Equity markets ended the third quarter with their biggest losses in four months, and we're now staring down the closing months of 2009. Half the quarter, of course, is dominated by holiday sales, which ups the stakes at the finish line and sets the tone for the bulk of 2010.

Even though company performances have been fairly strong through this reporting season, it's tough to shake the nerves associated with depressed consumer spending and high unemployment.

Kraft Foods (NYSE: KFT) is expected to report Q3 EPS on November 3. KFT's $16.7 billion bid for Cadbury PLC (NYSE: CBY) was rejected by CBY in September. KFT faces a November 9 deadline set by the U.K. Takeover Panel to make a formal offer for CBY. KFT November option implied volatility is at 25, December is at 24; versus its 26-week average of 25, according to Track Data, suggesting non-directional price movement.

iShares Trust FTSE/Xinhua China 25 Fund (NYSE: FXI) is recently up $1.30 to $43 in pre-open trading. FXI is an index fund that seeks investment results that correspond generally to the price and yield performance of the FTSE/Xinhua China 25 Index. FXI overall option implied volatility of 38 is near its 26-week average according to Track Data, suggesting non-directional price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

In an interview with Reuters, Kraft Foods Inc. (NYSE: KFT) reported that it expects sales in China to gain 10% in 2009. "This is one of the times when I love being in the food business. This is a market that, whatever happens in the economy, people still eat. And we have a range of products to serve everybody's needs," explained Lorna Davis, the company's president of operations in China. "Opportunities here are just huge," she added.

The projected 10% sales growth for 2009 roughly corresponds with Kraft's 2008 sales results in China. The food firm plans to maintain its healthy pace of expansion by way of a 20% boost to advertising spending. "If you want to build your business here and you don't spend more than 10 percent of your total revenue on advertising, you are not going to grow," asserted Davis.

Almost a year ago, when Steve Halpern suggested that investors take a second look at Procter & Gamble (NYSE: PG), he offered a very sound argument: the manufacturer had a strong domestic and international presence, was trading well and -- perhaps most importantly -- was heavily involved in staples. Over the ensuing year, Halpern's advice has proven to be pretty strong. In fact, on September 29, when the bottom was falling out of the market, P&G was one of the three stocks in the S&P 500 that fell the least.

P&G, as well as the other two stocks that fell the least, Kraft Foods (NYSE: KFT) and Coca-Cola Enterprises (NYSE: CCE), and the one S&P stock that actually rose, Campbell Soup Company (NYSE: CPB) have a few things in common. First off, they all are connected to products that make people feel safe. These sorts of brands (which Kevin Roberts calls Lovemarks) are almost recession-proof. When things get bad and people lose faith in the market, they experience an ever-greater desire to reach for a Coke and a smile, grab a bowl of "Mmm! Mmm! Good!" Campbell's soup and eat a plate of Kraft Macaroni and Cheese. Given their ability to evoke memories of a comforting childhood, these mid-level brands will often experience an uptick in troubling times.

The other thing that all these companies have in common is that they are staples. In boom times, people tend to eat out more, subcontract cleaning and laundry services, and try pricier, upscale brands. In tougher times, however, the tendency to eat in and do one's own laundry means that companies like Kraft, Coca-Cola and P&G may actually find themselves in a better financial position. This isn't to say that staples don't have ups and downs, but rather that their fluctuations tend to be less severe -- and they sometimes even buck the prevailing market trends!

"The organic food industry is surprisingly resilient in an economic downturn," explains Benjamin Shepard, contributing editor with Personal Finance.

He adds, "Mainstream retailers and your corner grocer have been embracing the trend, devoting an ever-growing amount of shelf space to organic foods." Here's a trio of favorites.

"What was essentially a nascent industry in 1997 with $3.6 billion in sales has exploded to a behemoth with almost $14 billion in sales in 2006, according to the Organic Trade Association.

"And barring a major economic disaster worse than we've seen thus far, the industry looks set to continue double-digit growth well into the next decade.

"That's not to say there aren't potential troubles ahead as commodity prices continue to soar. Organic farming techniques tend to be more cost intensive--ironically enough--and transport costs continue to swell.

