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The Real Returns Report, June 11 2012

The Real Returns Report, June 11 2012

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The

VOL. 1, No. 21

Real Returns Report
Sometimes Contrarian, Always Data-Driven
JUNE 11, 2012

Contents Update Value Barometer

Page 1 2

Contents License/ Disclaimer

Page 5

Update

Alex Dumortier, CFA
alex.dumortier@gmail.com linkedin.com/in/alexdumortier

Cheap Chinese!
I have added the Hang Seng Index to the Value Barometer (see the top of page 3), and the timing is not incidental: Hong Kong shares are cheap right now! I strongly urge interested investors to look at this opportunity more closely. As always, I welcome in any constructive feedback – you can reach me at alex.dumortier@gmail.com. AD  1

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June 11, 2012

The Real Returns Report

Value Barometer
U.S. Equities
Current value (06/08) Broad Market/ Large-caps S&P 500, Equity q ratio S&P 500, P/E10 S&P 500, 10-yr real return Equity volatility VIX Index 21.2 1990 - 2012 60% 19.3 20.5 7.8 0.70 1871 – 2012 50% 0.64 0.69 0.25 Series length Percentile rank Geometric average Arithmetic average Standard deviation

20.5

1881 – 2012

78%

15.2

16.4

6.6

2.0%

1936 – 2012

24%

6.7%

6.9%

5.6%

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

U.S. Fixed Income
Current value (06/07) High-Yield BofA ML High Yield Master II Index, OAS U.S. High Yield Bonds, 10-yr real return 695 bps 1996 – 2012 69% 538 bps 601 bps 305 bps Series length Percentile rank Geometric average Arithmetic average Standard deviation

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

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June 11, 2012

The Real Returns Report

Foreign Equities
Current value (06/11) Hang Seng Index (Hong Kong), P/E10 14.1 Series length 1996 – 2012 Percentile rank 13% Geometric average 18.6 Arithmetic average 19.1 Standard deviation 4.4

Source: Hang Seng Indexes

Precious metals
Gold Real price, USD $1,576.5 1970 – 2012 96% $637.8 $709.4 $343.7

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

CHF 1,526.6

1970 – 2012

95%

CHF 766.9

CHF 830.8

CHF 354.9

14.1%

1979 – 2012

89%

1.6%

1.9%

8.2%

10.9%

1979 – 2012

92%

0.6%

0.8%

6.9%

$28.2

1970 – 2012

92%

$12.4

$14.9

$11.2

15.9%

1980 – 2012

93%

(0.5%)

(0.1%)

9.0%

Industrial metals
Copper Real price, USD 10-yr real return, USD $7,480.3 1960 – 2012 79% $4,832.3 $5,370.4 $2,494.3

13.2%

1970 – 2012

95%

(0.6%)

(0.4%)

6.6%

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

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June 11, 2012

The Real Returns Report

Energy
Current value (06/06) U.S. Natural Gas Real price, USD 10-yr real return, USD $2.41 1960 – 2012 36% $2.86 $3.59 $2.47 Series length Percentile rank Geometric average Arithmetic average Standard deviation

(5.4%)

1970 – 2012

10%

4.1%

4.3%

7.8%

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

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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June 11, 2012

The Real Returns Report

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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