• Stocks stall, yields up, oil up, China eases up, rates go up, inflation is up.

  • The Recession – not if, but when.

  • End of qtr. action should see stocks rise just a bit.

  • Earnings season is only 2 weeks away.

  • Try the Stuffed Zucchini Flowers.

There was no carry thru to the stock rally that began last week….as investors/traders and portfolio managers remain a bit confused over what is next. By the end of the day the Dow gave up 65 pts, the S&P lost 12, the Nasdaq lost 83 pts, the Transports gave back 35 pts while the Russell gained 6 pts.

Eco data last week was weaker than expected and that is what some are saying was the reason the rally even began…. (vs. just being in a short-term oversold condition). Then yesterday’s eco data had both - an upside surprise and a downside surprise….…. Durable goods stronger than expected and Capital Goods Ordered and Shipped also stronger than expected while Pending home sales m/m were UP but y/y sales down big…falling 12% while the Dallas Fed Survey also fell much more than expected….at -17.7 vs. the expected – 6.5.

This left everyone thinking – What to do? So, stocks slipped in what could be described as a ‘slow day’ as investors remained in a holding pattern as the quarter comes to an end. The ‘dog days of summer’ are upon us, schools are out, kids are going to camp, and families are prepping for the summer vacation. The 4th of July weekend is here, earnings will begin in 2 weeks and then it starts all over again…. What will companies reveal? What will they say about profit margins and pressures on their businesses? In the middle of all this will be another round of macro data points that will only serve to ‘fill in the blanks’ causing many to ask: What will guidance look like then and what will be the speculation around what the FED will say and do at the end of the month when the next FOMC (Federal Open Market Committee) meeting takes place on July 26th and 27th?

The wage/price inflation spiral begins….

Word that United Airlines approved a pilots contract that will see a 14% pay raise over 18 months (I erroneously reported it was over 36 months yesterday – so I am now correcting myself) sets the stage for similar hikes throughout the industry, because if you think that American, Delta and JetBlue pilots are going to stand by and say –‘Oh that’s great for United pilots….’ Think again…..They will join the chorus and demand the same if not more for them to remain in the pilot seat……And this is how it begins….the WAGE/PRICE SPIRAL (reminiscent of the late 70’s/’80) that will only exacerbate the inflation story….because what the pilots are saying (and soon lots of others) is that “We cannot afford to come to work at current wage rates because inflation is robbing us of our earnings…” so cough it up…..and let’s go (especially when they report ‘better than expected’ earnings). United has now set the bar….do not expect the others to negotiate a ‘better deal’ – they drew the line in the sand, and it is at least 14%.... And for the airlines to offer these pay raises they have to do what? Oh right – raise the price at the pump! (That is an analogy…capisce?).

And then do you think that the flight attendants are going to stand by without putting up a fight? Especially now that many of them feel ‘threatened’ by bad traveler behavior….They will seek ‘combat duty pay’ on top of a 14% pay raise….And then think about all the ‘bag handlers’ – you know the guys that work outside in the rain, snow, ice, and heat…..(like the post man….and wait until federal employees start screaming about not being able to feed their families!).

This is only the beginning….so this whole idea that inflation is peaking…. get it out of your head right now…. ‘We have only just begun….’ (to live….White lace and promises, a kiss for luck and we’re on our way……

And this increase in wage demand will start to permeate other industries and then…. Well, strap in…. Welcome to 1979…. (I was 18, had dark brown hair, a full bushy stash and curls going down my neck - just graduating from high school……oh boy – think about THAT!)

Now why the back and forth? Because every good piece of economic news is ‘bad’ for the market – Why? Because strong growth will continue to feed the inflation monster and that will force every central bank to hike rates forcing us into an inevitable recession –" if we are not already there.

Now my friend Brian Wesbury – Chief Economist at First Trust Advisors is on the other side of this argument. He is not in the recession camp (yet). He points out that in the first five months of the year, manufacturing production is up at a 6.6% annual rate, nonfarm payrolls are up at an average monthly pace of 488,000, and the unemployment rate has dropped to 3.6% from 3.9%. April revealed that “real" (inflation-adjusted) consumer spending and personal income (excluding transfers) were at record highs. He also points out that gross domestic income (real GDI), an alternative measure of economic output, rose at a 2.1% annual rate in the first quarter (vs. a negative 1.5% print in the GDP).

