This is a report on the performance of our share price model for Loews Corporation (L). The model is based on the decomposition into a weighted sum of two consumer price indices (selected from a larger set of CPIs), linear trend and constant; all coefficients and time lags to be estimated by a LSQ procedure.
The background idea is simple and straightforward: there is a potential trade-off between a given share price and goods and services the company produces and/or provides. For example, the energy consumer price does influence the price of energy companies. It should be taken into account that the defining consumer price (or relevant CPI) has to be related to some independent and dynamic reference, which can also be a consumer price index. A higher relative growth of the defining CPI should be manifested in a higher pricing power for the company.
A month ago we presented a quarterly report and confirmed the stability of the original model obtained in September 2009 for the period through October 2008. Here we test the previous model and make a regular update using new data through February 2012 (March 2012 for the share price). All in all, the original model is valid since October 2008 and does not show any clear sign of changes in the future. This is a reliable model valid during the past 52 months!
A preliminary model for Loews Corp. was obtained in September 2009 and covered the period from October 2008. This old 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, i.e. the lowermost RMS residual error, between July 2003 and February 2011. The food and beverages index leads by 5 months and the TS index by 4 months. The 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, November 2010
L(t) = -2.03F(t-5) - 2.12TS(t-4) +28.23(t-1990) + 448.98, March 2011
L(t) = -2.01F(t-5) - 2.09TS(t-4) +27.96(t-1990) +440.65, September 2011
L(t) = -2.03F(t-5) - 2.02TS(t-4) +27.65(t-1990) +431.99, December 2011
L(t) = -2.01F(t-5) - 2.01TS(t-4) +27.49(t-1990) +428.70, stdev=$2.41, February 2012
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. It is worth noting that the model obtained in March 2011, accurately predicted the small fall observed in the second and third quarters of 2011.
The model residual error is of $2.41 for the period between July 2003 and February 2011, as shown in Figure 3. In the first quarter of 2012, the model foresees essentially no change. In the second quarter, the price is expected to rise to $40 per share.
Figure 1. Evolution of the price indices F and TS.
Figure 2. Observed and predicted share prices.
Figure 3. The model residual error; stdev=$2.41.