Citrin: Beware Of ETF Bulls Running Wild

March 22, 2013

In times of elevated hype, a fundamental look at things—and some serious asset allocation—could mean all the difference, Jonathan Citrin says.

The markets are rallying, and “perma-bears” such as Meredith Whitney and Adam Parker are turning bullish, all the while ETF investors pour assets—to the tune of roughly $10 billion so far this month—into U.S. equities funds, but investors might be confusing improving sentiment with risk tolerance.

Higher markets in no way mean asset allocation isn't more important than ever, Jonathan Citrin, head of Citrin Group, a Birmingham, Mich.-based registered investment advisor, told IndexUniverse Correspondent Cinthia Murphy. Quite the contrary—diversification is key. Finding that diversification in an environment of highly correlated asset classes, however, is increasingly becoming a difficult task. The markets are rallying, economists of all stripes are turning bullish. Do you think there’s a solid fundamental case for this newfound bullishness in the stock market?

Citrin: It’s really concerning to me, actually, and not the fact that we are at all-time highs, but the fact that everyone seems to be jumping on this bandwagon. When you get some of these perma-bears changing their tunes, it’s kind of crazy. I have no way to predict what’s ahead, and the market could be a leading indicator of what’s to come, but when I look around the world, I see tough economic circumstances. Even though corporations are showing decent profits, I just see—from China to Japan to India to Brazil to Europe to the U.S.—I just see slowdown and difficult economic challenges. I think one of the problems here is that we have been so focused on debt, we are forgetting to look at GDP; GDP is growing very slowly in just about every country.

We have seen Obama start a more GDP-focused rhetoric here, which is encouraging, but Europe has seen four-straight quarters of negative GDP. How markets are at all-time highs is just puzzling to me. How do you see the latest news out of Cyprus fitting into this market environment?

Citrin: If you look at Cyprus, and think of the possibility that it may fall out of the euro, you know there’s going to have to be some sort of bailout. But the markets seem very numb to it. It’s a familiar scene, like 2007, or 1999. These easy-money policies that get implemented to solve these problems just keep coming back, and the government seems to constantly underreact and overreact. If you look back at 1999, interest rates were 6 or 7 percent here, so they stepped in and did too much slowing until the market came to a crash. Then, they dropped rates to all-time lows, and then came the housing bubble—there seems to be no type of moderation. I’ve had this feeling before, where we’ve seen this happen but everyone else seems to be joining this bandwagon anyway. What’s the biggest risk this widespread positive sentiment poses?

Citrin: People have gotten lulled back into thinking they can time the market, and it’s scary. It’s a great thing to have sentiment improve, but too-high or too-low sentiment can also get us into trouble. When the government or central banks stimulate the economy, they are ultimately stimulating sentiment, and sentiment is at an all-time high right now.

I’m getting all these calls from clients who are nearing or are at retirement age, wanting to take on more risk because they are seeing everyone around them make money. There’s no better indicator to me of the absurdity of the current market sentiment than what clients are saying.


Find your next ETF