The Greatest FLIP FLOP *JUST* Happened

Mike Wilson was heralded as one of the

great economists declaring that hell of

2022 and being right time after time and

time again in 2022 as stocks just hit

New Low after new low after new low

finally culminating in a painful end in

December of 2022 for many stocks get now

Bloomberg is nearly making fun

of Mike Wilson suggesting that he's hit

his mayakopa the I was wrong apology

and that folks is exactly what we need

to explore now why was Mike Wilson wrong

and what does he now suggest is going to

cause the next great headwind for the

economy and stocks going forward well of

course deflation

yes Mike Wilson is now going from well

inflation is not the problem to

it's an earnings recession

oh wait

maybe it's not an earnings recession

maybe it's actually a revenue recession

that'll be driven by disinflation which

will be the true headwind but he does

admit in this piece that he was wrong so

let's evaluate what's going on with Mike

Wilson and let's give people credit

where credit's due everybody can make

mistakes so this is by no means a hit

piece on Mike Wilson it's just to say I

love seeing the Bears flip

because now we can finally get all on

the same page and we can start looking

forward at what potentially is actually

a headwind so is that disinflation and

where is Mike Wilson say he was wrong

well we'll get to that in just a moment

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linked down below or email us at staff

and meet kevin.com to learn more so what

do we have here this inflation is now

eating into sales growth which means

investors focus is likely to shift

towards Top Line Growers rather than

just companies exhibiting cost

efficiencies

so I wrote next to that hmm so like

actual growth stocks and the reason I

wrote that is because of my personal

positioning and where my positioning has

gone uh you know since since I sold in

January of 2022 uh again I you know

bought back in obviously throughout 2022

in various different by the dev sessions

but the argument that I made back in

2022 is that eventually what we'll want

to look for are companies with true

quality growth and potentially even uh

you know strong free cash flow that we

would want to stay away from companies

with low free cash flow or ultimately uh

the you know a low ability to

potentially survive a recession and some

of that is exactly what we end up seeing

Mike Wilson talk about in the story and

I think it's interesting because it's a

big flip from what we've been used to

Mike Wilson saying uh much of what Mike

Wilson has been focused on has been this

idea of let's get into defensives let's

get into Staples but it's really been

the Staples that have benefited the most

of just that headline Revenue growth

based off inflation in fact if we take a

peek over here it says what to own in

Mike Wilson's piece as we head into the

bulk of earnings season over the coming

weeks we expect performance dispersion

to rise and we recommend investors look

for stock ideas with the following

attributes

how familiar does this sound ask

yourself truly does it does this sound

familiar to what I said you know a year

to seven months ago

High earnings quality strong free cash

flow and improving earnings revision

driven by sales growth

really interesting because that's

literally what we had talked about uh

about positioning in contrast to this

idea that oh Staples and defensives are

where it's at

which means if you want to counter trade

Mike Wilson maybe is it now time to look

for cheap defenses anyway so what do we

have here so this gives us a little bit

of a heads up here uh he does indicate

advertising is has been pretty upfront

weak in spending and this is true we've

seen some weakness in advertising uh

cyclical housing headwinds are reaching

a peak globally and uh take a look at

this this is where he indicates that uh

you know or I should say this is where

he breaks that oh look at this Jim Bill

Jimbo's even talking about it

everybody's look at that we were wrong

Wilson higher valuations than expected

yeah this is where Mike Wilson breaks

down his reasons for why he believes he

was wrong one of the reasons he gives is

he argues that the debt ceiling being

extended and adding basically a trillion

dollars to to the US debt came as a

surprise

I wrote on the left side here really

like it was pretty widely expected that

we were going to extend the debt ceiling

we knew it was dramatic but there was

really no moment where people like oh

yeah we're really going to default and

at least on Wall Street certainly

mainstream America a lot of people are

like yeah Donald Trump says default get

in there and throw the furniture around

let's go let's default

sorry

uh then he talks about this idea that

well you know be careful because soon 27

million people are going to have to

start repaying student loans but there's

actually an asterisk on this remember 27

million people do not have to start

repaying their student loans they just

start accruing interest again they

actually don't really have to start

making payments again until next year

just also somewhat remarkable to

consider he also talks about this idea

which we've heard before about consumers

willingness to borrow on credit cards to

basically keep spending money and this

is where again I love looking at this

chart household Debt Service payments is

a percentage of disposable income sorry

folks the trend for the Bears is down

you can see the trend line right here on

the oh there we go now you can see the

trend line there on the right the trend

is down where actually if anything

bouncing off of the trend line

and continuing to Trend down we're way

lower than where we have been on the

household Debt Service payments as a

percentage of disposable income uh over

here we've got talk that well you know

the Federal Reserve they injected

liquidity through uh the banking crisis

and that's not fair you know they gave

us QE so there's sort of a lot of like

lashing at explanations it feels like

for why basically you know Mike Mike was

