in fact create water companies that took over the municipal water department. Rishon Le Zion, Petach Tikva, Natania transferred the municipal infrastructure to these new frameworks, with the idea that private companies are by definition more efficient and they are bankable (they can raise money in the Stock Exchange or to sell bonds to the public). Several financial organizations tried to get into the new business, such as Gaon Agriculture, but with the years it became evident that actually there was no much business to do.

Since the Infrastructure Ministry became a fief of the Labor Party, the process of privatization of water infrastructures (and of electricity and so on) was put into suspended animation. The next Minister of National Infrastructures within the new coalition is the very same old Minister, Fuad. fat gnome of a person, big red cheeks and all the hair painted black. He walked from his native Iraq to then Palestine and lead the evacuation of the Iraqi Jewish community in early fifties. I recognize his merits, but I dont like him. I happen to know him personally since his office was across the corridor and with the paper walls favoured by modern office science, I overheard most of his phone conversations and those of his two ugly fat old and specially relevant, loud and vulgar secretaries. I also met him in the Labor Party.

(The highest salaries in Israel are drawn by employees of the Electricity Corporation, followed by those of Mekorot, the National Water Corporation. I heard personally Fuad assuring the vaadot - workers commissions - that he will never privatize any state company. And that is why he is and will be the minister.)

In summary, I see no opportunities to invest in this area in Israel.

Another possible investment area is the kablanim - the contractors who actually build roads, water carriers, wastewater plants. Most of them are small family business, and only a few are in the Stock Market. Menrav, a contracting company, built the Beer Sheba wastewater plant, and its main sewage lines. Elco is a mechanical contracting firm, supplying mechanical equipment and mounting them. Tambour builds wastewater treatment plants. In general, the specifically water, wastewater and other infrastructure business in Israel is too small to maintain specialized firms, and these contractors are general contractors. All of them are looking for contracts in foreign countries, such as Romania, Hungary and Russia, as in Israel there is very hard competition and they lose money in many projects. They are also very risky investments, since they have no solid local basis but follow the ups and downs of Israel's construction sector.

Where is this new fund going to invest its money? I dont see much potential. And no one is getting rich in this field. The Aqua fund seems more a publicity gimmick, to attract the public's savings with a new concept.

I think the public will buy the new product, since the Government always says that they are going to carry out grandiose plans of investment in infrastructure. (As a former insider, I can attest that this intention is always real and sincere, but the bureaucracy is unable to spend all the budgets the Otzar puts to its disposition. Israel has very good infrastructure and there are no new projects that make economic sense, at least not in the water sector. In fact, the bottleneck for Israel´s infrastructure is the scarcity of projects that make economic sense, and the lack of bureaucratic capability to formulate, organize the public bidding and supervise projects. Every infrastructure project in Israel is at one point stopped by litigation. And as Alex Wiznitzer - currently head of the National Road Company - said, there are not enough engineers in Israel to take care of the design and supervision! Yes, engineers should be paid more since we are so precious. I love Alex!).

The concept has to be attractive to the gullible public, and not necessarily investable or profitable. We were not born yesterday and are aware that PKN makes its money managing the fund buyer's money (taking some 2-3% annual management fee and the spread between selling and buying price of the fund, as well as other ways of profiting from the capital under its management) and not from making money for the fund buyers. For that purpose, to get the people to give their money to them to manage, Aqua Plus is a great concept.

It may not even be the worst of all the funds Israelis can and do buy.

Wasser- und Luftgescheften

Periodically, some self-proclaimed guru advices people to invest in the new gold, in the new oil - water. Always the same arguments, always the same golden pot awaiting the wise and virtuous somewhere in the rosy future. I have yet to see one who got rich on water. On the contrary, Vivendi - a French state corporation founded just to capitalize on the water illusion - abandoned all its water business including signed contracts in Argentina, Bolivia and everywhere. Of course, after losing undisclosedly fabolous amounts of money and time.

The most recent idiot says in Yahoo:

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.

