Citi Searches For Clouds In The Market’s Silver Lining

The latest media attention around the NYSE margin debt reaching a new high clearly shows that investor sentiment is extremely bullish.

Rise in margin debt

The chart below (courtesy of shows the evolution of margin debt over the years.

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A market fueled by margin debt becomes vulnerable because a small correction could trigger a much larger slide as panicked investors lack the wherewithal to wait it out and allow the market to resume its trend.

Euphoria model

A research note by Citi analysts Tobias M Levkovich, Lorraine M Schmitt and Christina Wood draws attention to their Panic/Euphoria Model, that has been showing euphoric readings for six weeks now.

2-panic-euphoria Market

Investors appear to have become completely disillusioned with bonds and the relentless flows into equity funds are another indication of their bullish sentiments. The Citi analysts point out that equity funds have received more funds this year than the amount received in the previous five years combined.

3-equity-flows Market

In fact, a new factor may be at play – TINA, an acronym coined by the Citi team that stands for “There Is No Alternative” – and which applied to stocks, means they are the only game in town.

There appears to “excessive enthusiasm” in the markets, warn the Citi analysts, though several metrics other than the Panic/Euphoria model show this is not the case.

Macro worries due to market values

The Citi team also draws attention to “fiscal imbalances that can restrain growth as was the case in Europe and earnings growth can no longer provide an impetus to market values.”

They call attention to market views that “dangerous deficits and unsustainable policies” could cause the US to undergo the same fate as troubled European countries such as Greece, Ireland and Italy.

Only when push comes to shove

Unfortunately, these longer-term fiscal problems are unlikely to be tackled unless the political leadership is forced to do so due to the development of a crisis situation.