IRONBRIDGE 2018 OUTLOOK - Theme: Dance Until the Music Stops - IronBridge Private Wealth
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IRONBRIDGE 2018 OUTLOOK
Theme: Dance Until the Music Stops
www.ironbridge360.com
Our Firm
IronBridge Private Wealth serves successful investors, business owners,
professionals and institutions who expect their advisors to think deeply
about their financial success.
Fiduciary Standard Risk Management
IronBridge is a Registered Investment Risks in markets are dynamic and change
Advisory firm held to the highest standard over time, as do our clients’ tolerance for
of care, highly regulated, and committed risk. Our strategies adapt to changing
to serving the best interest of our clients. conditions and reposition appropriately.
Portfolio Management 360 Global Research
We believe that investment success A deep understanding or markets is critical to
occurs when applying the correct investment success. We provide a twice-
strategy in the correct environment. per-month research report with updates on
various markets as well as portfolio
positioning and strategies.
Disciplined Process Innovative Fee Structures
Our investment approach does not We believe in giving clients choices when it
involve guessing or trying to predict the comes to fees. We offer traditional fee
future. We apply analytical tools and a structures, a combination of traditional and
structured approach to identify which success fee structures, and also a fee
assets to hold and which to sell. structure that is completely results-driven.
Learn more about our firm at the end of this report, or visit us online at
www.ironbridge360.com
2
Market Outlook
We analyze the markets through three lenses:
Fundamental Analysis, Investor Sentiment, and Technical Analysis.
We define, weight, and score 25 measurements to come up with our market outlook.
FUNDAMENTAL ANALYSIS - Bearish
• Valuation Measurements (P/E, P/B, P/S, etc)
• Macroeconomic Conditions
INVESTOR SENTIMENT – Neutral to Bearish
• Optimism/Pessimism Measurements
• Surveys on Bullishness or Bearishness
• Cash Exposure/Risk Taking
TECHNICAL ANALYSIS - Bullish
• Trend Analysis
• Momentum
• Breadth and Relative Strength
Our proprietary FIT Model is a combination of over 20 various market measurements
designed to provide an independent, unbiased and non-emotional snapshot of the current state
of the market. This includes a reading of the current expected position in a given market cycle.
2018 Overall Outlook: Bullish but Watching for a Top
IronBridge 2018 Outlook 3
Fundamental Indicators
We look at 6 Fundamental Measurements split into 2 groups, valuation & macro.
All but 1 of the 6 measurements are flashing major bearish warning signs.
We are in a seasonally strong period for the stock market, but valuations are stretched.
Fundamentals
Valuation
1 Current P/E Ratio
2 CAPE Ratio
3 Equities % of Total Assets
4 Free Cash Flow Yield %
Other
Macroeconomic
5 Yield Curve
6 Seasonality
From a fundamental perspective equity markets are overvalued.
IronBridge 2018 Outlook 4
Schiller’s CAPE Ratio
Schiller’s CAPE Ratio is one fundamental factor we follow.
Price to a 10 year average earnings is a very expensive 32x.
Source: www.multpl.com/shiller-pe
The only time stocks were this expensive was during the tech bubble.
IronBridge 2018 Outlook 5
S&P Earnings Per Share
Recent Stock Market rise has not been accompanied by a rise in EPS.
As a result, P/E ratios suggest overvaluation.
Multiple Expansion unlikely to continue at current pace: better earnings are
needed to support further appreciation.
IronBridge 2018 Outlook 6
S&P Earnings Forecasts
Earnings forecasts are historically much too optimistic.
Don’t make investment decisions based on earnings forecasts.
IronBridge 2018 Outlook 7
Macro - Unemployment
Unemployment rates follow optimism with a 10 month lag.
When the public is optimistic, low unemployment tends to occur.
When pessimism is in force, so too is high unemployment.
Most fundamentals are cyclical in nature.
The current trends rarely persist into perpetuity.
IronBridge 2018 Outlook 8
Seasonality
The market is historically strong from October through April.
October through April are historically the best performing months.
IronBridge 2018 Outlook 9
Investor Sentiment Indicators
Many Sentiment Indicators are at levels associated with prior major market tops.
