Consumer (not so) Staple

The following is a guest post by Dr. Saif K. Lalani.

As always, nothing on this is sight is to be construed as investment advice. Further, I do not censure or edit guest posts in any way. I am precluded from being too specific, others are not.

By Saif K. Lalani

"Consumer (not so) Staples

The market anxiety over the past few months has given rise to a different breed of investor. With bond yields offering a mere pittance, and a majority of stock sectors looking vulnerable, investors are increasingly turning to “consumer staples” companies. However this may be mistake of magnanimous proportions.

“Consumer Staples” refers to a group of stocks that sell a group of “non-discretionary” products. Things we have to use regardless of how we feel, or how much money we make. However with the arrival of peak oil this will be put to a severe test at multiple levels.

It is a common belief that we “need” a new razor after every three shaves, that we “need” to have beer every Friday evening. With the US consumer now about as tapped out as Bernanke's ability to solve problems with rate cuts, rising prices of food and energy will force cuts in other areas. If everyone decided that the old razor could manage an extra shave… that would shave off 33% of Gillette's razor sales. Skipping the Friday evenings once a month would have a similar effect on restaurant and beer sales.

In the past whenever the consumer was under stress the ever-increasing loads of credit came to the rescue. This time however credit is being cut drastically. Banks across the board are doing this. (American Express has gone to such extreme lengths that the CEO was spotted using a VISA card.) Add to that the fact that this cycle of rising commodity prices has just begun. I could name you 30 commodities that would never be able to satisfy demand if China ever even tried to consume as much as the western world on a per capita basis. India's booming economy is another problem. The rising prices along with cutbacks and increasing unemployment means that consumer staple companies will have little ability to pass on price increases leading to marked margin compression. For example,, look at what has already happened to Starbucks and Hershey. Rising Milk and Cocoa prices have demolished both companies. Starbucks boldly tried to increase prices and saw it's same store sales growth flatline. Starbucks is not included in the consumer staples group but it serves to make a similar point. The stock is down 60% from its highs. For more entertainment read the recent reports from General Mills, Tyson foods, Constellation brands, Kellogg, Kraft and Dean Foods.

There is another emerging trend that is going to work against the consumer staples. Anyone who has gone to a grocery store even once has noticed the huge differences between brand and non-brand items. As prices increase people will be forced to switch to non-brand names. Maybe some will not switch while others will switch only in a few products but the effect will be large enough. A majority of listed companies are those that make brand name products. Sure a few companies will survive and few will thrive but if you are going to blindly purchase consumer staples mutual fund or ETF’s, I promise it will be painful.

Barring the energy and precious metals sectors there are no safe sectors. Diversification makes you look extremely smart when you do not know what you are doing. That is what your investment advisor is aiming for. I have been long oil since it was $40 a barrel and gold since $450 and silver since $8. Never diversified beyond commodities and will never need to at least not until the entire world wakes up to them and starts buying them like they did tech stocks in 2000."

Saif K. Lalani