Thursday, September 17, 2009

The World's Most Precious Resource

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Rude Awakening

The Rude Awakening

Baltimore, Maryland

Wednesday, September 16, 2009


* Two aqua companies to help buoy your portfolio,

* A behind the scenes peek at investing in Asia and the Mid East,

* You call THAT newsworthy?! And plenty more...


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Joel Bowman, switching it up a bit from Taipei, Taiwan...

We wrote an entire introduction for today's column but, on closer inspection, it is not nearly important enough to precede it (as introductions are generally supposed to do).'ll find our own, somewhat ranting notes below but, as a priority, here's what Chris Mayer, the mind behind the Mayer's Special Situations and Capital & Crisis investment letters, has to say about some things of much greater magnitude and relevance. Please enjoy...

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The World's Most Precious Resource
By Chris Mayer

Yesterday, I met with Ben Simpfendorfer, who is chief China economist for the Royal Bank of Scotland. He works out of Hong Kong, but is in the U.S. on business. We struck up a correspondence a few months ago after I read his book The New Silk Road (which I heartily recommend). We soon learned we are kindred spirits on a lot of what is happening around the world, and I was glad to finally meet him in person.

Simpfendorfer's book highlights the growth of trade between China and the Arab world, a point I've also tried to show in my newsletters. It's important for several reasons, not least because volumes are starting to become significant. They are also growing exponentially. For instance, a decade ago, Chinese exports to the Middle East totaled $4 billion. Today, they total more than $60 billion.

There are all kinds of investment implications from this shift in trade, which I've tried sorting out in these pages and in Capital & Crisis. The non-U.S.-centric trading models will affect the value of the dollar and commodities and more. Simpfendorfer talked about some of this over lunch.

If you've read this publication for any length of time, you know one of the critical issues is water. This is still not widely appreciated. But Simpfendorfer, who has traveled extensively throughout the Middle East and China -- and speaks Mandarin and Arabic ("Yes, I have no free time," he says) -- will tell you it's a "huge problem."

In fact, when we talked about the state of the U.S. economy, Simpfendorfer ventured that water might be what keeps the U.S. on top for decades yet:

"The Silk Road has an average of 2,260 cubic meters of internal renewable water per person. The equivalent figure is 9,300 in the United States. In fact, an abundance of water is an important, but often overlooked, reason why the United States might defy its critics and remain the world's major power through the end of this century."

Conversely, when you look at the new Silk Road -- an area that covers North Africa, the Middle East and Asia -- water is what could "bring the region to its knees," as Simpfendorfer says.

We talked about how water was crucial to nearly everything -- and not just for drinking. You need water to run factories and to make textiles and consumer goods of all kinds.

This week, there were many warnings in the headlines that the water crisis is worsening. Simpfendorfer talked about Syria and how a quarter of a million farmers had to abandon their land due to drought. It's worse in Iraq, where water flows have fallen by two- thirds. Lack of water, Simpfendorfer offered, might do more harm to the rebuilding effort in Iraq than Islamic extremists.

You probably saw the headlines about Mexico. It's experiencing its worst drought in half a century. Mexico City is close to running out of water and Mexican farmers will likely report crop losses of over $1 billion.

According to the LA Times:

"Hard hit have been corn, beans, barley and sorghum, plus livestock. Farmers and officials say the impact, including lost earnings, unpaid debts and shortages of staple foods, could be felt well into next year.

"'Although no one wants to recognize it, there is a food crisis,' said Cruz Lopez Aguilar, president of a national federation representing rural dwellers. He and others say increasing imports to make up for lost crops could raise food costs."

Mexico is not alone. Kenya, Argentina, Australia, India, and other places have suffered drought this year. The problems are deeper than drought, but drought does magnify the weaknesses in the world's water systems.

As an investment theme, it means companies that help alleviate water stress, manage water resources more efficiently or even own water resources outright, should grow in value over time.

