Just Sell It

Today's market action saw investors shun assets across the board, regardless of asset class.  Domestic equities, commodities, Treasuries, and emerging markets simply found no meaningful reason to rally.  And instead of firming through the end of their respective sessions, all major markets saw the selling pressure continue apace right through the close.  To be sure, this is a significant development and highly indicative of a market environment that is growing increasingly bearish.  That said, volume on the S&P 500 (3.6 billion shares) was not such to indicate that there was any panic or meaningful conviction behind today's move, so we'll have to wait and see if this proves to be a short term dip or the outset of a larger sell off.  Regular readers of Fundamentally Technical know that I remain firmly in the bear equity camp over the near term and today's price action was further confirmation that this skepticism has been warranted.  Even if you disagree with my fundamental outlook for the major indices, the size and speed of the recent rally has to give even the most staunch bull a moment's pause.  Risk is simply shaded more to the downside at this point in time, which begets the need for playing defense.

While there's not a lot for me to add tonight that was not covered this morning, I would like to bring to your attention a fairly significant development in the municipal bond market.  While there has been much talk of the financial crisis facing state and local governments, these concerns have been pushed to the background over the past year as federal stimulus money filled most of the gaps that were present in 2009/2010.  However, as news of 2011 budget shortfalls in states like California and Texas are coming to light ($25 billion in each state), investors are quickly reevaluating their muni-debt love affair.  The chart below depicts the share price of PIMCO's Municipal Bond Fund II (symbol: PML).  As one of the larger municipal bond funds out there, it should be a decent proxy for what's going on in the muni-debt world.

As  you can see, the past week has been absolutely brutal for municipal debt.  And while some of this sell off can likely attributed to increased inflation concerns (which have plagued the Treasury market as well) and a higher probability of an extension of the Bush tax cuts, the scale of this move clearly speaks to outright credit quality/default concerns among investors.  And with Republicans now largely in control of Congress, the likelihood of another round of fiscal stimulus is greatly diminished, thus leaving states and municipalities with the having to choose between budget cuts and tax hikes to close their deficits.  I'm not saying that this decision is a bad thing, but the fact is that such actions will not prove stimulative to the domestic economy.  Higher taxes are well known to slow economic activity while layoffs will end up having a similar effect as former employees lose their sources of income and reduce spending accordingly.  This yet another scenario that speaks to the heart of the increased pessimism that appears to be building around the markets.  The fact that these concerns are not confined to specific markets is all the more concerning since it reduces the number of investment options available to long-only investors.  Tough times to be an investor for sure. 

Until Monday.....