wrong and and it's okay it's okay and

these are not necessarily oh completely

wrong I mean it is true that consumers

at some point are gonna have to repay

their student loan debt that can affect

five percent of uh revenues that

companies is an expectation but many

have believed that markets are already

pricing this in and again it's going to

come A year later than we really expect

this uh refilling of

the treasury general account and the

liquidity issue I mentioned over here

that ended up being of course a giant

nothing Burger which we expected because

of the ample buffer in the federal

reserve's repo facility which isn't

actually mentioned here uh there is this

talk though about liquidity Trends not

being supportive of equity prices this

is is an argument right so the yellow

line here is the S P 500 this is roughly

the average we're drawing here with a

little laser and then of course you've

got the blue line here showing liquidity

you can see this massive gap on the

right side where liquidity is actually

relatively low relative to how much the

stock market has rallied

in my opinion while this is a red flag

it is possible that liquidity

expectations are being priced in up to

18 months to two years early where

markets are of the belief that oh don't

worry liquidity will come back from the

FED we'll get there I mean I believe

that I actually think we'll get back to

quantitative easing certainly by 2020

five six and that might be pre-priced

getting pre-priced in

so uh Mike Wilson does warn that he

believes that it's premature to

extrapolate the benefits of artificial

intelligence across everything for this

year but does agree that AI in the

future will be extremely constructive

especially for companies like Nvidia and

Microsoft

here you can see that the upside move

and Equity multiples on the back of the

themes we've seen

has has been a lot stronger and lasted a

lot less a lot longer been more

persistent than they anticipated

that is we were wrong he says this is a

pretty powerful piece on Wall Street

right now and I expect to hear a lot of

folks talking about it and it's nice to

see the actual piece

inflation is now falling faster than

consensus expectations I thought this

was also quite fascinating that Mike

Wilson is basically talking about hey

inflation is actually

less of a headwind than we thought if

anything is falling less than expected

no reanimation of inflation though a lot

of bears aren't arguing that inflation

is really going to take off now they're

arguing that the earnings recession and

the cumulative effects of fat tightening

are going to crush us into an earnings

recession that'll lead the FED to

stimulate again which could lead to

inflation again

it's unlikely that we'd see the

inflation again that we saw in 2021 but

it is possible that the bite of Fed rate

hikes hasn't quite fully hit yet

now here Mike Wilson argues that many

companies had their sales grow solely

because of price this is something that

I've regularly argued especially when we

look at sort of the rollover of

inflation Dynamics which we regularly

talk about It's always important to

remember how these sort of price

comparisons work easiest way to do that

is visually so if we look at

2023 versus 2022 it's always worth

remembering that most companies took

their price increases in q1 of last year

with some lingering price increases into

Q three more of them really in the first

half than the second half right that

really actually means that if we compare

2023 back to 2022 a nine percent price

increase taken in q1 will actually look

like an increase in prices in Q2 in Q3

in Q4 in q1 and then you get roll off or

if you didn't change prices again you'd

be at zero that's where you'd eventually

get roll off of course if you increase

prices something more gradually and you

said well you know we actually increase

prices six percent then three percent

then one percent then zero then you're

looking at a six percent bump over here

uh well actually let's let's go back a

little bit zero and price increase over

here let's draw the price at what what

the inflation would look like quarter

after quarter in this quarter it looked

like you'd have a nine percent bump then

a ten percent bump in pricing if you

went for six in q122

three in Q2 one in Q3 zero in Q4 all of

2022. you'd have this cumulative

inflation effect right so you'd have six

in q122 9 in Q2 22. 10 in q322 uh

technically uh then you'd be flat but

still 10 of an increase you get to q1

you're at a ten percent increase Now

You're Gonna Roll the six off here's how

how the roll-offs work assuming you

didn't take any more price increases

You're Gonna Roll Off that six that you

had on the prior comparison and now

you're actually only going to be

four percent higher now we're going to

roll off those three and then by Q3 2021

you're actually only one percent higher

and then you're flat so this is kind of

how that roll off looks and it's

unfortunate because for a lot of folks

who were reading this sort of headline

news on you know Bloomberg or whatever

where there was talk about hey uh

there's there's this uh there's this

massive fear that wait a minute we're

going to end up with uh all of this uh

this inflation all throughout 2023

because look Pepsi just raised prices in

q1 or Domino's raise prices five percent

in q1 no no they didn't those were

year-over-year comparisons so if we draw

this in for exactly what Domino's is

saying here we're looking at expecting a

3.9 here 3.9 here and then we're getting

down to two percent by that fourth

quarter right so you're really getting

this this uh you know more of a

corrected View of how we should actually

be looking at inflation roll-off when

when we consider ah okay this is how

roll-off is going to function

unfortunately and more people realize

that in the first quarter I think they

would have invested in stocks more

because we would have realized okay

inflation is gone no that's exactly what

we did at least myself because well in

my opinion it was pretty clear inflation

was going away but not because of

