Daily Clueless Musings

The tension in middle east is rising. There are also small protests in several major cities in China. Although the development is not surprising at all to people who follow the situation, the market has been, as we discussed before, underpriced the potential risk on US economy. After gold and silver made their highs for the last several days, US stock market finally broke and red-green futures finally flattened on the rally. Time will tell if the market is going to turn a blind eye to the situation and buy on the dip again, as they did after the protest in Egypt broke out. But for now, market still does not fully price the potential risk. Stocks are still sitting comfortably above the lows it made after the Egypt protest. Volatility in oil futures actually traded lower on the day. And the steepness of the Eurodollar curve is still sitting in the back reds and front greens. Market seems to be discounting the fact that $100 oil is going to be a tax on discretionary consumption of the majority of the consumers. Wal-Mart reported a terrible earning today, which painted a dark picture of the low end consumer. Gallup's consumer daily spending number also shows a strong pay check cycle. Ironically the February reading of Consumer Confidence is 70.4, 5 points higher than expectation. Maybe only people with a sizable stock portfolio are doing those surveys. The recent pickup in economic activity is largely led by better than expected consumption in 4th quarter of 2010. A weaker US consumer will certainly push the recover further. If oil stays at the current level, the steepest part of the yield curve should be pushed further out toward the backend.