Water: The Ultimate Financial Commodity
By Joshua Enomoto, Founder of ContangoDown.com and CrushTheStreet.com Contributor
Water: it is the ultimate commodity. Without it, human life, and indeed all life would cease to exist. Water is the central element supporting various industries and its management has led to the development of thriving communities in locations where such endeavors were impossible simply because of the very lack of this liquid asset. While many take the effortless act of turning on a faucet as a mundane routine of everyday life, there will come a time when such expectations will be a considered a high privilege.
Few really understand how scarce water is: roughly 70% of the earth’s surface is covered in water, but most of this (97%) is saltwater, which obviously is not fit for human consumption and cannot be used to irrigate crops, nor to apply it to most industrial purposes. According to Investopedia.com, out of the remaining three percent, only one percent is readily available freshwater that can safely be consumed.
More importantly for investors, water-based financial metrics, such as the Dow Jones U.S. Water Index, have been on a consistent rise in accordance with both domestic and international demand:
Developing nations that will soon become “developed” have added a naturally mathematical burden on current supply, with demand being attributed to both industry and agriculture to sustain nominal growth as well as qualitative growth. It is the latter that will likely catch many Westerners, especially Americans, off-guard. No longer will the bulk of the Third World be content with mere sustenance: it will be prosperity that they seek, the kind enjoyed by most in America. It can also be concluded that a global rise in standard of living would directly correlate with longer average life spans, further draining an already constrained resource.
There are a couple of ways to participate in the coming “liquid bull market,” with water-based ETF’s being one of the most straightforward. In particular, we will focus on the PowerShares Global Water Portfolio fund (ticker symbol: PIO), which has exposure to companies listed on a global exchange:
Currently, PIO stands at $18.87 and may likely hit a short-term correction soon. This is based on the fact that since the faster 50 day moving average (blue-line) crossed above the slower 200 DMA (red line) in September of last year, PIO saw a lift of around +12%. The last bullish crossing of the moving averages occurred between October 2010 and August 2011, where PIO experienced a net +10% move before the price collapsed, initiating a bearish cross that lasted until March of 2012, resulting in a net -11% loss. The hesitation that PIO is lingering though at present suggests a loss of technical momentum: the declining RSI and MAC-D indicators confirm this. Also, with a 12% move already in the bag after September 2012’s bullish cross, the cycle of this ETF is leaning towards near-term bearishness.
However, a rising level of support should prevent PIO from falling too far below the $17 level. If confirmed, this would keep intact a well-defined trend channel that has been in play since December of 2011. From $17, I would look for a realistic price target of $19.50, which would secure a near 15% profit. The downside is the $14.50 price point which we saw in late 2011, which from $17 would also equate to near 15% loss, balancing out the risk:reward ratio to 1:1.
Fundamentally, it would be difficult to see PIO fall that low since every major water index is positioned very bullishly. Aside from black swan events, investors can have a reasonable level of confidence of making profits in this sector, but as always, your entry and exit strategy is critical. No investment is fail-proof, but water as a financial commodity deserves serious attention for anyone’s portfolio!