“The public pays very little attention to GDI because the government usually takes an additional month to report that data, after GDP is initially released. But, over time, GDI is just as accurate as GDP in describing the performance of the economy”

And that measure is NOT screaming recession (yet) no matter how painful it feels right now. (Think surging energy/food/ and cost of housing – everything that matters to most Americans). He goes onto to reason that a recession is about real economic pain – not an academic style of semantics that tries to make the data fit some ‘technical definition…. especially since we are in the middle of the mid-term elections. That are now only 4 months away….because if they succeed in convincing us that the recession has begun – it usually hurts the party in control……causing upheaval on the hill and in the White House…..I mean – we see this every 2 years – with every President - as the minority party tries to regain control and this year the stakes are very high……as the heat in the kitchen is reaching the boiling point. What I find interesting is that he is expecting the recession not to begin until late 2023 or early 2024 and it will not look like the late 70’s, 2008-2009 or even like 2020. His analysis suggests it will be more like 1990-91….and to that I say – “Brian – I love you - Good Luck’.

My analysis (or better yet, my gut) tells me that while what he says is true, reality says the public does not see it that way nor do so many asset managers – thus the collapse in the index’s - and so the volatility continues and will continue until we get even more clarity on how this change in monetary policy is working. The key here is that ‘whenever’ the recession does officially come, that will be the time to ‘back up the truck’ ……...because that will be the time that the FED starts the stimulus process all over again….

Look – inflation is running at 8.6% here and running at 8+% across Europe and 9.1% in the UK. US rates are only 1.75% while European rates remain just south of 0% in negative territory – this after a dozen years of stimulus and support…Inflation is not just going to slow down…..it needs to be ‘arrested’ and that can’t happen until they kill demand (because the FED and ECB cannot control the supply chain, nor can they control Putin- the very reasons the Dems hold responsible for this out of control situation). So, whatever you believe you believe, but the market action is telling you what the story is…...and right now – it is continued uncertainty and that will lead to continued volatility and downside pressures.

Now – that does not mean you jump out the window and light your hair on fire….it just means you need to understand the environment and plan accordingly…. there are opportunities in this mess….and there are places to put ‘investment dollars’ that offer stability, safety, income, and growth. Think the more traditional big, boring names…the mega caps that have multi-national exposure that offer dividend growth and long-term histories. Also think about current energy policy and the opportunities that this creates…. because while we all want to go green, we are not there just yet and most likely will not be for at least 3 decades – but during this time there will be opportunities that present themselves….and already are.

Think cybersecurity, think aerospace and defense, think artificial intelligence, think consumer staples, financials, and industrials…. think healthcare. Think about who you are, what is your risk profile and more importantly -what is your time frame? Because time plays a significant role in your decision making. This morning we are seeing US futures rally (just as we saw yesterday morning in the pre-mkt) ….….

Dow futures up 130 pts, the S&P up 15, the Nasdaq up 50 and the Russell is up 12 pts at 4 am. Trading for the next 3 days will remain erratic and at times unexplainable as the month and qtr. comes to an end and portfolio managers ‘rebalance’ their portfolios and investors re-allocate investment dollars.

Eco data today includes Retail Inventories – exp of +1.6% - which would suggest that either consumers are not buying this stuff, or the supply chain issues are receding – and the way they tell the story will be interesting. Consumer Confidence of 100 and that would be a decline of 6 pts vs. last month and finally the Richmond Fed Survey – expected to be -5. Remember that Thursday brings us the latest PCE report – the FED’s favored inflation gauge and this will be important.

European markets have now been open for two hours and they are all up as well…between 0.75% and 1.5%. The story is the same…. runaway inflation, rising rates, and end of qtr. window dressing. News that China has eased up on its very strict covid protocols is helping to send mining and energy stocks higher…. (Think demand.). The PBoC (People’s Bank of China) has pledged to keep monetary policy supportive and that helped stocks in the region advance which is helping European shares advance as European/Sino trade data would be expected to improve.

