Update On Consumer Staples

We recently highlighted the statement "We do not view lower product cost as a margin expansion opportunity" made by the U.S.'s largest grocer during their earnings announcement. And, the fact many consumer products prices are dropping substantially. Not their equity prices but the prices of their goods. I was browsing the food section at Target yesterday and there were hundreds of new permanent price markdowns on major brand items. Some of this is due to falling input costs but much is due to other factors.

Today Procter & Gamble, the world's largest consumer packaged goods company is cutting its forecast and the stock is making a multi-year low. When the stock market was making new highs we wrote that no investment would be spared the wrath of this downturn. Brand name manufacturers in the staples business are very exposed to tremendous risks. Substantial emerging markets exposure, currency volatility, shrinking margins from competing private label business, demands from retailers to lower prices in an effort to boost sales and demands from consumers for greater value. Were companies able to manage these risks effectively, there remains the issues of unsustainable earnings, decreasing cash flows, higher costs of capital and stock valuations priced to perfection. Even if unit sales remain robust, we shall see what will likely be a major repricing of risk and future opportunity discounting in their equity valuations.