lagging data coming to us from uh you

know from from Bureau of Labor

Statistics or the Census Bureau but

rather my favorite way to look at

leading indicators of inflation is

actually determining what our companies

actually doing and the best way to see

what companies are actually doing is

looking at those earnings calls and

saying okay well how are they behaving

relative to what uh what people expect

the rollover of inflation Dynamics leads

a lot of these stable companies whether

it's Pepsi or otherwise to show more uh

gains in and revenue growth then they

are probably Justified to have

now he indicates that those will be a

material headwind if pricing power were

to roll over for those companies now

this is actually what I went on to call

faux pricing power we coined this term

somewhere around January

and I said Pho pricing power is when

sales are up because everybody's raising

pricing it's during an inflationary time

but in my opinion true PP

true pricing power is increasing sales

relative to the competition

in other words

in your class in whatever area or field

that you're in are you able to maintain

margins and increase sales better than

your competitors that is true pricing

power in my opinion it's relative

pricing power compared to those around

you a great example I think is you know

Tesla of course is reducing prices but

the entire industry is reducing prices

which company however though still has

the best margins or better margins or a

better capacity to increase sales than

other companies and quite arguably that

is Tesla the same could be said about a

company like apple where Apple might not

be increasing pricing on the iPhone but

they're still now expecting more sales

than well a ever before and B compared

to any competitor

another pricing Power stock okay great

so the inflation-driven boom we pointed

to at that time uh is uh now leveraging

in reverse and this is just a a warning

again for those Staples and defenses

which is the opposite of what Mike has

been recommending even up up to

potentially as recently as last week

where he still reiterated and doubled

down on Staples and defensives so

something worth keeping in mind on this

is a very big flip-flop that sort of box

of uh you know here are the stocks we

recommend uh you know this this chart

actually uh is the chart that they've

regularly pointed to uh they they have

not find it incredible that they've kept

it the same Healthcare Staples utilities

uh and still underweight discretionary

and cyclicals

okay great well let's keep looking at a

couple more a piece of items here from

what Mike mitt Wilson has to say there

are a few more things in here that are

quite interesting so earnings revision

breath has decelerated over the past two

weeks and is now at negative territory

uh in other words expect more potential

uh downward outlooks from companies

pessimistic uh forward-looking guidance

I agree actually that guidance is going

to be a big part of a stock moves over

the next few uh a few months as we get

through not only this sorting season but

expectations for Q4 a lot of fear that

Q4 will actually end up being where the

yield curve finally bites and drives us

into recession

uh so here's some charts talking about

those consensus estimates falling uh and

uh what do we have here Consumer Finance

net charge offs are increasing uh with

the low end consumer being challenged

card spending is slowing but loan growth

is is still high because consumers are

paying less of their loans off this is I

put a little a here because it's again

when we look at the percentage of

disposable income it's not 100 true

however it is true that there is a lack

of price Discovery in commercial real

estate because so few were deciding to

sell that's actually

one extra piece that I think is so

interesting is so many folks are worried

about the impact of potentially a

commercial real estate crisis and some

kind of collapse in the real estate

market because of commercial real estate

but what you're actually finding is

because so few commercial real estate

owners are selling it's actually really

hard to realize that there's any kind of

office or commercial real estate

collapse why well because nobody's

selling or very few were selling like

you're getting some San Francisco

properties trading uh very few otherwise

because rates are quite High uh you know

which obviously it doesn't justify uh

buying some of these larger properties

at this point unless you can get a

really incredible deal but sellers are

still holding on to not necessarily

wanting to give up to their properties

in commercial real estate uh for a great

deal that will change over time but it's

certainly coming a lot slower than

expected and Mike Wilson has a good

point here that you could really delay

this commercial real estate crisis which

we've already updated many valuations

for these commercial properties for the

equities just getting written down not

to the point of actually calling for a

debt crisis we talked about this the

other day where basically you know if

you have a 100 million dollar building

and enjoy drops 40 in value and it's

leveraged to 60 percent well then the

bondholders or the node holders don't

lose a dime it's just the equity

investor that loses money uh anyway so I

find that an interesting argument as

well though from Mike Wilson here that

hey you know everything's just going a

lot slower than expected and things are

just going better than I expected and

therefore Mike Wilson says and admits

that he was wrong

so now we have to find a new bear to

follow

of course we'll still read Mike Wilson's

pieces and see if there's any kind of

new flip flop but I find it very

interesting so that does it for this

morning's me Kevin report I hope to be

live a little bit later with more

information and coverage so uh that is

the Great

meets Kevin report brought to you once

again today sorry for not being here

yesterday appreciate you I'll see you in

the next one jumping over to the course

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