Bill Gross: We Register a 6 on the Irrational Exuberance Scale

“Bill Gross opens his latest monthly letter to PIMCO clients with a classic 1996 quote from then Federal Reserve Chairman Alan Greenspan: “But how do we know when irrational exuberance has unduly escalated asset values?”

Yale economist Robert Shiller later wrote a book titled “Irrational Exuberance” to describe the run-up in tech stocks write before the dotcom bubble burst.

So, with asset prices at multi-year highs, Gross tackles the issue of overpriced assets.

He references the recent work of economist Jeremy Stein who used “irrational exuberance” to question the run-up in the high yield, aka junk bond, market.  Without getting into details, Stein ultimate concludes that he sees a “fairly significant pattern of reaching-for-yield behavior emerging in corporate credit.”  In other words, the valuations may be a bit stretched.

Now, Gross doesn’t declare that the junk bond market is in a bubble.  After all, the title of his letter is “Rational Temperance.”  From his letter:

On a scale of 1-10 measuring asset price “irrationality”, we are probably at a 6 and moving in an upward direction….”

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“After coming within points of an all-time high, stocks have begun to stumble, and volatility appears to be returning to the markets.

This has led some market pros to declare that an amazing four-year rally in stocks is over and that we’re on the precipice of a new crash.

And there is certainly no shortage of logic to support that view.

Massive U.S. federal budget cuts are looming, political instability in Europe is returning, and currency values around the world are falling.

And by many measures, U.S. stocks look due for a comeuppance. Valuations are elevated, profit margins are at all-time highs, and there are signs of investor complacency everywhere.

Of course, not everyone thinks stocks are headed for a crash. In fact, some experts think we’re at the beginning of a new long-term bull market and that investors should go “all-in.” But we’ll focus on those folks later.

For now…

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“Applications for U.S. home mortgages sagged for a third week in a row last week, even as mortgage rates eased slightly, an industry group survey showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 3.8 percent in the week ended Feb. 22.

The MBA’s seasonally adjusted index of refinancing applications slipped 3.3 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, dropped 5.2 percent…”

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“MINNEAPOLIS (AP) — Target’s fiscal fourth-quarter net income dipped 2 percent as it dealt with intense competition during the crucial holiday season. But its adjusted results beat analysts’ estimates and it forecast first-quarter earnings above Wall Street’s view.

Shares rose almost 2 percent in premarket trading Wednesday.

The Minneapolis-based company earned $961 million, or $1.47 per share, for the period ended Feb. 2. That’s down from $981 million, or $1.45 per share, a year earlier….”

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“NEW YORK (Reuters) – JPMorgan Chase & Co said on Tuesday that it plans to cut 17,000 jobs by the end of 2014, representing about 6.6 percent of the company’s overall workforce, as the bank sheds staff that helped it deal with bad home loans.

The bank is optimistic that it can generate record income this year and is planning to add 4,000employees in commercial and investment banking and credit cards to help it win business, bank executives said at an investor conference.

That hiring will be more than offset by job cuts in areas like mortgage servicing and retail banking, where the bank is positioning for a recovering housing market and new forms of branch banking. The net impact of the additions and cuts will be 17,000 fewer employees on the bank’s payrolls.

The job cuts reflect the pressure that banks are under, even as the U.S. housing market and overall economy show signs of recovery. Many banks are looking to automate more of their businesses to make their staff more productive and improve profits.

For example, at JPMorgan’s branches, where it plans to cut about 6,000 tellers and other employees, the bank hopes customers will use automated teller machines for every day transactions and that remaining staff can focus on higher-margin activities like selling wealth management services….”

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“Britain’s economy shrank in the fourth quarter as exports fell and an uncertain outlook depressed company investment.

Gross domestic product declined 0.3 percent from the three months through September, with net trade knocking 0.1 percentage point from output, the Office for National Statisticssaid today in London. That matched the initial estimate published in January. The ONS revised its full-year data and said the economy grew 0.2 percent in 2012 instead of stagnating.

