Cramer vs. Kass: Consumer Staples

Doug Kass
The Anti-Cramer on Consumer Staples
11/20/2008 7:40 AM EST

This blog post originally appeared on RealMoney Silver on Nov. 20.

This morning, Jim "El Capitan" Cramer extols the virtues of consumer staples.

As many are aware, I have taken the opposite tack; I have been short the consumer nondurable sector most of the year and remain so.

Basically, I depart from Jim's view regarding the significance of lower commodities costs (particularly of an energy kind) on profit margins, as I believe the wealth-destruction (see opener coming up) in home prices and stock prices materially offsets that benefit and will lead to lost market share to generic producers.

Here are some excerpts from my May 2008 interview in Barron's, which outlines my bearish case:

But why are you so bearish on the U.S. consumer?

The consumer is spent up, not pent up, and more levered than during any period in history. That's one of the structural problems facing the economy. At the same time, job growth is declining and real disposable incomes are pressured as inflation literally is eating away at the consumer's buying power. It is frightening that the consumer has entered this economic downturn with the most levered position in history. On top of that, we're facing four consecutive months of job losses. We've seen the depreciation of the two most important assets, home prices and equities. Consumer confidence is at a 26-year low. The availability of credit continues to be a problem that will plague the economy for a while. Inflation, the cruelest tax of all, is rising as energy and food prices, in particular, are soaring. And the first-quarter GDP report contained a number of ominous signs that the consumer is spent up while the housing depression continues apace.

So, which consumer stocks are you shorting?

Colgate-Palmolive (CL Quote), Kellogg (K Quote) and General Mills (GIS Quote), which are trading at 17 to 18 times earnings, but have secular earnings-growth rates of 7% to 10%. These companies historically are seen as recession-resistant, but we doubt it. All three are aggressively lifting their selling prices in response to huge cost increases, but demand is starting to suffer as private-label companies and generics gain market share. Demand elasticity, or sensitivity to changes in prices, in toothpaste, soaps and other consumer products has begun to surface in the current recession, as consumers trade down to private-label products.

At the time of publication, Kass was short Colgate-Palmolive, Kellogg and General Mills.