However, history teaches us these levels can persist for years before any change
in trend actually results.
Investors hold record NYSE margin, record low cash levels, and are extremely
confident. But volatility remains low and bullish sectors are leading the markets
higher resulting in a conflicting sentiment signal.
Sentiment
7 NYSE Margin Debt
8 Rydex Cash Cushion
9 Conference Board Consumer Confidence
10 Sector Leadership
11 Trailing 3 Month VIX
12 Risk Taking Appetite
Investor appetite is certainly stretched, but that can persist.
IronBridge 2018 Outlook 10Conference Board Survey
Consumer Confidence is very high, and interest rates are very low, resulting in
extremely low savings rates.
Optimism has only been this high twice before, both near market tops.
IronBridge 2018 Outlook 11NYSE Margin Debt
Margin used to buy NYSE stocks is at all time highs, but it hasn’t slowed yet.
This debt is very correlated to movement in stock prices, and becomes a bearish
catalyst to the markets when they start to sell off.
Margin is at an all time high, but usually it’s not a concern until it starts to fall.
IronBridge 2018 Outlook 12Technical Indicators
We look at 13 Technical Measurements.
Most Technical Analysis measurements are bullish.
Technicals
Trend
13 Proprietary Trend Strategy
14 Daily Charts Trend
15 Weekly Charts Trend
16 Monthly Charts Trend
Momentum
17 60 DMA > 200 DMA
18 Divergences Present?
19 Daily Momentum Extremes?
20 Weekly Momentum Extremes?
21 Monthly Momentum Extremes?
Other
22 Wave Top Count
23 Wave Alternate Count
24 Market Breadth
25 Dow Theory
Market technicals remain bullish. History provides us clues for the next top.
IronBridge 2018 Outlook 13Importance of Technical Analysis
Fundamentals and Sentiment measures have been flashing bearish warning signs for
years, yet prices continue to march higher.
Instead of guessing where a top might occur, we prefer to let price drive our behavior.
Thus, there is no reason to think the uptrend is over yet.
The uptrends remain intact (at least for now).
IronBridge 2018 Outlook 14Momentum
Momentum reveals a currently overbought condition. Given that, we expect a
pullback in 2018.
The key then will be to watch that the trends continue to hold.
Larger market tops tend to have momentum divergences, which is not the case now.
Momentum is overbought on a daily, weekly, and monthly
basis, increasing the risk of a short term pullback.
IronBridge 2018 Outlook 15Anatomy of a Market Top
History provides us with clues to identify the next market top. One example is
below, which we wrote about extensively in our October 27, 2017 report.
You can view that report here.
There are 5 key technical signals of a market top.
The S&P 500 is currently not showing any of these signals.
IronBridge 2018 Outlook 16US Equity Markets Conclusion
The stock market has shrugged off the fundamental and sentiment warnings
for years, and there is no reason yet to expect that to change for 2018.
The fundamentals and sentiment measures are extended, but the uptrends
remain firmly in place. This suggests having a full allocation to equities.
IronBridge 2018 Outlook 17International Equities
International stocks will have periods of outperformance relative to US stocks.
Periods of outperformance tend to be shorter than periods of underperformance.
Emerging Market Stocks
Emerging Market Stocks
versus the S&P 500
We recommend a tactical approach to international investing.
Do not Buy-and-Hold.
IronBridge 2018 Outlook 18US Dollar “Smart Money”
The U.S. Dollar hedgers are unhedged again, and that suggests we should be bullish.
A rise in the US Dollar would be bearish for international investing.
When the hedgers are not hedging, that has been good
for the U.S. Dollar. We also are bullish.
IronBridge 2018 Outlook 19Bond Market Cycles
Bond Markets are cyclical, and tend to move in 60-year cycles
(30-years of rising yields followed by 30-years of declining yields).
The bond market cycle suggests we are due to begin a
30-year period of rising interest rates.
IronBridge 2018 Outlook 20Yields are Ready to Move Higher
Bonds are not near as safe as everyone thinks they are.
A 30 year bull market in bonds has likely lulled investors to sleep.
Bond yields may have bottomed in the summer of 2016.
