The Rude Awakening
Wall Street, New York
Wednesday, September 27, 2006 ------------------------- - Record high temperatures, record low water levels,
- Three well-situated stocks to capture profits as the
nation runs dry,
- Paris and Laguna Beach battle it out for cultural
superiority, plenty of green for the week so far...
------------------------- Eric Fry, reporting from the vacuous, cultural wasteland of
Southern California... "Why on earth did you move to Los Angeles?" a perplexed
American expatriate wanted to know, as he lifted an
afternoon aperitif to his lips. "Why didn't you move here
to Paris like I did, or just stay in New York?" "Well I just wanted to reside in a culturally rich
environment. So L.A. seemed the obvious choice," your
editor joked. "I see." "Have you ever been to LA?" your editor inquired. "Yeah, a couple of times," the friend replied. "I remember
driving all over the place. You just drive and drive...but
there's nowhere really to go." "...and nothing really to see....and nothing really to do,"
your editor suggested, helping his friend to complete his
stereotypical assessment. "In fact, there's nothing really
even to think about in L.A." "Right," the friend chuckled. "That's about it." "Well, for some reason," your editor countered. "I love
living in Los Angeles...Laguna Beach, actually. Southern
California may seem like a vast, plastic void to some
folks, but it is a stimulating void for me...Some plants
flourish in the desert, you know." "I guess," the friend shrugged. "In Los Angeles," your editor continued, "I actually enjoy
the lack of diversions and institutions and individuals
that purport to have 'depth.' New York is just as shallow
as L.A. It just doesn't realize it." "I just don't get it," the friend continued. "Life here in
Paris is sooo much nicer. You never have to drive. You just
hop on the Metro and go to wherever you like. The
restaurants are wonderful; the wine is wonderful; the
images of daily life are wonderful."
"You'll get no argument from me," your editor replied. "Paris is ONE kind of wonderful. That's why it's my second
favorite city in the world. But on a 12-month basis, I
could do without the sensory assault of big-city
living...and I could do without cold weather. I prefer
body-surfing to ice skating." "But don't you find city life stimulating? Didn't you enjoy
New York?" "I loved New York. And yes, I sometimes find big-city
living stimulating. But many times, I find it stifling. For
whatever reason, the crash of waves on a nearly deserted
beach in Laguna seems to nourish my creativity more than
the whining sirens of Parisian police cars or the blaring
horns of New York taxis." "I still don't get it," the friend persisted. "I think I'd
go out of my mind in Los Angeles. Isn't it boring?" "Yeah, it's boring alright," your editor decided to agree.
"Let's go with that." --- Special ---
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By Chris Mayer Record high temperatures took their toll across America
this summer. More than 60% of the United States was
abnormally dry. Sweltering, record-setting heat stretched
from the woodlands of Georgia to the suburbs of Arizona,
from the "Big Sky" country of Montana to the dairy farms of
Wisconsin. Paul Smokov, an 81-year-old South Dakota farmer, called
conditions this summer "the worst since the 1930s." Many
other farmers would agree: · U.S. peanut farmers will produce their smallest crop
since 1915 · Oklahoma is having its worst drought in its history,
which is taking a toll on crops and livestock. The USDA
estimates half of the state's cotton crop and a third of
its sorghum plantings are in poor or very poor condition.
Livestock is mostly in fair or poor condition, with three-
quarters of the state's pastures and ranges in poor to very
poor condition · Another headline reads, "Drought Expected to Cut
Minnesota Crop Yields." Lower soybean harvests will cost
Minnesota farmers about $300 million · The USDA says we'll have the worst wheat harvest in
18 years — this has pushed up wheat prices to 10-year
highs. More than just drought go into these numbers, but it is a
contributing factor in all cases. The drought conditions
simply highlight how poorly we manage our water resources.
In some places, water supply is tight, and it should remain
tight for decades — regardless of the disturbing
predictions of climatologists. Las Vegas, Nev., is the classic case. The city adds about
5,000 new residents per month. The Colorado River provides
over 90% of Las Vegas's water. But as The Washington Post
recently noted, Las Vegas "lives on a diet, an allocation
of water it was awarded decades ago, when Las Vegas was a
whistle-stop." The city needs more water. "Las Vegas' appetite for water
is practically unlimited," Carpenter says. Water officials
are looking for new sources of water. Their plan is to cut
into aquifers across the state, in a great swath. Some of
these water sources are hundreds of miles away. A plan is
already set for a 250-mile network of pipelines to bring
fresh water from Nevada's valleys. This a $2 billion
project. The problem is what's on the top of aquifers: small towns
and ranchers, who do not want to see their water tapped and
don't want to risk turning their lands into a dust bowl.
"Nevada's valleys are majestic and arid," the Post reports,
"sloping floors covered in greasewood bushes and fields of
alfalfa irrigated with springs or wells the ranchers have
dug themselves." Wildlife — rabbits, coyotes, antelopes —
gather at pools. All of that could be at risk if they drain the valleys.
People know what happened to California's Owens Valley,
drained 100 years ago to provide water for Los Angeles. The
once lush valley is now a wasteland. This sets up tensions between the growing cities that want
water and the rural areas that have it. So far, the cities
are winning. Coastal California, Phoenix and Salt Lake
City, for example, all draw water from distant sources. You can make all the moral judgments you want about what is
happening. You don't have to like it. But one thing should
be clear: Owning a supply of water in the American West
looks like a great investment. And companies capable of
building out needed water infrastructure are going to enjoy
a long bull market. I've been recommending three stocks that are well-situated
to prosper from this growing crisis in the American West.
First, there is PICO Holdings (Nasdaq: PICO). This is the
most obvious and straightforward tie-in with parched
Nevada. PICO owns water rights in that state and in
Arizona. As the owner of Vidler Water Co., PICO is on the
front lines of quenching the thirst of Nevadans. 
Vidler recently inked a deal to provide water to parts of
Reno. A telling quote, from the latest press release: "We
are not aware of any other water currently available to
support this demand." The deal calls for the construction
of a 35-mile pipeline, costing $65–70 million. This brings
us to our second tie-in — Northwest Pipe (Nasdaq: NWPX).
Northwest Pipe is the company supplying pipes for that 35-
mile pipeline for Vidler Water. It's a pretty simple
connection here, too. Building out water infrastructure
requires a lot of pipes. Northwest Pipe is in all the
markets where water pipe needs are particularly acute. I
won't rehash the whole story here, since I wrote a lot
about the company in the August issue of Capital & Crisis.
But suffice to say, Northwest Pipe should be busy for years
to come. Finally, we have SJW Corp. (NYSE: SJW). As with Northwest
Pipe, I've told SJW's story recently. To reiterate a key
point: SJW has a healthy supply of water. In the Santa Cruz
Mountains, SJW owns 7,000 acres of property. In a time
where new water supply is hard to find in the American
West, this asset is likely to appreciate significantly over
time...especially is drought becomes a common feature of
the North American climate. [Joel's Note: Yesterday Eric offered a public response to
an email he received from his sister. I wrote to him
shortly afterwards, commending this method of communication
via the Rude vehicle and today I shall take the opportunity
to do the same. An enthusiastic Rude reader wrote to us
this week with the following question: Joel, I'm wondering if somehow I missed the water report? Last
time I contacted you about it was in May and it was still
in the works. Is it available yet? Please let me know. I
apologize if I missed the announcement. Thanks!
Phil N. No apology necessary, mate. The water report is indeed
finished and is just one of the special situations that
Chris Mayer is continuing to investigate for his readers.
You can learn all about it right here: Mayer's Special Situations – Investing in Water
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