When is a 97% drop in profit not necessarily a bad thing? Well, when the company still manages to top expectations of course. This unlikely scenario has unfolded for Michigan-based chemical firm Dow Chemical (NYSE: DOW).

Let's deal with the 97% profit drop first. This massive fall was triggered by falling sales, job cuts and the company's acquisition of Rohm & Haas, a specialty chemicals firm that Dow took over.

Dow Chemical (NYSE: DOW - option chain) shares are headed higher today after the company closed its acquisition of Rohm & Haas. This allows DOW to announce today it plans to sell Morton Salt to German company K+S Aktiengesellschaft for nearly $1.7 billion. This will help DOW stabilize its finances, which were left in a lurch when Kuwaiti financing on the Rohm & Haas deal fell through. Left out in the cold in this deal is Compass Minerals International (NYSE: CMP), a salt company that had been expected to get a bid from K+S. If you think that DOW won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on that stock.

DOW opened this morning at $9.46. So far today the stock has hit a low of $9.25 and a high of $9.75. As of 12:05, DOW is trading at $9.69, up 88 cents (10.0%). The chart for DOW looks neutral and S&P gives DOW a 3 STARS (out of 5) hold ranking.

I wrote yesterday about the current, relatively low level of the CBOE Volatility Index (VIX), comparing it to the 2002 -2003 triple-bottom. I concluded that low levels after a bear market could indicate that a capitulation had occurred.

There was more evidence of that yesterday.

When the market opened sharply lower, the VIX opened very close to its intra-day high but sharply reversed and closed the day just .68 higher at 45.52. And the Dow and the S&P 500 traded fractionally lower.

This week should flush out most of any remaining bad earnings news with some very big names, such as Dow Chemical (NYSE: DOW), Disney (NYSE: DIS), Merck (NYSE: MRK) and Motorola (NYSE: MOT) reporting today.

Since July 11, the price of oil has fallen 25% from $147 to $110. This has been terrible news for holders of energy stocks -- which have nosedived. But for people who need to fill up their tanks, prices at the pump remain relatively elevated -- having fallen about 10% (I remember paying $4.11 at the peak and now pay $3.69 a gallon).

Meanwhile, the New York Times reports that companies using oil in their products are keeping their prices high despite the oil price drop. These companies seem to be acting in unison to raise prices -- suggesting there is not enough competition in their markets.

Which companies are raising prices still? Those who believe they can get away with it as they try to recoup the lost profit resulting from the recent increase in the price of oil -- which is an important raw material in their products..

• Procter & Gamble (NYSE: PG) increased prices to retailers up 7% to 10% "for items made with ingredients derived from oil to 'recover costs already incurred,'" according to a Times interview with its spokesman.
• Dow Chemical (NYSE: DOW) raised prices by 50% for the oil-based raw materials that go into diapers and polystyrene. It "does not want to give up those increases until the company recovers its old profit margins since '[its] prices continue to lag [its] cost increases,''" according to a Times interview with its spokesman.
• Goodyear Tire and Rubber (NYSE: GT) has raised tire prices by 15% and is "still making synthetic rubber tires from oil-based feed stocks bought at relatively high prices more than three months ago [and it] 'could not consider canceling the price increase until it knew whether oil prices were going to stay down,'" according to a Times interview with its spokesman.

DuPont (NYSE: DD), a competitor of Dow Chemical (NYSE: DOW), reported earnings for the second quarter today, and as Melly Alazraki stated in her Before the Bell article, agriculture helped drive results and earnings. Expectations were not just met, they were beaten by four pennies. The call was for $1.07 in earnings per share by analysts, and DuPont delivered, on an adjusted basis (excluding $0.07 related to a litigation benefit and a better tax rate), $1.11 per share. Last year at this time, DuPont reported $1.04 per share for the bottom line, giving the company about a 7% growth rate.

Shares are up as of this writing by a little under 2%. Not a bad increase considering DuPont is a stodgy Dow Jones component. But it's not exactly an exciting price rally, and it basically reflects my feelings for the earnings results. They were decent enough, but they weren't so overpoweringly good that I'd want to initiate a position in DuPont. And that's saying something, because the business is cheap on a forward-looking basis and from a dividend-yield point of view, in my opinion. DuPont thinks it can do somewhere between $3.45 and $3.55 per share for the fiscal year. With shares trading around $45, that gives the stock a decent valuation.

