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Water Infrastructure During the Recession Editor’s Note: The infrastructure theme shouldn’t be anything new to you. We’ve discussed it many times in the past, including some small-cap plays set to take advantage of it. Well today, Chris Mayer is here to expand on the water side of this problem. Enjoy… Nip and Tuck
Before the war, water pipes were usually over-engineered. That is, they were cast-iron pipes, built to last forever. The average useful life of water pipe from the 1920s is over 100 years. After the war, people had to be stingier in the construction of these pipes. We’re feeling the effects of this today. More than 56% of all water breaks today occur in pipes built in the 20 years immediately after World War II. Many of those pipes are reaching the end of their useful lives. I caught up with Thomas Rooney after the holidays. He is the former CEO of Insituform Technologies, a water pipe replacement company. He told me the story above about the World War II metal shortage, which I found fascinating. Rooney’s a good guy with a lot of insight into the water and infrastructure sector. He shared some of those insights in our recent talk. He noted that just because pipes need replacements doesn’t mean it will happen. In fact, as Rooney explained, there is a subtle link between infrastructure spending and new housing construction. This link suggests that spending on water infrastructure will decelerate, just when obsolescence demands that spending should accelerate. ********************************** Discover the Secret Market that Produces an Average of 25,000% Gains The first time, I thought it was beginners luck. The second time, coincidence. But after nine “jumper stocks” rose 185%, 163%, 140%, 2,341% and more in under 12 months…I knew this was the best way to pick stocks I’ve ever seen. Find out how to become one of only 2,000 people in the world to join this exclusive service. It’s all right here… ********************************** One of the bubbles that burst over the last eight-nine months, Rooney told me, is the idea that water infrastructure spending is “recession proof.” A water utility is recession proof, Rooney offered. “It’s just like how you’ve got to buy power.” But water infrastructure spending is not. Consider the mechanism for how water infrastructure funding works. Much of it comes from “tap fees.” When a developer builds a new development, he pays tap fees to the local utility. These tap fees are supposed to cover the cost of connecting that house to the public water system. But in reality, the developer puts in everything. It costs the local utility close to zero to accept these tap fees. Usually, its cost is simply to get an inspector out at the site to approve the work. Well, this amount of money turns out to be huge. The average tap fee in the U.S. is $1,500-2,000 per home. Consider that we were building two million homes per year. That’s $4 billion in free cash flow for the utilities. Housing starts, as we know, have collapsed. Take a look at this chart from the U.S. Census Bureau:
So guess what happens to tap fees? Poof! Water infrastructure spending feels the pain of that. Rooney was one of the first people to point out this connection between infrastructure spending and new housing construction. As Rooney says, infrastructure spending is discretionary. There is good news, though. As we watch U.S. spending contract, it’s a different story in other parts of the world. In Canada, where the commodities boom helps line government coffers, infrastructure spending is rising in double digits. “Where there is loose change,” Rooney says, “you see discretionary spending go nuts.” ********************************** 47 New Millionaires Every Day and a New Billionaire Every Month The $7 billion “Golden Quadrilateral” is minting new fortunes in this aggressively growing economy. But all you need is this one $17 stock. Read more here… ********************************** Even then, Canada could spend more. Ontario wastes $1 billion every year in water. But the government says it would cost $11 billion to fix. Thinking like bureaucrats, Ontario officials believe they are making a good decision in “saving” $11 billion every year. But in the private market, you could easily finance $11 billion in return for a promised $1 billion annual return. That’s a 9% cash return. The ultimate bubble, Rooney says, is the idea that even current spending is recession proof. It isn’t. As Rooney says at Insituform, he saw spending not only slow, but actually contract. So we are in the ironic situation of having worsening infrastructure problems, but a declining level of spending to fix them. There is still a huge opportunity remaining in the water sector. It starts with a little saying: “It takes a lot of water to make oil, and it takes a lot of oil to make water.” It’s called the energy-water balance, or the energy-water nexus. “People are going to make tremendous amounts of money by focusing on the confluence of water and energy,” Rooney says. For example, how to extract oil by using less water — that’s a big issue. Also, refining oil requires a lot of water, as does processing and transporting various sources of energy. Utilities use water for cooling and emissions scrubbing. Hydroelectric power, of course, uses water directly. In fact, hydropower accounts for about 40% of all freshwater usage in the U.S. That’s a massive amount of water, behind only irrigated agriculture. I’ll be sure to continue my research on this subject, no matter where it takes me. I’ll be sure to let you know, whenever I find out more… Sincerely, P.S.: If you haven’t already, I urge you to check out my special report on this very subject. I found the five best companies that will take advantage of this unfortunate water situation. I put them together in a special report aptly named “Blue Gold.” Get your copy here… Editor's Note: You are probably aware that Chris just released his book, Invest Like a Dealmaker. Already, it is a bestseller for business on Barnes & Nobles and Amazon. To get your copy, check it out here… |
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Chris Mayer, the editor of Capital & Crisis, began his career in banking, specifically, corporate lending, after earning an MBA with a concentration in finance, He later started writing Capital & Crisis, a monthly newsletter that gave Chris' unique brand of financial commentary a more regular and expanded format. With an unusual fondness for old books, old investors and old ideas, Chris fits perfectly into the Fleet Street mold. |
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