IronBridge 2018 Outlook 21Bond Market “Smart Money”
History teaches us the commercial hedgers are typically on the correct side of the
market when at extremes, net long near lows and net short near highs.
The smart money posturing supports a further selloff in bonds.
The “Smart Money” is currently the 2nd most short bond prices ever.
IronBridge 2018 Outlook 22Crude Oil
Crude’s chart suggests a counter-trend move may be occurring.
If so, then the primary trend, down, may once again take over.
Crude has had trouble breaching $70/barrel. Is $45 again inevitable?
IronBridge 2018 Outlook 23Crude Oil “Smart Money”
The “smart money” is also typically the most short near crude price tops, and
the commercial hedgers are now the most net short they have ever been. This
supports the bearish case.
Commercial Traders’ large net short positions often
correlates to price highs.
IronBridge 2018 Outlook 24Crude Oil Backwardation
Backwardation typically occurs nearer tops than bottoms. This means
the price to own crude today is higher than the price paid in the futures
market to own it tomorrow.
Crude backwardation is occurring now and that has not
bode well historically for crude prices.
IronBridge 2018 Outlook 25Conclusion
US Equities
We are Bullish until Prices Show Signs of a Turn
International Equities
Tactical Opportunities will Present Themselves; Do not Buy-and-Hold
Fixed Income
Risks are High while Yields are low.
Commodities
Expect a Continued Choppy Environment
As the 9-year bull market in US stocks nears an end, it is
crucial to have exit strategies in place.
IronBridge 2018 Outlook 26Our Team
JIM DENHOLM GWEN HENSON CHAD KARNES
EXTENDED TEAM
CMT CFP® MBA, CMT
Founder | Managing Director Financial Planner Portfolio Manager Specialized Partners
Jim founded IronBridge to Gwen delivers comprehensive Chad develops and executes We leverage partnerships with
deliver a wealth management wealth planning strategies, investment strategy and various 3rd party firms for
experience different from the and focuses on ensuring our analysis for IronBridge clients. items such as banking,
homogenized large banks and clients receive the highest He is also integral in producing lending, technology,
investment firms. He runs the level of service. market commentary and compliance, legal, private
firm and oversees investment reports. equity and other wealth
strategy and activity. management services.
IronBridge 2018 Outlook 27Biography
A Firm Built for Clients
As founder and managing director, Jim Denholm created IronBridge to assist clients on their paths to success.
Every aspect of IronBridge was developed with a client-first mindset, including financial planning, portfolio
management, risk mitigation, customer service and innovative fee structures.
Recognized as an Industry Leader
Jim has earned numerous awards for helping clients pursue their financial goals. Prior to founding IronBridge,
Jim was a Senior Vice President with Wells Fargo Wealth Management, where he managed customized
portfolios for high net worth clients. His knowledge and diligence earned him recognition as a Wells Fargo
Premier Advisor for each of the past 10 years and a nomination as a Barron’s Top 1000 Advisor.
Before joining Wells Fargo Advisors in 2005, Jim was Senior Vice President at JPMorgan as a Wealth
JIM DENHOLM, CMT Advisor. He began his career as a financial advisor with Morgan Stanley Dean Witter. Jim has been trading
stocks since 1997, and has been advising clients on investment strategies since 2001.
Founder | Managing Director
Unique and Distinguished Educational Background
512.327.8901 Jim brings a unique and distinguishing educational background to his client relationships. He earned a
jim.denholm@ironbridge360.com Bachelor’s degree in Mechanical Engineering from the University of Texas at Austin, providing a strong
www.ironbridge360.com analytical basis for investment management and planning.
Education: In addition to his engineering degree, Jim is furthering his education in portfolio management by pursuing
University of Texas at Austin advanced certifications in globally recognized, graduate level programs that provides a strong foundation of
Bachelor of Science in Mechanical investment analysis and portfolio management skills. These designations emphasize the highest ethical and
Engineering professional standards.
Chartered Market Technician, Commitment to Service
CMT Jim’s commitment to service also carries over to his involvement with the local Austin community. He currently
serves on the board of the Austin Symphony and the Dell Medical Children’s Trust. He has previously served on
Honors: the boards of the United Way Financial Stability Council and the Downtown Austin YMCA.