If anyone is reading this blog, please dont invest in water. It's just air.

There some specialized water related specialities that make money. Bottled water for consumption. Very pure water for washing microprocessors and diluting vaccines. The most promising may be the Holy Water sold by Bubba Sally - a convicted swindler that served time and decided to grow a beard and buy a white robe, and set up a prospering Saint & Holy Rabbi business in the desert township of Netivot, Israel, selling a powerful miracle water in small bottles.

Parking lot over the Bilu River

I received an assignment (not yet signed) of designing a parking lot ... on a river. The river borders a large supermarket located in a busy roadcross, which has no place for the supply trucks to turn around nor for the clients to park their cars. The idea is to entomb the river in a structure for 150 meters and over it, create parking space. Also the other riverbank could be added as parking potential, and the local authority did agree for a monthly rent.

I proposed to leave parts of the river without cover, to save money but also to leave a breathing space to nature. I am so busy that I had no time to formulate a written proposal and a draft contract.

The Desalination Scene - Follow Up

Sabar Plotzker interviewed Yossi Rozen, the manager of Israel Chemical Industries. He received options three years ago at 4.25 shekel and these days he sold it at 18.00, making 24 million shekel profit. He deserves it. ICI is part of the Israel Corporation, created by Shaul Eizenberg and owned today by the Ofer Brothers. From the start, Shaul Eizenberg had its aim on the Chinese market, where he had excellent contacts, being one of the planners of its current industrial development. Another firm of the Company is Israel's large water desalination project in Ashdod, and Rozen shows he had invested a large amount of original thinking in this area.

He thinks that Treasure's Wonder Boys were wrong from the beginning, because they opposed desalination on the basis that the solution to Israel's water scarcity was freeing the water market. In effect, more than half of the water is consumed by the agricultural sector, which receives the water at subsidized prices. Freeing the price would have rised its price to the level where demand and supply are balanced. That would have meant the end of Israeli irrigation with drinking water and a dramatic restructuring of the agricultural sector. Rozen thinks this approach was wrong and desalination should have been started long before it actually was.

My opinion is that the liberal, capitalist, free market approach of the Treasure was basically right, but impossible to implement. Israel's strong anti-market forces would not have allowed it. The Treasury even failed to break up and privatize Mekorot, the Water Company. The Electric Company is stonger than ever, having elevated his champion Amir Peretz to President of the Labor Party and the junior partner of Ehud Olmert's government. The agriculture lobby is even stronger. So water desalination was inevitable, and possibly an indirect way to introduce competition in the water market.

Rozen, who is in the fertilizer business but knows a lot about China, has strong opinions about the water industry. He thinks that Israeli water technology is in great demand, specifically in China, as this country is having growing supply problems. He is thinking of taking the Israeli desalination experience to conquer the Chinese market. I have been 5 times to China as Israeli water expert, and yes, no doubt that we are wanted and there is a very great potential. The Chinese people are friendly and there is "click" between them and us. As for me, I did fail to catch this opportunity, as I always do, after having invested time and effort and having reached a point where I was actually in business. I even rejected the Kaifeng factory's contract we have signed of employment. I have no name for this ugly behaviour, I frequently do it with girls, making them believe that I am hot and invest in courting them, but becoming indifferent when they are coming around and willing.

Regarding Rozen, he has adopted the Teva model, trying to buy up foreign business and becoming an international corporation. Israel Chemicals has the cash to do so, we will see if they have the business talent of Eli Horowitz and Israel Makov.

No one will do my thinking for me

That is my conclusion after the last four months of freelance activity in the Israeli water field, as well in the TASE (Tel Aviv Stock Exchange). I have to think about defining the project before accepting it and ensuring that I am going to be paid. In the financial area, my own ideas proved to be very good and profitable, but following the lead of the analysts was a disaster. So, my investment in Solomon Investment House based on an analyst evaluarion, resulted in a 14% loss. Machteshim Industries, recommended by all the analysts, has not given any fruit. There is no substitute for thinking for oneself.