Consumer Staple Classics: Campbell, Clorox, Johnson & Johnson
Don't underestimate basics in tight economy.
Paul Kangas: Tonight's "Street Critique" guest says even with today's run-up in oil prices, crude is in a bear market and so are most other commodities. He's Kevin Depew, executive editor at the financial information website, www.minyanville.com. Kevin, welcome back to NBR.
Prof. Depew: Thank you, Paul. Pleasure to be here.
Kangas: So we saw crude prices rise about $3 a barrel today, but you think crude and commodities overall are entering a bear market. What is your reasoning?
Depew: Well Paul, we've talked so much about the bear market that may or may not be happening in equities and there's really another bear market that's happening right under our noses. If you look at crude oil prices from the mid-July peak, they're down almost about 20 percent. As of yesterday's close, they were down 20 percent on Tuesday's close. So that's a definition of a bear market, that minus 20 percent move. We're seeing commodities come down 15 percent using the CRB commodity index. Gold is down almost about 15-16 percent as well. This is really a global demand story where demand is beginning to slow in response to tighter credit conditions.
Kangas: So you're seeing a slow down in the global economy as the main cause here.
Depew: That's right. In you go back maybe six, nine months ago, there was this talk of a decoupling, where the United States problems with credits were not going to spill over into the global economy. That's clearly not the case. We're seeing slower demand in China on the heels of the Olympics or during the middle of the Olympics here and I think that's going to persist.
Kangas: You were previously bullish on the US stock market. How does this commodities bear market impact our stocks?
Depew: Here's the thing Paul. Now sitting at home, we would think OK, if crude oil is going to go into a bear market and gasoline prices are going to come down, commodity prices are going to come down, that's going to be good for the stock market. Well, that's not really the case. That's good for us at home as consumers and good for our economy, but we're in a situation where consumer demand is slowing and so that's going to impact the stock market and the economy as well. It's not necessarily a good thing for stocks.
Kangas: All right now, with this in mind, you do favor a few sectors, do you not? Which ones are they?
Depew: Well that's right. When there's a commodities bear market, the sectors that benefit the most are consumer staples and health care.
Kangas: Well, let's get specific here. How about some names and ticker symbols?
Depew: These are no big surprises, but if you look at the charts, it is surprising. Johnson & Johnson (JNJ) is the first stock. All these stocks are making higher lows or higher highs since the beginning of the year in contrast to the S&P 500.
Kangas: OK, a second choice?
Depew: Campbell Soup (CPB). That's a classic defense play, a beneficiary. As commodities prices come down, input costs for Campbell's are going to come down and they're not going to make those packages any larger and they're not going to roll back those price increases they've been passing through.
Kangas: OK, one more choice.
Depew: Final one is Clorox (CLX). Clorox makes those house staples that we need when it's cleaning supplies, what have you and these are all just unsurprising. They sound like very boring stocks, but those are beneficiaries in the coming environment.
Kangas: Well, they've had a pretty good run up, most of them, just in recent months.
Depew: Well they have and I think that's going to continue and I think this is a longer- term story in a couple of months.
Kangas: Kevin, do you own any of the stocks you mentioned or have other disclosure to make?
Depew: I do own all three.
Kangas: You own all three, well, that's a vote of confidence isn't it? I want to thank you very much for being with us, once again.
Depew: Sure thing, my pleasure.
Kangas: My guest, Kevin Depew, executive editor at minyanville.com.
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