"But so far the industry has been able to pass the bulk of the higher costs onto consumers, and although sales volumes have dropped off and profits are down, those consumers are as dedicated as ever.

Shares of the nation's largest food and beverage maker, Kraft Foods Inc. (NYSE: KFT), have been surging in morning trading despite posting a decline for its first-quarter profit, as its earnings numbers were better than analysts had forecast.

For the quarter, Kraft Foods announced that its profit dropped 13% to $608 million, compared with $702 million a year earlier, dragged down by higher expenses for ingredients. The 2007 earnings results included a one-time interest benefit related to the spin-off from Altria Group Inc. (NYSE: MO). On an adjusted basis, the company posted quarterly earnings of 44 cents per share, slightly higher the 40 cents per share that analysts expected.

The food giant posted solid growth in its first-quarter revenue, which climbed to $10.37 billion, up from $8.59 billion reported in the same period a year ago. Analysts had forecast lower revenue of $9.77 billion in the quarter, according to Thomson Financial. The increase in revenue came as the company benefited from both the weak dollar and gains related to acquisitions.

Kraft Foods, Inc. (NYSE: KFT) is in a bit of a pickle. As the following article makes clear, the company knows it has to raise prices. There's just no choice in the matter. Commodity input costs are on the rise, and something has to give. But the problem is, consumers not only have to pay more for Kraft foodstuffs, they have to ante up more of the green stuff for everything else too -- fuel for the car, heating oil for the home, you know the drill.

If you're a Kraft shareholder, should this concern you? What about if you own other consumer-oriented stocks based on the supermarket shelves that are feeling the inflationary pinch, companies such as General Mills, Inc. (NYSE: GIS) -- which reported earnings today -- or Kellogg Company (NYSE: K), or maybe even beverage businesses like The Coca-Cola Company (NYSE: KO) or PepsiCo, Inc. (NYSE: PEP)? Well, it should, of course. Inflation is no fun, and with the price of oil hitting new highs recently, a trend that seems very much intact, consumers will be strapped. In fact, Kraft is now trying to make up for lower volumes by raising the cost of its goods; this isn't ideal, perhaps, but Rick Searer, who is the president of Kraft North America, brings up an almost humorous point -- "consumers have to eat." I have yet to meet one that doesn't, come to think of it!

But I think the consumer companies are relatively sophisticated with their data-analysis protocols and are, perhaps, a bit more nimble in terms of deducing what shoppers want to buy for purposes of stocking their pantries. At least, I would hope they are -- we've been hearing about better data-mining techniques for years. Kraft obviously will promote a wait-and-see attitude in terms of the consumer and her reaction to the recession, but I don't think shareholders should be overly worried at this point. A lot of these defensive names have international exposure and stand to benefit from the falling dollar, for one thing. For another, we all have to eat! And since the defensive names generally have dividend yields, they tend to be safer bets during a recession; don't think they can't fall, though, because they can. One just hopes they don't fall as much as, say, your typical financial entity or a broad market index.

Disclosure: I own shares of Coca-Cola; positions can change at any time.

Kraft Foods Inc. (NYSE: KFT) stock is falling this morning after the company announced its fourth-quarter profit fell to $585 million, or 38 cents a share, from $624 million a year earlier. Earnings excluding restructuring costs matched analysts' estimates of 44 cents a share, but KFT's revenue was hurt by higher costs for dairy products and other ingredients, which offset an 11% increase in sales. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on KFT.

After hitting a one-year high of $37.20 in June, the stock hit a one-year low of $28.63 last week. This morning, KFT opened at $29.75. So far today the stock has hit a low of $29.51 and a high of $29.95. As of 10:50, KFT is trading at $29.90, down $0.29 (-1.0%). The chart for KFT looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $35 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in 5 months as long as KFT is below $35 at June expiration. Kraft would have to rise by more than 17% before we would start to lose money.

The Wall Street Journal has indicated that Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) has taken a 5% stake in Kraft Foods Inc. (NYSE: KFT). The stake is under 5% and looks like it was made before activist investor Norman Peltz piled into the food giant, which is under pressure from Carl Icahn as well.

