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August 3, 2006

Chemicals industry laying groundwork for 2007, Thurs., August 3, 2006, 1:18 PM

With recent quarterly reports that have disappointed, the Cara 100 companies in this industry have gone into or close to the Accumulation zone.

Macro-economic concerns over the Bernanke Fed policies and what they might be doing to the U.S. economy have weighed on the psychology of the traders of these companies, and many traders are selling at a time I feel they should be accumulating.

Today UBS research has published its monthly report on the Chemicals industry. Download UBS report.

You will read that Cara favorites Dow (DOW), Lyondell (LYO) and 3M (MMM) are also favored by UBS.

You will also see in charts 9 through 18, an economy that has not crashed, but, while slowing, is setting up a case for +7 pct growth in capex in 2007 " far above the growth rate in durable goods and GDP, which UBS is estimating will hold in a 2 pct to 3 pct range. That augers well for revenue growth and pricing power to come for chemicals in 2007.

As you know these things are cyclical. That's because chemical companies are highly economy-sensitive.

So looking out at the major drivers of the U.S. economy, I believe we are witnessing the bottom of the auto cycle; however, I am still concerned about the house building cycle. If these two cycles were to bottom together, I'd expect to see the chemicals stocks at or near the top of the charts in 2007.

I recommend traders continue to watch the Cara 100 DOW and LYO as well as Cara 250 MMM.

Dow Chemical Co. [GICS 15, Cara 100]
(DOW: Yahoo Finance file)
(DOW: StockChart chart)
(DOW: Investertech chart)
(DOW: ADVFN Financial Data)(DOW: ADVFN Financial Data)

Lyondell Chemical Co. [GICS 15, Cara 100]
(LYO: Yahoo Finance file)
(LYO: StockChart chart)
(LYO: Investertech chart)
(LYO: ADVFN Financial Data)(LYO: ADVFN Financial Data)

3M Company [GICS 20, Dow 30, Cara 100- removed June 25, Cara 250- added June 25]
(MMM: Yahoo Finance file)
(MMM: StockChart chart)
(MMM: Investertech chart)
(MMM: ADVFN Financial Data)
(MMM: ADVFN Financial Data)
(MMM: Value Line Report May 19: next one is due Aug. 18)

Monthly data charts with RSI:

002u012.gif

Weekly data charts with RSI:

002u011.gif

Daily data charts with RSI:

002u010.gif


Posted by Posted by Bill Cara on August 3, 2006 01:18:06 PM | Category: 15 Materials , Cara Global 100 Best Companies

Discourse

DOW... seems to be a pattern here:

Heinz Haller (Corporate Vice President) BUY 5.0K $34.47 $172.3K 4 Aug-02

Charles J. Kalil (Corp VP & General Counsel) BUY 10.0K $34.28 $342.8K 4 Aug-01

Phillip H. Cook (Corporate Vice President) BUY 1.0K $34.21 $34.2K 4 Aug-01

Geoffery E. Merszei (CFO) BUY 15.0K $34.10 $511.5K 42.4K 4 Jul-31

Andrew N. Liveris (CEO) BUY 20.0K $34.45 $688.9K 4 Jul-31


In addition as g034 mentioned in an earlier discussion of DOW- IF energy declines chemicals benefit... so if one is holding energy adding chemicals may be a good hedge.

Looked at on valuation basis DOW is trading below the low end of 10 year range... SLB in contrast is trading above the high end of 10 year range. As I say, if one is going to be overweight the popular sector (energy) then a hedge of some type might be appropriate.

I am overweight the unpopular chemical group (and tech) and underweight energy.

Posted by: stockman [TypeKey Profile Page] at August 3, 2006 2:00 PM [link]

Seeing that DOW is in the accumulation zone, I wanted to write September OTM puts on DOW. However, the sequential price skips for puts on this security is $5. Unless I write an ATM put at $35 (premium $0.60), my only OTM option is a Sept 06 $30 put with a premium of $0.10. Since that premium amount barely covers the trading cost, I have decided to wait until DOW goes down further and the $30 put premium price goes higher.......unless someone would care to suggest an alternative........

Posted by: jragusa [TypeKey Profile Page] at August 3, 2006 9:53 PM [link]

I follow LYO as my primary chemical play. That stock took a beating following Katrina and finally capitulated in March 2006 to provide an excellent buying op.

Posted by: CalexKitty [TypeKey Profile Page] at August 4, 2006 6:20 AM [link]