Two years ago we introduced a concept linking share prices and CPI components. We began with models of share prices for ConocoPhillips (NYSE:COP) and Exxon Mobil (NYSE:XOM) which are classified in the S&P 500 list as related to energy. It was demonstrated that the time history of these prices could be accurately approximated by a linear function of the difference between the core CPI, cCPI(t), and the headline CPI in the United States. At the initial stage of our research, this difference was found to be the best to predict share prices in the energy subcategory.
Briefly, our pricing model states that a share price, p(t), (we use a monthly closing price adjusted for dividends and splits) can be approximated by a linear function of the lagged difference between the core and headline CPI:
p(t) = A + BdCPI(t+t1) (1)
where dCPI(t+t1)=cCPI(t+t1)–CPI(t+t1), A and B are empirical constants. In the original model for COP for the period between 1998 and 2009, A=72, B=-5.5; t is the elapsed time; and t1=1/6 year is the time delay between the share and the CPI change, i.e. the CPI has a lag behind the share price.
In a previous article we have extended our original pricing model for ConocoPhillips with various CPI and PPI components and found that the evolution of its share can be better approximated by a linear function of the difference between the core CPI and the consumer price index of energy, eCPI.
In this article, we test several pricing models for ExxonMobil, XOM(t), with the same CPI and PPI components tested for ConocoPhillips. The set of defining indices includes: the core and headline CPI, the consumer price index of energy, eCPI, and the producer price index of crude petroleum, pPPI, together with the overall PPI. Thus, we test model (1) with p(t)=XOM(t) and two different models for the period between 2001 and 2011:
XOM(t) = A + B(cCPI(t) - CPI(t)) (2)
XOM(t) = A1 + B1(cCPI(t) - eCPI(t)) (3)
XOM(t) = A2 + B2(pPPI(t) - PPI(t)) (4)
All coefficients in (2)-(4) were estimates by the least squares for the period between January 2001 and July 2011. As for ConocoPhillips, we found no time delay between the share price and defining differences, i.e. t1=0. Figures 1 through 3 compare three XOM models. Corresponding coefficients are given in Figure captions. The best model (in sense of RMS residual, s) for the period between 2001 and July 2011 is based on the core and headline CPI (s=$9.32). Almost the same accuracy is associated with the model based on the core and energy CPI (s=$9.84). At the same time, model (4) based on the producer price indices is the worst (s=$10.9).There is a dramatic difference between ExxonMobil and ConocoPhillips. The former company was less sensitive to the change in consumer prices during the financial crisis. The predicted amplitude is much higher than that observed between 2008 and 2009. ConocoPhillips has followed up the change in the difference between the core and energy CPI. When the behavior between 2008 and 2009 is extrapolated into the 2010s, the expected fall in oil price at a five-year horizondown to $30 per barrel will likely not result in a proportional decrease in XOM’s shares
Figure 1. The observed XOM price and that predicted from the core and headline CPI. A=$86, B=-5.8.
Figure 2. The observed XOM price and that predicted from the core CPI and the consumer price index of energy. A1=$56, B1=-0.27.
Figure 3. The observed XOM price and that predicted from the overall PPI and the producer price index of crude petroleum (domestic production). A2=$68, B2=-0.55.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.