Britain’s subdued economic outlook prompted Bank of EnglandGovernor Mervyn King and two other policy makers to vote for more quantitative easing this month. The struggle to recover from a recession is also undermining the government’s deficit- reduction program and was cited by Moody’s Investors Service last week when it stripped the nation of its top credit rating.

“Net exports were a drag and consequently there remains little sign of a rebalancing within the economy toward business spending and trade,” said James Knightley, an economist at ING Bank NV in London. “We are hopeful of a return to positive GDP growth in the first quarter given the improvement in business surveys, but it is likely to be modest.”

The pound rose against the dollar and was at $1.5145 as of 10:18 a.m. London time, up 0.1 percent from yesterday….”

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“European Union leaders piled pressure on Italy’s rival factions to form a unity government committed to budget rigor after a deadlocked election stirred fears of an quagmire that would re-ignite the euro debt crisis.

In a message that resonated in Rome, EU President Herman Van Rompuy warned in Tallinn,Estonia, that backsliding on budget discipline and economic reforms would shatter market confidence in the 17-nation currency union’s crisis management.

“Every time we turn a corner, we must keep in mind that just around that corner lies the danger of complacency,” Van Rompuy told Estonia’s parliament yesterday. “There is no way back. And this we simply cannot afford.”

Italy’s stalemate shook European bond markets, with investors moving money from crisis-hit Spain, Portugal, Greece and Italy itself to the perceived haven of Germany. Ten-year Italian yields rose by the most in 14 months, rising 41 basis points to 4.9 percent; the risk premium against German debt jumped 51 basis points to 343 basis points.

As leaders of Italy’s two rival blocs, Democratic Party chief Pier Luigi Bersani and former Prime Minister Silvio Berlusconi, weighed their options, European officials alternated between pleading with them to craft a stable government and fretting that they won’t manage to….”

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Headline revision for December is now 3.7%

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“West Texas Intermediate rose from its lowest level this year. World powers and Iran ended two days of talks without agreement on the country’s nuclear program.

Futures gained as much as 0.5 percent. Iranian nuclear negotiator Saeed Jalili said negotiations with the U.S. and its partners will resume next month in Istanbul after discussions in Almaty, Kazakhstan, concluded. Americans and others made no offer to ease oil or financial sanctions on Iran, said a U.S. official, asking not to be identified. Crude inventories climbed by 904,000 barrels last week to 373.4 million, the highest level since December, the American Petroleum Institute said yesterday.

“Although there are promises for another round of talks and statements on both sides seem to be putting a positive spin to the talks, there was no deal done,” said Amrita Sen, chief oil market strategist at consultant Energy Aspects Ltd. in London.

WTI for April delivery was at $92.84, up 21 cents, as of 12:05 p.m. London time in electronic trading on the New York Mercantile Exchange. The volume of all futures traded was 23 percent below the 100-day average. The contract slid 48 cents, or 0.5 percent, to $92.63 yesterday, the lowest close since Dec. 31. Prices have gained 1.1 percent this year and declined 4.7 percent this month.

Brent for April settlement on the London-based ICE Futures Europe exchange was up 36 cents at $113.07 a barrel. The volume of all futures traded was in line with the 100-day average for this time. The European benchmark crude was at a premium of $20.23 to WTI futures, compared with $20.08 yesterday….”

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“The euro strengthened from a seven- week low and Italian 10-year bonds gained after the country sold 6.5 billion euros ($8.5 billion) of debt amid political turmoil. Oil advanced.

The euro appreciated 0.4 percent to $1.3118 at 12:15 p.m. in London after earlier rising as high as 1.3122. Italy’s 10- year bond yield dropped six basis points to 4.84 percent after jumping 41 basis points yesterday. The Stoxx Europe 600 Index (SXXP) climbed 0.2 percent and Standard & Poor’s 500 Index futures advanced 0.13 percent. The Nikkei 225 Stock Average (NKY) capped its biggest two-day decline since November 2011. The yen strengthened against all but one of its 13 major peers and West Texas Intermediate oil gained 0.3 percent….”

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“Italian government bonds advanced as the nation sold 6.5 billion euros of securities at a sale.

Ten-year yields fell four basis points, or 0.04 percentage point, to 4.86 percent at 10:17 a.m. London time. The rate earlier dropped as much as nine basis points to 4.81 percent.”

