We have been reporting on the performance of our share price model for Loews Corporation (NYSE: L) since 2010. Loews "operates primarily as a commercial property and casualty insurance company". In November 2012, we presented a model including data available for October 2012. Here we update the model with the closing price through March 2014 and the (not seasonally adjusted) consumer price indices for February 2014.
Our model decomposes a share price into a weighted sum of two consumer price indices (selected from 92 CPIs), linear trend and constant; all coefficients and time lags to be estimated by a LSQ procedure. For L, the same model is valid since November 2008 and does not show any clear sign of changes in the future. This is a reliable model valid during the past 65+ months!
A preliminary model for Loews Corp. was obtained in September 2009 and covered the period from November 2008. This initial model included the index of food without beverages (FB), which led by 6 months and the index of transportation service (TS) with a 4 months lead:
L(t) = -2.52FB(t-6) - 1.38TS(t-4) +27.93(t-1990) + 377.24, stdev=$2.04, September 2009
where L(t) is the share price in US dollars, t is calendar time. Since November 2010, the defining indices were the same: the index of food and beverages (F) and the TS index. Figure 1 depicts the evolution of the indices, which provide the best fit model. (The difference between F and FB is just marginal.) The food and beverages index leads by 5 months and the TS index by 4 months. Table 1 demonstrates that the original model does not show any tangible change with time - only coefficients have been slightly fluctuating:
L(t) = -2.04F(t-5) - 2.08TS(t-4) +28.09(t-1990) + 441.81, Nov 2010
L(t) = -2.03F(t-5) - 2.12TS(t-4) +28.23(t-1990) + 448.98, Mar 2011
L(t) = -2.01F(t-5) - 2.09TS(t-4) +27.96(t-1990) +440.65, Sep. 2011
L(t) = -2.03F(t-5) - 2.02TS(t-4) +27.65(t-1990) +431.99, Dec 2011
L(t) = -2.01F(t-5) - 2.01TS(t-4) +27.49(t-1990) +428.70, Feb 2012
L(t) = -2.00F(t-5) - 1.96TS(t-4) +27.18(t-2000) +693.99, Sep 2012
L(t) = -1.89F(t-5) - 1.93TS(t-4) +26.23(t-2000) +670.12, Mar 2014
The current model is depicted in Figure 2 together with high and low monthly prices as a proxy to the uncertainty bound of the share price. The predicted curve leads the observed one by 4 months. The solid red line presents the contemporary prediction, i.e. one sees four months ahead. Major falls and rises are well forecasted four months in advance. The model residual error is of $2.61 for the period between July 2003 and March 2014, as shown in Figure 3.
Figure 2 predicts a significant rise in L share price - to $59 in June. With the current level of $45 it makes 30% in three months. With the longer record of successful price prediction at a three months horizon we cannot exclude a significant (much larger than the standard error) positive correction.
Table 1. Selected models for the period between November 2008 and March 2014.
Figure 1. Evolution of the price indices F and TS.
Figure 2. Observed and predicted share prices.
Figure 3. The model residual error; stdev=$2.61.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.