The

VOL. 1, No. 20

Real Returns Report

Sometimes Contrarian, Always Data-Driven
JUNE 4, 2012

Contents Update Value Barometer

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Contents License/ Disclaimer

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Update

Alex Dumortier, CFA

alex.dumortier@gmail.com linkedin.com/in/alexdumortier

There is no Commentary this week, as my emphasis is currently on expanding the breadth of coverage of asset class data (furthermore, the end-of-month update process is an extra burden.) Here are some of the changes I have made and others that I will be making soon: I have added 10-year trailing inflation-adjusted returns for the S&P 500 Index, which will help pin down where we stand in terms of mean-reversion of equity returns. As a former trainee options trader, I'm fascinated by the VIX Index, so I've added it our coverage. Note that the VIX is highly mean-reverting and is an indicator of short-term stock market returns. I'm working on adding the implied equity risk premium for the S&P 500 Index, which will nicely round out our coverage of this widely-followed benchmark. I have removed the P/E 10 for the Russell 2000 Index, because the series is too short to be of much use on its own. I expect to add trailing 10-year returns for small-capitalization stocks in the near future instead this series is much longer and, therefore, more meaningful.

I hope readers will find this useful. As always, I'm interested in any constructive feedback you can reach me at alex.dumortier@gmail.com. AD 1

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The Real Returns Report

Value Barometer
U.S. Equities
Current value (06/01) Broad Market/ Large-caps Aggregate U.S. equities, Equity q ratio S&P 500, Equity q ratio S&P 500, P/E10 S&P 500, Trailing 10-yr real return Volatility VIX Index 26.66 1990 - 2012 85% 21.3 22.6 8.2 0.92 1945 2011 81% 0.66 0.71 0.26 Series length Percentile rank Geometric average Arithmetic average Standard deviation

0.68

1871 2012

46%

0.64

0.69

0.25

19.8

1881 2012

75%

15.2

16.4

6.6

1.3%

1936 2012

21%

6.7%

6.9%

5.6%

Source: Federal Reserve Board of Governors, Robert Shiller, Standard & Poor's, The Real Returns Report

U.S. Fixed Income

Current value (05/31) High-Yield U.S. High Yield Bonds, Trailing 10yr return 6.2% 1936 2012 75% 3.6% 3.7% 3.4% Series length Percentile rank Geometric average Arithmetic average Standard deviation

Source: BofA Merrill Lynch, Federal Reserve Bank of St. Louis, Ibbotson Associates, The Real Returns Report

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The Real Returns Report

Current value (06/01)

Series length

Percentile rank

Geometric average

Arithmetic average

Standard deviation

Precious metals
Gold Real price, USD $1,606.0 1970 2012 97% $637.8 $709.4 $343.9

Real price, CHF Trailing 10-yr real return, USD Trailing 10-yr real return, CHF Silver Real price, USD Trailing 10-yr real return, USD

CHF 1,567.9

1970 2012

96%

CHF 768.7

CHF 832.8

CHF 355.9

14.3%

1979 2012

89%

1.6%

1.9%

8.2%

11.1%

1979 2012

93%

0.6%

0.8%

6.9%

$27.4

1970 2012

90%

$12.4

$14.9

$11.2

15.5%

1980 2012

93%

(0.5%)

(0.1%)

9.0%

Industrial metals
Copper Real price, USD Trailing 10-yr real return, USD $7,516.5 1960 2012 80% $4,817.9 $5,354.5 $2,487.0

13.7%

1970 2012

95%

(0.6%)

(0.4%)

6.6%

Source: LME, The Real Returns Report, The World Gold Council

Energy
Current value (05/30) U.S. Natural Gas Real price, USD Trailing 10-yr real return, USD $2.39 1960 2012 36% $2.85 $3.58 $2.46 Series length Percentile rank Geometric average Arithmetic average Standard deviation

(5.6%)

1970 2012

9%

4.1%

4.3%

7.8%

Source: U.S. Energy Information Administration, The Real Returns Report, The World Bank

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The Real Returns Report

Notes Equity q = Market value / Net worth (estimated at market prices) This is a variation on Tobin's q. When it is calculated over all U.S. equities, it is a quarterly series since it depends on data from the Federal Reserve's Flow of Funds report. However, it's possible to calculate the ratio mid-quarter, as I have done, by adjusting the market value to reflect changes in equity market indexes. Here, I used the Wilshire 5000 full capitalization index, which is the broadest measure of U.S. equities' market capitalization and performance. P/E10: Also known as the cyclically-adjusted PE (CAPE) or "Shiller PE" after Robert Shiller of Yale. The P/E10 uses the average of the prior ten years' earnings, on an inflation adjusted basis, as its earnings input. The rationale behind this is the observation that earnings are too volatile on a year-to-year basis to provide reliable information on a company's (or a market's) true earnings power. By using a ten-year average, the P/E10 smoothes out earnings volatility and allows investors to better identify legitimate changes in risk premiums. The figures in this table are derived from Professor Shiller's data (available from his web page), which include series of monthly average prices for the S&P 500/ S&P Composite Index.

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The Real Returns Report by Alex Dumortier is licensed under a Creative Commons AttributionNonCommercial-NoDerivs 3.0 Unported License. Permissions beyond the scope of this license may be available at longrunreturns.blogspot.com.

Disclaimer: This research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. This research does not constitute a personal recommendation. The price and value of the investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

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