“Mario Monti’s caretaker government is considering postponing a 3.9 billion-euro ($5.1 billion) bailout for Banca Monte dei Paschi di Siena SpA, leaving the final decision on the payout to the next government, two people familiar with the discussions said.

According to the decree approved by Monti’s cabinet in December, the payment is set to be completed by March 1. Under the government’s rescue plan, Monte Paschi will sell securities, dubbed “Monti” bonds, to the government with a 9 percent coupon that may rise to as much as 15 percent.

A decision whether to go ahead with the capital injection may be made as soon as today, said one of the people, who asked not to be identified because the talks are private. Government and Monte Paschi officials didn’t answer several phone calls seeking comment. The stock fell as much as 4 percent in Milan trading.

Italian elections this week produced a hung parliament, with comedian Beppe Grillo’s anti-austerity movement winning more than 25 percent of the popular vote, compared with the 10.5 percent of the votes received by Monti’s coalition in the lower house. Grillo opposed the current bailout plan, arguing that a parliamentary commission should investigate the bank’s dealings. A delay may prompt a review of the terms, said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities…”

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“Bulgaria was too strict with austerity as energy prices soared, angering voters and bringing down the Cabinet, said Nouriel Roubini, the New York University professor who predicted the 2008 global financial crisis.

“Fiscal austerity is valid and countries should have some fiscal policies,” Roubini said in an interview yesterday, before a conference in Sofia organized by Doverie, the biggest pension provider in Bulgaria. “Probably in Bulgaria austerity has been very front-loaded.” …”

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“India will probably contain the budget deficit at about 5.3 percent of gross domestic product this fiscal year as it tries to slow inflation, and economic growth is set to recover, Finance Ministry advisers said.

“The government is committed to fiscal consolidation,” they said in a report in New Delhi today, predicting GDP will rise as much as 6.7 percent in the year through March 2014. Deficit curbs, along with “demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates,” they said.

Finance Minister Palaniappan Chidambaram, who presents the budget tomorrow, faces the task of narrowing the widest fiscal gap in major emerging nations to avert a credit-rating downgrade. The Reserve Bank of India has signaled government spending has added to inflation risks, limiting the extent of interest-rate cuts as the economy falters….”

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I can just see Tattoo saying “Boss de Prane is dropping $…”

“Federal Reserve Chairman Ben S. Bernanke, who offered Japan a prescription for ending deflation as a Fed board member a decade ago, endorsed Prime Minister Shinzo Abe’s efforts to reflate his nation’s economy.

“They should try to get rid of deflation — I support their attempts to get rid of deflation,” Bernanke said at a Senate Banking Committee hearing in Washington yesterday. When asked whether Japan had paid a price for its central bank expanding its balance sheet, he said that “depends on your point of view — the current prime minister thinks they haven’t done enough.” …”

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“Asian Development Bank President Haruhiko Kuroda is set for parliamentary confirmation as Japan’s next central bank chief following his nomination, ushering in a leadership team projected to step up monetary stimulus.

Members of the main opposition Democratic Party of Japan said they will back Kuroda, easing his passage through a split parliament. Prime Minister Shinzo Abe will present his nominees for Bank of Japan governor and two deputies tomorrow morning, ruling Liberal Democratic Party lawmaker Genichiro Sata said.

While the DPJ signaled resistance to one anticipated deputy pick — Kikuo Iwata, an advocate of greater government oversight of the BOJ — two other opposition parties showed support, increasing the chance that Abe gets approval for his full slate. Confirmations would yield him a win on his biggest agenda item since he took office in December vowing to lift Japan out of 15 years of deflation….”

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World Markets

Currencies

Commodities

USD Libor

Euribor

Yields for Italy, Spain, France,  and Germany …

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[youtube://http://www.youtube.com/watch?v=n2DndWivek8 450 300]

Link for iPhone users: http://www.youtube.com/watch?v=n2DndWivek8

[youtube://http://www.youtube.com/watch?v=0G4EDsuoUSI 450 300]

Link for iPhone users: http://www.youtube.com/watch?v=0G4EDsuoUSI