A Remarkable Rotation

 | Nov 06, 2013 | 2:05 PM EST
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Is the rally in consumer-products stocks really a harbinger of tough times ahead? I know Doug Kass opined on this issue earlier, and I want to give you my three cents about the group.

I say three cents because I've discovered three different truths about this group, and two out of three are actually quite bullish.

First, let's belabor the obvious. Typically, Clorox (CLX) and the Procter & Gamble (PG) can't rally like this unless the economy is either dead in the water or is about to be dead in the water. That's been the standard reason for a run in these stocks. This move by Clorox, for example, has very little to do with growth in earnings per share and much more to do with how much you will pay for the stream of earnings. I remember when Goldman Sachs downgraded it 10 points ago, saying the growth wasn't there. But the steadiness is there, and if you think we are going into a recession, you know that no one skimps on bleach.

But coin No. 2 is very different. The second of my three cents says that inflation has been raging across the board in every single aspect of the ingredients and shipments of the products. Every conference call from these companies is studded with laments about fuel, plastic, grains, surfactants -- you name it. There's always something that's costly. It looks to me that the cost pressure has subsided in almost every single ingredient. Gone are the days when we heard that costs were going through the roof, as Gary Rodkin from ConAgra (CAG) said a few years ago. The deflation is palpable, and it especially matters when you layer on the possible positive swing in currencies that a weaker dollar may give these companies.

The third positive coin? These companies are firing machines. They have been brutal with these restructurings. Kellogg's (K) jumped the other day despite limp revenues and so-so earnings because it is firing 7% of its work force.

Firing your way to prosperity is not the way of a higher stock price. But what if these companies get even a little lift from the world's economies? Anything that gives the consumer more spending power -- such as a decline in gasoline prices -- can lead them away from the knockoffs and the small sizes of the dollar stores and back into the brand names that comprise this group.

While the traditional reason for these stocks to rally (a recession coming) is always a possibility, the other reasons (raw cost deflation and the incredible number of firings that have replaced expensive people with technology) may better explain this remarkable rotation that has taken everyone by surprise.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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