The Rude Awakening
Berlin, Germany
Friday, August 10, 2007 ------------------------- ------------------------- From Joel Bowman in Berlin, Germany… -387, -44, -56: Yesterday's closing numbers for the Dow, NASDAQ and S&P, respectively. The market action of late reads like a manual for catwalk models: Binge then purge…repeat as necessary.
"The credit derivatives market globally has increased form something like $1 trillion dollars in notional values five years ago, to something like $34 trillion currently," observed Eric in yesterday's Rude Awakening. We'd call that a binge. Yesterday, the bulimic Dow skinnied-up to the tune of 2.83% of her total weight. Not wishing to be outdone, the S&P dropped 2.96%. The sell off was triggered by news from BNP Paribis that it would freeze three funds that invested in U.S. subprime mortgages. Attempts by the European Central Bank and the Federal Reserve to reassure investors only worsened the problem. The ECB provided overnight loans of some 130 billion to help ease the pressure and the Fed kicked in with a "larger-than-normal" $24 billion in temporary reserves to the U.S. banking system. Investors interpreted the moves as siren sounds and continued their selling with renewed vigor. So how does one survive a market that seems to be making a habit out of posting triple-digit swings? In the column below, Eric offers a few words of caution for wary investors operating in these turbulent markets and investigates one asset class that may provide a little calm from the storm. If you missed part one of this transcript, you can read it here: Splashdance - By Eric J. Fry Enjoy… --- Protect Your Wealth - The Survival Report --- WARNING! Brace yourself for the most shocking money implosion of the last 76 years, as a "Second Wave of Housing Hurt" crashes down… Thought you were "done" with the property bust? Think again -- then get ready as a whole "second wave" of falling prices sparks the worst property-led recession of the last 76 years! The following triple-edged "housing hedge" strategy could shelter both you and your money, IF you let me rush it to you FREE as soon as possible…Protect Your Wealth Here. -------------------------------------------------- Splashdance, Part II
By Eric J. Fry Even in the midst of a booming commodities market, water is still an overlooked resource. It is a thing that seems ubiquitous in the wealthy West. But clean water is not ubiquitous - nor in the West or in the East. This reality will make money for somebody. In fact, it already has. Water utilities have been outperforming the S&P 500 for more than a decade. More recently, the Palisades Water Index has produced twice the return of the S&P 500 since 2003. So it would be easy to assume that water stocks are overdone. But I don't think so. On the other hand, maybe today is not really a great entry point…especially if the overall stock market continues to take a header. But I am looking at an opportunity that I believe will endure beyond 2007. So it's an area that you, at least, want to begin to examine and begin to invest in. And I'll say this about the water sector in relation to other kinds of sectors: It's a sector in which opportunities are increasing and certain. And you don't get those opportunities every day in the financial markets. 
There are really two opportunities in water: global and domestic. The global opportunity stems from traditional grim statistics like these: Half of all hospital beds in the world are occupied by someone suffering form a water related disease. During WWII one combatant died every five seconds. Today, contaminated water kills one human being every 3.5 seconds. 80% of the world's population lacks access to running water. Half of China's water is contaminated. China has the highest liver and stomach cancer rates in the world, directly related to consumption of water. I have a little chart here that presents a few statistics about the odds of dying from various kinds of diseases or causes. Water-related diseases are third on the list. One in twenty human beings will die from a water-related disease. 
The only other two causes of death that I would mention are at the bottom of the list. The odds are one 62,000 that you will die for legal execution….one in 79,000 for lightning. I thought that was kind of remarkable. The odds of getting scorched by Man are higher than getting scorched by God. A recent World Health Organization report from just last year states that five million children under the age of five die from water-related diseases every year. This chilling fact is one of the reasons that perhaps this opportunity clouds my judgment just a little bit. Here's why: A water-related disease is, by definition, preventable. It is technologically preventable. We can't prevent heart disease; we can't prevent cancer; we can't cure these things. We can make them better, easier, less
fatal, but we can't avoid them. We can't eliminate them via our technology. But we can eliminate water-related deaths, just from what we know already.
