Weekly Hard Assets Insights
By David McAlvany

Santa Arrives Late; 2022 Arrives on Time

Well, Santa arrived late on Wall Street this year, but he came bearing gifts, nevertheless. This week the S&P 500 accomplished its 70th all-time high of the year to wrap up 2021.The index notched an intraday all-time high-water mark on Thursday at 4,808.93. Not to be left out, the Dow Jones made a new all-time high as well this week, nearly touching 36,700 intraday on Thursday. Trading volumes and economic data releases were light this week due to the holiday season.

Some of the most significant news of the week came from the Covid front. Late this week, the number of new Covid cases in the U.S., led by the omicron variant, reached a record of nearly 500,000 per day. The United States now has the dubious distinction of reporting the highest number of new daily cases in any country at any time. According to the Daily Mail, the U.S. recorded 2,184 deaths on Wednesday, and averages 1,546 deaths per day—an 18 percent increase over the past two weeks. But that number is still lower than the pandemic record, of 4,442 deaths in a single day recorded in January 2020.

The CDC also reports that 75,477 Americans are currently hospitalized due to complications with Covid, an 11 percent increase over the past two weeks.Many medical experts expect the current surge to worsen in January. Dr. Michael Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota, was a particularlyoutspoken expert this week. As quoted by the Daily Mail, Dr. Osterholm spoke Thursday on MSNBC, saying, Right now we have a very imperfect situation thats going to require some very imperfect responses…. Over the next three to four weeks, we are going to see the number of cases in this country rise so dramatically that well have a hard time keeping everyday life operating.

If the new Covid surge accelerates as expected, we will have to watch for any significant new policy responses and, if any, theirresulting economic impacts. That said, despite this alarming news building throughout the week, the Santa rally didnt flinch.At present, markets dont seem concerned, but with the holiday season ending, we will remain alert for a more definitive market reaction to this emerging new Covid scare next week and beyond.

For the final 2021 market performance tally, the S&P 500 surged 27%. The Dow Jones gained 19%, the Nasdaq added 21%, and the small cap Russell 2000 increased 15%. West Texas Intermediate Crude oil had an explosive year, gaining 55%.Copper shined, as the metal matched the S&Ps 27% price increase. Aided by a year-end surge, the Dow Jones Utility Average Index sparkled with a 55% increase. The Dow Jones US Real Estate Index recorded an amazing 129% year-over-year gain. Gold and silver, however, were excluded from the 2021 party. The price of gold declined by 4%, while the price of silver dropped 12%. The HUI gold miners index underperformed physical gold and silver, shedding 14% on the year. 2021 witnessed the U.S. dollar index gain 6%, and the yield on the 10-year Treasury added 59 bps to close at 1.52%.

While 2021 will go down as a great year for many asset prices, stock market internals and macro dynamics continue to paint a questionable picture for the ongoing bull market in stocks.

The S&P 500 is fast approaching the upper trendline of the S&Ps 2021 trading channel. In fact, the upper rail of the trading channel has contained and reversed every rally into it (about seven) since September of 2020. This trendline now represents formidable resistance. If it continues to hold rallies in check, this resistance will frustrate long positions by either initiating another sell-off or significantly slowing the pace of gains. As long as both the support and resistance trendlines that constitute the rising channel hold, the market will continue to offer buy-the-dip opportunities amid a rising price trend.

On the other hand, of even more significance, if price breaks out above this trendline resistance, it will likely be a very strong indication that an unstable and disorderly final blow-off top may be trying to develop. While that may sound like fun, historically, these blow-off dynamics end with a river of tears, not cheers.Its also worth mentioning that the over 117% surge in the S&P off the March 2020 Covid lows may already constitute the better part of a major blow-off top of the entire rally that started in 2009. As has been mentioned in previous HAIs, a breach of the lower trendline support will trigger alarm bells all across Wall Street.

Under the surface of the major index price action, many signs of weakness continue to fester and, in some cases, worsen. The performance divergence between US stock indexes is becoming notable. While the S&P 500 and the Dow Jones are at new highs, other indexes are increasingly lagging of late. The tech heavy Nasdaq, the S&P mid-caps, and the small cap Russell 2000 have not only failed to make new highs, they are all considerably lower than their most recent highs made on November 8th. In fact, the Russell 2000 small cap index is currently trading lower than where it was last February.

Meanwhile, across all major indexes, technical momentum indicators are negatively diverging significantly from price action. For the weaker indexes, this technical momentum dive, on a weekly basis, began early in 2021. For the stronger S&P, the declining momentum developed this past summer and has worsened since. These negative divergences between prices and momentum indicate a significantly weakening trend. Absent a fresh catalyst, this will ultimately manifest in price following momentum lower.

In addition, the advance decline index, which measures the number of individual stocks advancing and declining, is still at the same level as last June. In that same time frame, the S&P 500 has rallied 13%. Some of this deteriorating breadth can be attributed to an ongoing shift from an aggressive risk-on sentiment towards an increasingly risk-averse market footing.The big cap index gains are being driven primarily by a smallnumber of mega-cap behemoths deemed to be a safer refuge for capital. At the same time, along with small caps, we are seeing underperformance take hold across the speculative fringe of the market that had previously been leading markets higher. Case in point would be Cathy Woods ARKK Innovation ETF that is essentially constructed to offer exposure to a group of this bullmarkets most speculative darlings. Since the ETFs peak in February, it has since declined 40% into the year-end.

