It's not as stupid as it sounds, if you look at the whole Obama quote and the context (this is lifted from a New York Times story yesterday):
"John McCain says he's about change, too -- except for economic policy, health care policy, tax policy, education policy, foreign policy and Karl Rove-style politics," Mr. Obama told his supporters here. "That's just calling the same thing something different." With a laugh, he added: "You can put lipstick on a pig; it's still a pig. You can wrap an old fish in a piece of paper called change; it's still going to stink after eight years."
In the latest sign of the campaign's heightened intensity, Mr. McCain's surrogates responded within minutes and called on Mr. Obama to apologize to Gov. Sarah Palin for the lipstick remark. But to those in the audience, it was clear that Mr. Obama was employing an age-old phrase -- lipstick on a pig -- and referring to Mr. McCain's policies. He had not yet mentioned Ms. Palin at that point of his speech.
It's also worth noting that the lipstick on a pig image has also been used by McCain on the campaign trail.