I believe that smells and the age of the cats is the key factor here and definately Peanut is very stressed out. The only thing I can think of is to separate them temporarily and see if anything improves. If Peanut continues to lick herself raw then you'll have to think of something else. I would call a vet and ask for their advice and by all means NEVER, NEVER hit a cat!!! It will only make him afraid of YOU not alter the behavior.