Tragically, the horrific annual death toll of children in poor foreign countries has never produced much of a profit opportunity. Children don't make money. And poor countries don't make very attractive customers. Without a profit motive, therefore, the tragedy persists. This problem has always been with us and it's not going to go away quickly. But this age-old story may finally be changing. What's changing is that the life-threatening aspect of water-related disease has become an enormous economic issue for probably the first time in modern history, certainly the first time in very modern history. In China for example, some economists estimate that water-related problems are trimming 1% a year from GDP. Polluted water is costing hundreds of billions of dollars in health-related issues, in worker downtime and in lost productivity. And the problem is becoming worse, which is why the Chinese government has been ramping geometrically its spending on water purification and water infrastructure. In the US, we have a different issue and opportunity: Infrastructure (which Chris Mayer has discussed at length in his investment service, Mayer's Special Situations). By 2020 about half of America's water pipes will have outlived their estimated useful lives. There is no national game plan to address this problem. But there are companies that will be providing the pipes, as they give way - or as they blow up…in the case of New York. But even here in the US, we have water-shortage issues that few people are really focusing on. The Ogallala Aquifer in the Midwest has been dropping, and we have severe water shortages out in the West and Southwest. That means higher prices for water. The pricing of water rights in the Middle Rio Grande offers a perfect example of the profit side of the water-shortage story. Water rights that were selling for $1,000 per acre foot in 1993 are up around $5,000 today, on average. But water values can vary dramatically. One company in Nevada just sold some water for $40,000 an acre foot up near Reno. Here in the US, water efficiency is more of an issue than water scarcity. That's because we use lots of water. Now there's nothing innately immoral or bad or awful about any of this. It's just a fact that as nations become richer, they consume more water. Americans use about 150 gallons of water per day per capita. The Chinese use 23 (gallons of water per day per capita). Our diet explains part of the difference. We are a meat-consuming country. Newsweek once observed that the water that goes into a 1000-pound steer would float a Navy destroyer. There's a lot of water that goes into meat production. And because of statistics like that, as China moves toward American levels of meat-consumption, China's demand for water will increase even more. These trends that I've identified - both overseas and here at home - demonstrate why Fortune Magazine declared, "Water promises to be to the 21st century what oil was to the 20th century: the precious commodity that determines the wealth of nations." And as I've declared many times in the Rude Awakening, "Water might also be the precious commodity that determines the wealth of portfolios." One final comment: in the context of the risky stock market in which we must operate, I want to provide quotes from two American CEOs about how we should address these risks. The first comes from Chuck Prince: CEO of Citigroup. He says, "The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point the disruptive event will become so significant that instead of liquidity filling in it will go the other way. When the music stops in terms of liquidity, things will get complicated, but as long as the music is playing, you've got to get up and dance." I think that's a long-winded way of saying, "We have no clue." And having no clue is dangerous, hence the words of another American CEO, Warren Buffet: "Risk comes from not knowing what you're doing." So start treading in the water sector. But tread lightly for now. [Joel's Note: While the markets are making a habit of triple digit swings, Chris Mayer is in the habit of recommending fundamentally sound, long-term investments, like water. Yesterday, while the markets were crashing all around, Chris issued an alert to his readers: "Sell Lindsay for a 100% Gain." If you'd prefer to steer clear of frothy, speculative stocks and ground your portfolio with some solid, fundamentally sound companies, Chris Mayer's approach to investing will be of great interest to you. Read his latest report here: Mayer's Special Situations ---------------------------------------------- Rude Endnote: Be sure to check in with our Baltimore desk around lunchtime today. There's plenty of action in the markets right now and today's 5 will have plenty to say about it all. Cheers, Joel Bowman
Rude Awakening aussiejoel@the-rude-awakening.com | 
