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The Real Returns Report, May 14 2012

The Real Returns Report, May 14 2012

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Published by: The Real Returns Report on May 14, 2012
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Page | 1
 
The
Real Returns
Report
Non-Consensus, Data-Driven Analysis
 
VOL. 1, No. 17 MAY 14, 2012
Contents Page
Commentary 1  Value Barometer
 –
Equities & Bonds 2  Value Barometer
Contents Page
From the Archives 5  License/ Disclaimer 6 
Commentary
Facebook's IPO: Dislike
 
Facebook's business clearly has some attractive characteristics, butthe company's hugely-hyped initial public offering (IPO) is extremely
un 
attractive to any value-conscious investor (to keno parlor habitués,it may be an interesting diversion, however.)To imagine that Facebook merits a price-to-earnings ratio of 70, onemust make wildly optimistic projections regarding growth andprofitability and make abstraction of the significant risks andcompetition the company will face in trying to protect its franchise. Or,as Peter Cauwels of the
Swiss Federal Institute of Technologywarns:  "Investors should be aware that everything they pay above $30 billion is justan option on future potential and everything above $60 billion is bubblemoney."
 Last June, I predicted that Facebook would end its first day of tradingas a public company with a market capitalization of $150 billion. Whilethis is by no means certain, I see no reason to revise that predictiondownwards today. At that level, investors might as well set a match totheir savings. It goes without saying (but it goes even better said, asthe French say) that I strongly recommend that investors refrain fromparticipating in this offering.
Value Barometer changes
As we continue to expand our coverage of asset class valuations andreturns, I've added U.S. high-yield bonds and natural gas to the ValueBarometer. Note also that I'm now displaying the arithmetic andgeometric averages for each series instead of deviations from theaverages (which had the potential to be confusing.) AD
1
 
Alex Dumortier, CFA
 
May 14, 2012
 
The Real Returns Report
 
Page | 2
 
Value Barometer
U.S. Equities
Currentvalue(05/11)SerieslengthPercentilerankGeometricaverageArithmeticaverageStandarddeviationBroad Market/ Large-capsAggregate U.S.equities, Equity qratio
0.98 1945
 –
2011 87% 0.66 0.71 0.26
S&P 500, Equity qratio
0.72 1871
 –
2012 51% 0.64 0.69 0.25
S&P 500, P/E10
20.8 1881
 –
2012 80% 15.2 16.4 6.6
Small-capsSmall-caps:Russell 2000, P/E10
29.5 2003 - 2012 32% 30.1 30.6 5.0Source: Federal Reserve Board of Governors, Robert Shiller, Russell Indexes, Standard & Poor's, The RealReturns Report
U.S. Fixed Income
Currentvalue(05/10)SerieslengthPercentilerankGeometricaverageArithmeticaverageStandarddeviationHigh-YieldBofA ML High YieldMaster II Index,OAS
600 bps 1996
 –
2012 57% 538 bps 600 bps 306 bps
U.S. High YieldBonds, Trailing 10-yr return
6.2% 1936
 –
2012 76% 3.6% 3.7% 3.4%Source: BofA Merrill Lynch, Federal Reserve Bank of St. Louis, Ibbotson Associates, The Real Returns Report
 
May 14, 2012
 
The Real Returns Report
 
Page | 3
 
Value Barometer (cont.)
 
Precious metals
Currentvalue(05/11)SerieslengthPercentilerankGeometricaverageArithmeticaverageStandarddeviationGOLDReal price, USD
$1,583.0 1970
 –
2012 96% $640.5 $711.9 $339.9
Real price, CHF
CHF 1,468.7 1970
 –
2012 94% CHF 767.0 CHF 830.8 CHF 354.3
Trailing 10-yr realreturn, USD
14.7% 1979
 –
2012 89% 1.5% 1.8% 8.1%
Trailing 10-yr realreturn, CHF
10.9% 1979
 –
2012 92% 0.5% 0.8% 6.9%
SILVERReal price, USD
$29.9 1970
 –
2012 93% $12.5 $14.9 $11.3
Trailing 10-yr realreturn, USD
17.4% 1980
 –
2012 89% (0.6%) (0.1%) 9.0%Source: Kitco, The Real Returns Report, The World Gold Council
Energy
Currentvalue(05/09)SerieslengthPercentilerankGeometricaverageArithmeticaverageStandarddeviationU.S. NATURAL GASReal price, USD
$2.36 1960
 –
2012 35% $2.87 $3.61 $2.49
Trailing 10-yr realreturn, USD
(6.9%) 1970
 –
2012 6% 4.1% 4.3% 7.8%Source: U.S. Energy Information Administration, The Real Returns Report, The World Bank

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