Yet, DuPont used cash for operations in its first six months, and capital expenditures have increased. Will the economy be kind to DuPont in the coming months? That's the wild card these days, the dreaded economy. Yes, DuPont may have done all right this quarter, but I don't need to buy it. I can look elsewhere for more compelling ideas.

Disclosure: I don't own any company mentioned; positions can change at any time.

TheStreet.com's Jim Cramer says its stunning buy of Rohm & Haas will get people thinking about an energy top.

Just when you thought it was safe to short anything, particularly anything with any commodity exposure, Dow Chemical (NYSE: DOW) (Cramer's Take) comes along and inexplicably pays a gigantic amount of money, $78 in cash, for Rohm & Haas (NYSE: ROH) (Cramer's Take)? My first thought was that it must be a joke. That is inconceivable. A hoax. Something perpetrated by frustrated longs to spook the shorts.

I mean, a chemical company? Two chemical companies? Ground Zero for slowing economic activity and raw costs? People unsure if Dow could even pay its nearly 5% yield? I mean, even last night on my show, I made fun of the idea that people are confusing Becton Dickinson (NYSE: BDX) (Cramer's Take), a medical supply company, with a chemical company because it uses resin.

Amazing.

Dow Chemical (NYSE: DOW) announced it will acquire Rohm and Haas (NYSE: ROH) for $78 per share.

DOW July option implied volatility is at 34; August at 41; above its 26-week of 30 according to Track Data, suggesting larger price movement.

ROH July and August option implied volatility of 38 was above its 26-week of 30 according to Track Data, suggesting larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Paul Krugman's New York Times op-ed tries to defend his Princeton colleague, Federal Reserve Chairman Ben Bernanke. Krugman suggests that inflation is not a problem because he can't find any long-term labor contracts with 11% annual pay increases as in 1981's United Mine Workers contract.

Krugman gets himself into a weak position and he does not disclose his fealty to Bernanke whom he evidently does not believe can defend himself. It seems absurd to pretend that inflation is not a problem. Food prices have tripled and oil prices have doubled as Bernanke cut the Fed funds rate from 5.25% to 2%. Last week Dow Chemical (NYSE: DOW) announced a 20% price increase as did Eastman Kodak (NYSE: EK) in response to rising oil and other commodity prices. Huntsman Chemical (NYSE: HUN) announced a 25% price increase. And consumers -- who account for 70% of GDP growth -- expect inflation to rise at a rate of 7.7%.

Well, this seems to be a case of love it/hate it sentiment. At least for me. Since I'm not a shareholder of Dow Chemical Co. (NYSE: DOW), I lean toward the more negative sentiment.

No doubt, many stockholders cheered the company's move today to raise its prices by up to 20% so as to combat high energy prices. After the company reported a 3% drop in earnings last quarter and an alarmingly shrinking profit margin, the move makes sense. Indeed, the stock finished the day 1.49%, or 60 cents higher to $40.83.

As a general investor, though, I can't help but consider the effect this move would have on other companies and the overall economy, and hence my other holdings. You see, Dow makes so many chemical supplies used in so many industries as raw materials that the announced price increase will affect many companies' costs.

And of course, as a consumer, I'm bound to hate the move. Already I pay higher food and gas prices -- now many other regularly purchased items will cost more as a result of Dow hiking prices. I'll pay more for products like antifreeze, cosmetics, pharmaceuticals, detergents, paint and clothes. Oh, diapers too.

Without being bashful about it, Andrew Liveris, Dow Chemical's chairman and chief executive, blamed Washington directly for failing to address the issue of rising energy costs for the past several years. "As a result," he said, "the country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy."

This is scary, and naturally Dow needs not absorb all the rising costs by itself. Therefore, we are now bound to see even higher inflation than some have originally anticipated. Too bad Dow's lobbying and the millions of pre-election promises haven't borne fruit, at least yet. We just have to wait and see now how much this move will affect us and how vast its implications will be as the prices trickle down the chain and reach us.

Dow Chemical (NYSE: DOW) shares are trading higher after the company announced it will raise product prices by up to 20% almost immediately. The company cited higher energy and raw-material costs for the price hikes, and used the announcement to criticize the government for failing to develop a logical energy policy. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on DOW.

After hitting a one-year high of $47.96 in July, the stock hit a one-year low of $33.01 in January. DOW opened this morning at $40.77. So far today the stock has hit a low of $40.25 and a high of $40.79. As of 12:40, DOW is trading at $40.70, up $0.47 (1.2%). The chart for DOW looks bullish and steady, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.

For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $35 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just 7 weeks as long as DOW is above $35 at July expiration. Dow would have to fall by more than 13% before we would start to lose money. Learn more about this type of trade here.