What is odd is that the newspaper noted that it was unclear if Buffett sided with activist investors Peltz and Icahn. This is somewhat amusing when you consider that Buffett invests his monies on a somewhat passive basis and does more voting type initiatives. He rarely steps in and demands that companies leverage their balance sheets or pursue rapid share buybacks for a short term boost. Those initiatives are usually risks to companies because the leverage can hurt on a long term basis. Buffett always looks at these matters in the long term, even if he only holds some of these passive investments for a few quarters.

If you can figure out an average price he paid, probably in the mid-$30s, you can bet that at that price the Oracle of Omaha was thinking there was long term value in Kraft. Based on a $1.80 estimate from First Call for 2007, Kraft trades at 18.8 times 2007 estimates after the 2% drop seen this morning.

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

Kraft Foods Inc. (NYSE: KFT) opened at $34.90. So far today the stock has hit a low of $34.54 and a high of $35.20. As of 10:50, KFT is trading at 34.89, down 0.64 (-1.8%).

After hitting a one year high of $37.20 in June, the stock has dropped down to test support around 35 over the past two weeks. The stock is slipping today after the company announced that it offered $7.2 billion in cash to acquire the biscuit division of French food company Groupe Danone SA (NYSE: DA). Recent technical indicators for KFT have been bullish but deteriorating slightly, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider an August bear-call credit spread above the $37.50 range. KFT has not been above $37.50 at all in the past year and has shown resistance around $36 recently. This trade could be risky if the company's earnings (due out in late July) are a positive surprise, but even if that happens, this relatively stable stock has had some serious resistance around $36 for much of the past year.

Brent Archer is an options analyst and writer at Investors Observer. Do you have any deadwood in your portfolio? Check out the 18 Warning Signs That Tell You When To Dump A Stock.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor control positions in KFT or DA.

Tomorrow morning, confectionary company Cadbury Schweppes plc (NYSE: CSG) will update its investors on a slate of issues that range from a spin-off of its U.S. drinks unit to taking austerity measures to cut costs. Cadbury is trying to recover from a salmonella scare last year, declines in its U.K. chocolate market share, and an increase in the cost of raw materials.

An overview of what could be discussed:

• Sale of U.S. drinks business: The company is expected to announce a sale of its U.S. drinks business, which includes 7-Up and Snapple. The New York Times reported that it is currently unclear which bidder is in the lead for the unit - bids came from a group led by Cott, a consortium that included Thomas H. Lee Partners and TPG and a third consortium led by Blackstone Group and KKR. Other possible candidates for the unit could include The Hershey Company (NYSE: HSY) or Tootsie Roll Industries Inc (NYSE: TR), in a deal that could value the unit as high as $16B. Other sources believe Kraft Foods Inc (NYSE: KFT) and Wm. Wrigley Jr. Company (NYSE: WWY) could be potential bidders; Kraft, JP Morgan believes, would have an edge over Wrigley due to greater funding, flexibility and synergies.

California Pizza Kitchen (NASDAQ: CPKI) on May 10 served up hot 1Q earnings with total revenue up 15.2% to just under $150 million. Comparable sales at restaurants open at least a year were up 4.7%, not great but not bad. Net income was $3.6 million or diluted EPS $0.18, including $.02 per share for accelerated restricted stock vesting. Average weekly sales were up 4% to $65,904. The average check was $13.23. All these increases, though modest, are tending in the right direction.

California Pizza Kitchen currently has 212 full-service restaurants, recently opening 2 in Austin, Texas, and 2 in San Francisco, as well as a franchise location in Japan. The company plans to open 4 more new locations in the second quarter. 181 locations are company owned and, the remainder are franchised. With the new openings, the company also expects to bring in a comparable sales increase of 5-6%, CEOs Rick Rosenfield and Larry Flax forecast 2Q diluted EPS of $.34-.36. California Pizza Kitchen is also looking to expand its brand alliance with Kraft Foods.

