Flight to Safety

Market participants have clearly embraced the flight to safety over the past few months. Treasury yields have been squashed to rates well below inflation while basically anything else has been crushed. Municipals are a good example. Typically, munis are beneficiaries of the flight to safety because of very low historical default rates. However, yields have come out as a result of the failing bond insurers and downright fear in the financial markets. The point is: it is clear investors are in protection of capital mode and are not concerned with taking undue risk. This does not bode well for a stock market recovery as investors shun risk and hide in the safest assets.

I continue to believe the market's risks are to the downside and the upside is very limited. Low credit availability, demographic shifts, a weak job market, and falling home and stock prices have set the stage for an extended decline. Sharp rallies will give way and lows are subject to be retested and broken.