With stocks beaten up, those courageous investors looking for cheap stocks should take a look at Dow Chemical (NYSE: DOW). With the recent announcement of its 50/50 joint venture with Kuwait's Petrochemical Industries Company (PIC), to form a market-leading, global petrochemicals company, Dow stands to become the world's leading petrochemical company. Look for growth in China to help propel earnings over the next decade.

"We're creating a petrochemicals company that will be a global leader from its first day of operation, an $11 billion company that is well positioned to grow profitably across the industry cycle," said Andrew N. Liveris, Dow chairman and CEO. "For Dow, this marks an important milestone in our transformational strategy: growing our Basics businesses through joint ventures; reducing our capital intensity; and, freeing up cash to invest in our portfolio of Performance and Market Facing businesses."

The stock is off 20% from its high, and it's now sporting a juicy yield of 4.5%. That's not all; the stock has a P/E of about 10.60 and more importantly, a PEG of just 0.86. So what you have is a company with nice growth, paying a handsome dividend, that has gotten pounded down. Dow Chemical looks like a winner for investors over the next few years.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has no position long or short in any stock mentioned as of 1/8/08.

The Associated Press is reporting that Dow Chemical Company (NYSE: DOW) will sell a 50% interest in five of its global businesses to a Kuwaiti company, Petrochemical Industries Co, for about $9.5 billion to form a new petrochemicals joint venture.

The joint venture will be based in the U.S. and will employ more than 5,000 people worldwide, mostly current Dow employees and will be 50% owned by Dow and PIC.

This will put cash in play that can be used for a wide range of activities. Dow may choose to slash long-term debt, which this tidy sum would eliminate almost entirely. It also may choose to expand other ventures that have a promise of higher returns or diversify into businesses that are less dependent on oil as feedstock and thereby increase potential growth while reducing volatility.

Dow Chemical Company (NYSE: DOW) was trading at $45.50 in pre-open trading, above its close of $41.75.

DOW and Petrochemical Industries Company of the State of Kuwait announced plans to form a 50/50 joint venture that will be a market leading global petrochemicals company. DOW overall option implied volatility of 29 is near its 26-week average of 28 according to Track Data, suggesting non-directional price risk.

Daily Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

MAJOR PAPERS:

• Reacting to $90-plus a barrel oil prices, airlines, many of whom are beginning to see profits again, are passing along increases to passengers. Led by AMR Corporation's (NYSE: AMR) American Airlines, the largest carrier, increases per ticket are being increased about $20, according to the Wall Street Journal (subscription required).
• The UAW may not face stiff opposition among its rank and file member for a new four year labor contact with Ford Motor Company (NYSE: F), as local leaders in Detroit approved a tentative four year deal, reported the Wall Street Journal.

OTHER PAPERS:

• The New York Post reported that two fired Dow Chemical Company (NYSE: DOW) executives shopped the company to investors, according to industry consultants' affidavits filed by the company to support its claims that the execs breached their corporate duties.
• The Telegraph reported that CIBC World Markets' financial services analyst Meredith Whitney has called for Chuck Prince's successors to break up Citigroup (NYSE: C).
• Several private equity firms are competing to buy the 32% stake in Sony Corporation's (NYSE: SNE) Sony Entertainment Television currently held by Indian investors, reported the Economic Times.

This year has been a stock picker's market extraordinaire! This month's review provides ample evidence of this, as you'll note that Google (NASDAQ: GOOG), which I included for fun because of its popularity, beat all else as a portfolio of one. The average of my seven picks came in second, beating James Cramer's average based on his nine picks. Both Cramer and I beat each of the three indices I am tracking, and therefore beat the average as well, with the largest and most stable, the Standard & Poor's 500 coming in last.

Of course, this could easily change given recent market volatility. A sharp downturn in the market could reverse our fortunes. A lot can happen in the remaining two months -- I take nothing for granted.

While Google shined brightly this year, Cramer and I have each made one pick that shined brighter. Cramer's best, Apple (NASDAQ: AAPL) has gone into orbit this year on the wings of the iPhone, iPod, and growing Mac sales. Benefiting from rising oil prices, shortages in China and the Chinese government allowing a 10% price hike, my PetroChina ADR (NYSE: PTR) has rocketed, becoming the second-largest capitalized company in the world. PTR has done this even in the shadow of Berkshire Hathaway (NYSE: BRK.A) selling its shares and Warren Buffett questioning the huge appreciation of the Chinese stock market and stocks overall.