The company is so confident in its continuing profitability that is recently granted a 3-for-2 stock split, the company's first stock split since the company's founding in 1985. After the split, the company will have just over 29 million shares outstanding, an increase of 10 million from the current 19.4 million shares. It is shaping up to be a good summer for California Pizza Kitchen as the stock has already gained 9% since January 2007. The stock closed at $36.26 on May 29th, down $0.15.

The next company on my list of the top 25 stocks for the NEXT 25 years is California Pizza Kitchen (NASDAQ: CPKI). This Los Angeles-based company currently has 210 units open, with the company operating 180 of them -- the remaining 30 are franchised. The concept was founded in 1985, but serious growth began about five years ago.

CPKI has the room to expand the concept by a factor of 15. The United States alone can support upwards of 3,000 stand-alone units. Pizza is one of America's favorite food choices and pizza transcends all demographics and appeals to virtually all ethnic tastes. The hallmark of California Pizza Kitchen is the freshness and the high quality of its pizza products. The company also offers a variety of entree-size salads, pastas and freshly made soups to satisfy almost any taste.

CPKI has initiated a loyalty card for its customer base to accommodate both convenience and repeat business. The company has also published its own cookbook filled with its signature pizza recipes. The average unit volume for CPKI is upwards of $3 million annually and growing. California Pizza Kitchen recently signed a deal with Kraft Foods Inc. (NYSE: KFT) to manufacture and distribute its frozen pizzas to the grocery store sales channel. Not only does this deal help CPKI build its revenue base, but it also helps spread the word about its dedication to a quality product. The Kraft opportunity allows for distribution to all 50 states.

I love these kinds of lawsuits -- ones where the dunderhead corporate marketing machine fails to be specific about what is actually in an edible product.

This time around, a Los Angeles woman has sued the Kraft, a division of Altria Group, Inc. (NYSE:MO), claiming that the nation's largest processed food company can't tell the difference between real avocado and colored hydrogenated vegetable oil. I've noticed on many foods (which I don't eat) that colorings, flavorings and cheap filler ingredients are the norm these days.

Altria Group is in the midst of some possible restructuring under the burden of many lawsuits, so this one single lawsuit probably does not carry much weight. In this case, though, Kraft faces a legal situation hinging on the tight court cases involving consumer fraud.

Gallo & Associates -- a Los Angeles law firm claiming significant experience prosecuting consumer fraud -- filed a suit in California Superior Court on this week on behalf of the female plaintiff that alleges Kraft has the temerity to call a product containing a mishmash of partially hydrogenated vegetable oils, whey, water and corn syrup "guacamole".

As far as I know, mashing avocados is how guacamole is made -- not with cheap, processed ingredients. According to reports, avocado represents less than 2% of the dip's contents. Kraft did respond by saying that it will re-label the product as "guacamole-flavored." Awesome job, folks.

MOST NOTEWORTHY:

• Swift Transportation (NASDAQ:SWFT) was downgraded by J.P. Morgan to Neutral from Overweight, citing weaker than expected Q3 guidance. Swift was also downgraded by Robert. W. Baird to Underweight from Equal Weight based on the macro headwinds and the upcoming tough Q4 and Q1 comps. Baird lowered Swift's price target to $25 from $33.
• ThinkEquity downgraded Texas Instruments (NYSE: TXN) to Sell from Source of Funds. The firm believes Q4 revenues may be significantly below expectations given the soft environment and order trends.
• Morgan Stanley downgraded Kraft Foods (NYSE: KFT) to Underweight from Equal weight based on valuation.

OTHER DOWNGRADES:

• Lehman Bros. downgraded Check Point Software Technologies (NASDAQ: CHKP) to Equal Weight from Overweight on valuation and the uncertain growth outlook.
• Sherwin-Williams (NYSE: SHW) was downgraded by Morgan Stanley to Equal Weight from Overweight on valuation.
• Bear Stearns downgraded Phelps-Dodge (NYSE: PD) to Peer Perform from Outperform, citing weakness in copper fundamentals.
• A.G. Edwards downgraded EMC Corp (NYSE: EMC) to Hold from Buy on valuation along with expectations for limited upside potential.

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