10 yr. treasuries yields were up yesterday and are up again this morning – now yielding 3.25%. And oil, which was under pressure for the past two weeks trading down to $101/barrel before finding support has rebounded nicely and is trading up $1.35 or 1.2% at $111/barrel. The latest China news (ease of covid restrictions) is what is helping to push oil higher today. Talk of price caps on Russian oil at the G7 meeting do not appear to be gaining traction…...

The S&P closed at 3,900 as stocks continue to ricochet around and investors try to decipher what is next. It is the end of the month and quarter….so expect lots of action…. I remain in the camp that says we cannot avoid a hard landing and so I remain cautious as we move into the 3rd qtr. I suspect that as earnings season begins and estimates come down, the market will be forced to re-price and a test of S&P 3600 should not be ruled out.

Stuffed zucchini flowers

It is that time of year again for the stuffed zucchini flowers.... you can only have these for a short period of time – so get ready for this annual delicacy.

On their own - they do not taste like anything – but they are perfect for stuffing....

You will need. Fresh Picked Zucchini Flowers. For the stuffing you need: – 1/2 c of ricotta cheese, grated Romano Cheese, shredded mozz, 1 egg (beaten) s&p.

For the batter you need: 2 eggs, ¼ c whole milk, ¼ c of flour, ¼ c of the grated Romano cheese and some chopped basil.

Clean the zucchini flowers and carefully remove the stamen. (Do not remove the stem - as you will need it to grasp when dipping and frying) (The stamen is the pollen producing "reproductive organ" of the flower. - while the stem is the stem!).

Mix the stuffing ingredients in a bowl and then place in a Ziplock bag with one of the corners snipped off – just enough to make a pastry bag.

Now – place the tip of the bag into the flower and gently squeeze a small amount of the mixture into the blossom – do not overstuff it. Gently twist the flower to close the end and place in the fridge for 20 mins. For the batter – scramble the eggs, add the milk, flour, cheese, and basil. Mix well – it should be thick like a pancake batter…. if it is too thin – it will not adhere to the flower.

Take the flowers out of the fridge.

Now add the olive oil to a large frying pan that will accommodate 4 or 5 blossoms at a time and heat it up….

Dredge the flowers in the batter and then place in the hot pan – do not overcrowd them. Fry until golden brown and then flip to fry the other side. (2 mins max/side). Remove and place on a plate lined with a paper towel – this will help to drain off the excess oil.

Using a white platter – cover with some arugula and then place the flower on top of the arugula and then sprinkle a bit more Romano cheese on top. It is all in the presentation…. You need to please the eye to please the pallet.

General Disclosures

Information and commentary provided by ButcherJoseph Asset Management, LLC (“BJAM”), are opinions and should not be construed as facts. The market commentary is for informational purposes only and should not be deemed as a solicitation to invest or increase investments in BJAM products or the products of BJAM affiliates. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. There can be no guarantee that any of the described objectives can be achieved. BJAM does not undertake to advise you of any change in its opinions or the information contained in this report. Past performance is not a guarantee of future results. Information provided from third parties was obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness.

Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will be profitable. The price of any investment may rise or fall due to changes in the broad markets or changes in a company’s financial condition and may do so unpredictably. BJAM does not make any representation that any strategy will or is likely to achieve returns similar to those shown in any performance results that may be illustrated in this presentation. There is no assurance that a portfolio will achieve its investment objective.

Definitions and Indices

The S&P 500 Index is a stock market index based on the market capitalization of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor’s.

UNLESS OTHERWISE NOTED, INDEX RETURNS REFLECT THE REINVESTMENT OF INCOME DIVIDENDS AND CAPITAL GAINS, IF ANY, BUT DO NOT REFLECT FEES, BROKERAGE COMMISSIONS OR OTHER EXPENSES OF INVESTING. INVESTORS CAN NOT MAKE DIRECT INVESTMENTS INTO ANY INDEX.

BJAM is an investment advisor registered in North Carolina and Arizona. Such registration does not imply a certain level of skill or training. BJAM’s advisory fee and risks are fully detailed in Part 2 of its Form ADV, available upon request.

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