The narrowing of market gains toward the big cap major indexes and away from the smaller and more speculative areas of the market seems to indicate that a larger de-risking phenomenon has already begun. In the context of the number of unresolved issues continuing to light up the threat board, this apparent sub-surface market trend towards de-risking makes sense. An ongoing inflation surge, a necessarily less accommodative USFederal Reserve, brewing corporate margin pressures, a slow-motion mess in China, an unfolding Omicron surge, and acollapsing Turkish Lira that represents the bubbling up of emerging market stress more broadly all amount to good reasons for caution heading into 2022.

That said, one of the problems with de-risking these threats byredeploying capital towards the safety of the largest capitalized US equities is valuation. The price-to-earnings ratioof the S&P 500 ends 2021 at over 30x. These are nose-bleedaltitudes. Historically, 20x earnings are frothy, and following the great financial crisis (GFC) of 2008, the S&P was valued at just over 12x earnings. Even worse, the 10 largest stocks by market cap in the US together are now valued at well north of 35xprice-to-earnings. That compares to just over 10x earnings following the GFC. The current premium valuation of this cohort was only equaled during the peak of the 2000 tech bubbleand has never been higher.

A similarly disconcerting sign from a group with a strong investing track record comes from corporate insiders. Data from InsiderScore reveals that in 2021, through November, corporate insiders sold a head-turning $63.5 billion in personal stock. That number represents a 50% increase over the full-year total in2020, and 2020 had the second most sales of the last six years.In fact, November 2021 set an all-time monthly record for insider sales at $15.594 billion. In a recent Wall Street Journalarticle, University of Pennsylvania Wharton School of Business professor Daniel Taylor said, What youre seeing is unprecedented.Taylor studies trading by corporate executives and directors. According to the WSJ, 2021 marks the most sales he can recall by insiders in a decade, resembling waves of sales during the twilight of the early 2000s dot-com boom.

In the context of an array of significant macro threats and an overwhelming number of historically powerful indicators flashing warning lights, markets way well be poised for a very difficult stretch. With markets, however, timing is notoriouslytricky. While that welltested truth has always been, it is now more greatly accentuated than ever in our era of unprecedented central bank market intervention. As long as the rising price channel in the S&P 500 remains intact, a general melt-up in markets will continue to get the benefit of the doubt. Still, with broad stock market valuations at present levels, history suggests that returns over time will be muted at best and devastating at worst. Meanwhile, strong fundamentals are in place and even improving along with attractive valuations in select hard asset categories within energy, copper, certain agricultural related areas, and precious metals. In the near term, anything can happen, but over the intermediate and longer term, these areas within the hard asset universe appear extremely well positioned to retake the lead over broad market stock indexes and outperform significantly.

According to economist Arthur Kemp, May you live in interesting times, is said to be an ancient Chinese curse. If it is a curse, I certainly wouldnt wish it on anybody, but one canobserve that as we enter 2022, interesting times are most certainly upon us. Our interesting times very much include markets, but extend well beyond. In our time, the primacy of the societal values of individual liberty and freedom seem to be on the wane. At the same time, interventions into free markets as well as restrictions and mandates imposed upon free society are increasing. Let us hope that 2022 sees crisis dynamics abate, and that in both markets and society more broadly, freedom as a value can once again ascend to greater prominence. Economist Friedrich A. Hayek, beyond mere convenience, recognized the profound rationale of freedom. Hayek observed:

by tracing the combined effects of individual actions, we discover that many of the institutions on which human achievements rest have arisen and are functioning without a designing and directing mind; that, as Adam Fergusonexpressed it, nations stumble upon establishments, which are indeed the result of human action but not the result of human design; and that the spontaneous collaboration of free men often creates things which are greater than their individual minds can ever fully comprehend. This is the great theme ofthe great discovery of classical political economy which has become the basis of our understanding not only of economic life but of most truly social phenomena.

While under certain circumstances, interventions, restrictions, and mandates might be temporarily useful, a primary societal focus on protecting freedom is a higherorder universal and timeless good. To borrow a phrase from John Henry Newman, in 2022, I hope that we remember that the useful is not always good, (but) the good is always useful.At MWM, we wish you all a happy, healthy, prosperous, and free new year!

As for weekly performance: The S&P 500 was up 0.85% this week. Gold was up by 0.93% while the price of silver increased by 1.79% on the week. Platinum was down 0.91% while Palladium lost 2.29% on the week. The HUI gold miners index was up 1.96%. The IFRA iShares US Infrastructure ETF was up 2.14% for the week. Energy commodities were higher. WTI crude oil gained 1.92%, while natural gas gained by 2.75% on the week. The CRB Commodity Index was up 1.33%, while copper was up 1.64%. The Dow Jones US Real Estate Index ended the year in strong fashion, up 3.73% on the week, while the Dow Jones Utility Average Index was up 2.62%. The US Dollar Index was lower this week, down 0.41% to close the week at 95.59. The yield on the 10year Treasury increased by 2 bps to close the week at 1.52%.

Happy New Year Everyone!

David McAlvany
Chief Executive Officer
MWM LLC