Over the weekend, Barron's published a favorable piece on Nalco (NLC:nyse), a stock I recommended several months ago to the subscribers of Mayer's Special Situations. Nalco is the world's largest water treatment company. According to Barron's, "It is about three times the size of GE, its biggest competitor."

The company has many solutions. One highlighted by Barron's is 3D Trasar Boiler technology, which saves water and energy and also reduces emissions. Nalco is also just starting to crack the growing markets along the New Silk Road:

"This year, Nalco has added 80 people in China and India, and recently hired a well-known Chinese ex-diplomat to lead Nalco's thrust there. The company has established a research center in Nanjing to develop products for Asia. With its huge infrastructure, polluted water systems and heavy dependence on coal-fired energy, China is a perfect prospect for Nalco's anti-pollution services and equipment."

Nalco has dramatically outperformed the S&P 500 Index since I first recommended the stock. Also interesting to note, Berkshire Hathaway owns 6.5% of the company and is its largest shareholder. Nalco won't double or triple overnight, but it ought to remain a rewarding investment over the years.

During our lunch, Simpfendorfer talked about Hyflux (HYFXF:pink sheets), a diversified Singaporean water company. He met with the company and believes it is in a great position to prosper from the water troubles along the New Silk Road.

As for China, specifically, you might wonder what Simpfendorfer's views are given that there is much debate right now about China's economy. He said the next five years or so "would be very difficult," but he did not expect China to collapse. This is very important, because if China does collapse, it would devastate commodity markets. Yet even modest growth in China could buoy commodity prices for years.

Joel's Note: Keeping in step with his general value theme here, Chris has just released his latest research report. In it, he details one investment rather "off the radar" for most investors...but one that could make quite the splash in coming months and years. For the full briefing, click here.

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[Rude Endnote: From above...

"Is Society Getting Ruder?" – a headline yesterday caught your editor's eye. Against our better judgment, we allowed our usually- rational self to suffered a glimmer of hope...

Day in and day out we toil, trying to bring our readers honest stories about trends that will have direct consequences on all of our lives. We make the occasional tipo, sure, but we feel we do an honest job as best we can.

And now… "Could it be?" we thought...hoped...almost prayed... "Could someone in the mainstream have stumbled across our humble Rude Awakening pages? Is a new age of reason, observation and occasional irreverence upon us?"

No...Not even close. "Well good!" we shout. "We didn't want you anyway!"

The story under the headline had nothing at all to do with false recovery hopes...or fraudulent government statistics...or corporate scandal... It was about three bozos who, smack bang in the middle of the greatest financial heist in history, managed to distract an entire nation from anything and everything that actually matters.

We won't give them any additional press here...except to point out the absurdity of such a vast media sideshow, especially now. Not to be the wet blanket here, but the United States is suffering under a debt load so burdensome that, in the very near future, the nation's entire budget will not be sufficient to pay the interest on it. American consumers, the "backbone" of a consumptive global economy, are not consuming...they are choking under stifling regulations and the persistent erosion of their personal liberties. Millions of people are unemployed or working fewer hours, for less pay, just to keep their heads above water. And, with its foot firmly on their heads, governments around the world are goosing their GDP figures (a spurious measure of economic wellness to begin with) with heretofore-unimagined levels of fraudulent spending in order to pull off the largest, most abominable scam ever perpetrated.

And, right when everyone should be paying the most attention, every major media outlet in the country get their knickers in a knot because an egomaniac with a bone to pick about a music video prances onto a television stage to ruin a poor starlet's night?

Too bad for her, yes. But more than that, too bad for America.

Is this really what passes as "newsworthy" today? Do we really need a parade of etiquette experts to give us their opinion on what constitutes a social faux pas? Is it desperately important that three "impolite" remarks were made for, gulp, television audiences to witness?

We offer a moment of silence, Rude reader, not for the loss of "manners" in the U.S., but for, as far as we can tell, a loss of perspective and priority. Hopefully it's only temporary.

We'll be back tomorrow with more Rude views.

Until then...


Joel Bowman

The Rude Awakening

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