Is there anything more annoying than perpetual scolds being right? They don't have to say "I told you so" -- it is implied by their beatific smirks.
However, if I look backward across the landscape of the past 45 years, I can see a number of areas where the sky-is-falling crowd was right. These include energy consumption, which I first recall reading about in the mid-1960s; carbon dioxide, which I can recall reading about in
Foreign Affairs in 1974; and the impending fiscal tsunami of unfunded government entitlement liabilities such as Social Security and Medicare, also the mid-1960s.
Today's subject, water and its relationship to energy production, also extends back to the early 1970s.
The only solace I can take is that the scolds' timing has been and remains bad. If you are decades early in warning about a problem, no one is going to take you and your jeremiads very seriously after a while. This has happened in recent market debacles such as the tech bubble and bust, and we saw this again with everything we have seen in the past year related to the unwinding of the credit bubble.
Doing Well and Doing Good
Before we launch into water, let's mock the world's do-gooders out of force of habit. We can look at the total return of the Mutuals.com Vice Fund, which goes out of its way to invest in tobacco, alcohol, gambling and military-related issues, and compare it with the returns for the Domini Social Equity fund, which invests in "socially responsible" firms, whatever those are.
The relative performance of the funds against each other and against the
S&P 500 total return index is no contest. Since money is not everything, may I suggest buying the Vice fund, shorting the Social Equity fund and donating the net profits to a charity of your choice? A win-win-win proposition it would be.
Cleanliness Is Next to Godliness
Whenever a topic becomes hot, count on financial marketers to create investable indices, funds, ETFs and all other manner of products to separate you from your money, in service to a higher cause. Standard & Poor's has taken time out of its busy schedule of slapping AAA ratings on all manner of feculent ooze to create both a Clean Energy Index and a Global Eco Index.
The composition of the two indices is displayed below, with overlaps in boldface. As many of the holdings are domiciled outside of the U.S. and in currencies other than the dollar, we will rely on S&P's calculation of their total returns in dollar terms.
| The S&P Clean Energy Index |
The S&P Global Eco Index |
| Acciona SA |
Aguas de Barcelona SA (Sociedad general de) |
| Archer-Daniels-Midland |
Allied Waste Industries |
| Babcock & Brown Wind Partners Group |
Archer-Daniels-Midland |
| Cemig-PN (Companhia Energetica de Minas Gerais SA) (ADR) |
China Grand Forestry Resources |
| Conergy AG |
Copel -PNB (Companhia Paranaense de Energia SA) (ADR) |
| Copel -PNB (Companhia Paranaense de Energia SA) (ADR) |
Covanta Holding Corp |
| Cosan Ltd |
EDF Energies Nouvelles SA |
| Covanta Holding Corp |
First Solar Inc |
| EDF Energies Nouvelles SA |
Gamesa Corp Tecnologica SA |
| Energy Conversion Devices |
Geberit AG |
| Ersol Solar Energy AG |
Iberdrola S.A. |
| Evergreen Solar Inc |
Itron, Inc. |
| First Solar Inc |
Kurita Water Industries Ltd |
| Fuelcell Energy Inc |
Nalco Holdings Inc |
| Gamesa Corp Tecnologica SA |
Ormat Technologies Inc |
| Iberdrola S.A. |
Pentair Inc. |
| JA Solar Holdings Co Ltd |
Plum Creek Timber Co. |
| LDK Solar Co. Ltd |
Q-Cells AG |
| MEMC Electronic Materials |
Rayonier Inc. |
| Ormat Technologies Inc |
Renewable Energy Corporation AS |
| Q-Cells AG |
Republic Services |
| Renewable Energy Corporation AS |
Severn Trent |
| Solarworld AG |
Sino-Forest Corporation |
| Sunpower Corp. |
Suez SA |
| Suntech Power Holdings |
United Utilities Plc |
| Theolia |
Veolia Environnement |
| Trina Solar Ltd. |
Vestas Wind Systems A/S |
| VeraSun Energy Corp |
Waste Connections |
| Vestas Wind Systems A/S |
Waste Management Inc. |
| Yingli Green Energy Holdings- ADR |
Weyerhaeuser Corp. |
The relative performance of these two indices against a global benchmark, the Morgan Stanley Capital International World Free Index, is a testament to the willingness of investors to fund wind, solar and biofuel technologies. The relative performance of the Clean Energy Index is a hare; that of the Global Eco Index a tortoise.
The Crude Oil Connection
What drives the Clean Energy Index? Why, dirty energy, of course. If we map the relative performance of the Clean Energy Index against crude oil, we find that the stocks lead the commodity by three months on average. If this pattern holds, we should expect last week's weakness in crude oil to continue for another two months.
The reason for this relationship is simple and brutal: Suppliers of alternative energy resources will capture the rent of higher crude oil prices. As crude oil sailed to and through $110 per barrel, any manner of alternative energy scheme looked profitable. However, as the suppliers capture the rent, the marginal BTU of conventional energy will remain cheaper than the marginal BTU of alternative energy; for this to be otherwise, the laws of thermodynamics would have to become inoperative at your convenience, and this is unlikely to happen in any of our lifetimes.
If crude oil prices continue lower -- and I still believe we are in a long-term bull market -- alternative energy sources would become uneconomic rather quickly. All those oil-shale boondoggles of the 1970s closed very quickly once crude oil prices fell in the 1980s.
Water Utilities
If the hare is propelled by crude oil, what propels the tortoise? Water, or at least water utilities. The relative performance of the Global Eco Index is matched very closely by one class of its constituents: water utilities. This is a simple theme; the multifactor Global Eco Index is not.
If we map the relative performance of the Bloomberg Water Index to the Bloomberg Global Index against the relative performance of the Global Eco Index, we see that they are essentially the same trade.
The water index is quite international; more than half of its weight is in France's Veolia Environment and the U.K.'s United Utilities. Other members include the U.K.'s Severn Trent, Spain's Sociedad General de Aguas de Barcelona, Brazil's Cia de Saneamento Basico, China's Shanghai Municipal Raw Water, Germany's Gelsenwasser and the U.S.'
Aqua America
(WTR)
.
As we move forward, we will find that the infrastructure for agriculture, energy production and urban growth all will depend on moving huge quantities of high-bulk, low-priced water. As was once the case with natural gas, the value in water is in the transportation and delivery, not in the commodity itself. But is there a more basic irreplaceable resource or a better "Warren Buffett" commodity, one with a steady market and repeat customers, than water?
All of those energy projects, from shale to oil sands to ethanol to coal liquefaction, depend on water. Increasing food supplies depend on water. The increasingly parched U.S. Southwest depends on water. Forget social investing without a purpose. Here's a case where you can do some good for the world and for your portfolio at the same time.
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