12-times named a Premier
Advisor at Wells Fargo The Amarillo native and his wife, Melanie, live in Westlake with their two sons, Mac and Patrick, and two very
Barron's Top 1000 Nominee large Rhodesian Ridgeback dogs. They enjoy what Austin has to offer, including live music, spending time on
10-times named Top Wealth Lake Austin, and trying new restaurants. Away from the office, Jim is an avid golfer and enjoys Texas
Advisor in Austin/San Antonio Longhorns sports.
IronBridge 2018 Outlook 28Portfolio Construction
IronBridge Private Wealth utilizes 6 strategies that take
advantage of 3 pillars for investment success:
Market Participation, Momentum, and Risk Management
Core Equity Tactical
Thesis: Own Individual Stocks or Cash Thesis: Global multi-asset exposure
Pillars: Exposure, Momentum Pillar: Exposure, Momentum, and Risk Management
Overview: We apply a fundamental screen to identify the Overview: The tactical model is the most flexible part of
possible universe, then apply proprietary technical the portfolio. This strategy can invest in US stocks,
analysis as our buy signal. We use a strict buy/sell international stocks, bonds, cash, commodities, as well as
discipline to identify which stocks to purchase and when use various hedging strategies. We apply a quantitative
to sell. strategy to identify strength, and follow that strength.
IronBridge Trend Tactical Income
Thesis: Risk-managed Index Exposure Thesis: Generate Yield
Pillar: Exposure and Risk Management Pillar: Exposure, Risk Management
Overview: This is our proprietary risk-managed index Overview: The goal is achieve total return through a
strategy. At any given time we are either long the S&P combination of yield plus price appreciation. Our universe
500 using low cost ETFs or are in cash. This strategy consists of US fixed income, international fixed income,
attempts to participate in moves higher in the index, while floating rate securities, preferred stocks, high dividend
having strong downside risk management. stocks, convertible bonds, pipelines, and REITs.
Sector Rotation Income
Thesis: Participate in sectors that are showing Thesis: Asset Protection and Yield
outperformance Pillar: Risk Management
Pillar: Momentum Overview: The Income Strategy has two goals: income
Overview: We have developed a proprietary mathematical generation and preservation of capital. In this portion of
process to identify the best performing sectors. We use portfolios we attempt to hire best-in-class managers who
low-cost sector ETFs in this strategy, and only four invest only in the fixed income markets. Our role is to
positions are owned at any given time, with a maximum of oversee these managers and use various tools to
two from one sector. understand their exposure and manage ours.
IronBridge 2018 Outlook 29Fee Structures
At IronBridge, we believe in giving clients a choice when it comes to paying fees.
Traditional Fee Traditional + Success Fee Success Fee Only
Predictable Fee in line Predictable Fee plus Annual Fees are earned only when
with industry standards. Performance Incentive. positive returns are generated.
• % of Account Value • % of Account Value • Zero Traditional Fee
• If Calendar Year Returns are • If Monthly Returns and/or
Above Hurdle, Success Fee Calendar Year Returns are
of 10% of Profits Above Hurdle, Success Fee of
10% of Profits
Success/Performance/Incentive fees are for qualified clients only. Fees are subject to a high-water-mark for applicable period. “Portfolio Profits”
means, with respect to a billing period (i.e., calendar year or calendar month), the realized and unrealized profits of a Portfolio account minus the
realized and unrealized losses incurred in a Portfolio account plus any dividends and interest determined after calculation and assessment of all
expenses payable by the Client for the period. Performance Fees will be subject to a loss carry forward provision (i.e., a “high watermark”) so that
no Performance Fee will be paid until all prior losses with respect to the Portfolio have been recouped for the applicable period.
IronBridge 2018 Outlook 30Disclosures
This presentation is for informational purposes only. All opinions and estimates constitute our judgment as of the date of this
communication and are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a
solicitation for the purchase or sale of any security. The investments and investment strategies identified herein may not be suitable
for all investors. The appropriateness of a particular investment will depend upon an investor’s individual circumstances and
objectives. The information contained herein has been obtained from sources that are believed to be reliable. However, IronBridge
does not independently verify the accuracy of this information and makes no representations as to its accuracy or completeness.
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