Following the post on ADSK, we revisit our prediction of IBM share prices made in January 2011. We also repeat the previous post on IBM in Appendix A in order to present our concept of share pricing and refresh the prediction. Overall we expected a healthy growth of the IBM share in 2011 and 2012 because the underlying model was very stable over the previous year and the trend in the difference between two defining CPI components (the consumer price index of motor vehicle insurance, MVI, and the index of housing, H) had not been changing since 1994.
The Bureau of Labor Statistics published new CPI estimates on 14.04.2011 and we have recalculated the model at the end of the first quarter. The obtained model does not differ much from the previous one:
IBM(t) = -4.60H(t-1) – 1.41MVI(t) + 41.58(t-1990) + 803.15
Both coefficients are practically the same, the time trend is slightly higher and the intercept is also by $24 higher. The lags are just one month shorter than in the previous model. Considering noisy data and the uncertainty in the (adjusted) monthly closing price, the original model is extremely stable.
The closing price in November 2010 was $146.76 and December 2010 - $162. The model predicted the price to grow to $142.4 by the end of March 2011. Actually, the price was $166.21. The increasing deviation may end up in a downward correction in Q2 or Q3 as it happened in July 2008 (see Figure 1). However, the overall growth in 2011 and 2012 should not be compromised by this correction, as discussed in Appendix A. We expect the share to rise.
Figure 1. The observed and predicted IBM share price in 2011Q1 and their difference.
Here we extend the modeling period in both directions - between January 1995 and December 2010. As before, the model coefficients are obtained by minimizing the RMS residual error. Current IBM model is as follows:
IBM(t) = -4.32*H(t-1) – 1.48*MVI(t-1) + 40.69(t-2000) + 779.0
where H is the index of housing and MVI is the index of motor vehicle insurance. Figure 1 depicts the overall evolution of both involved indices. The index of housing was on rise before 2009. Since December 2008, this index has been slightly decreasing. Since it has negative influences on the share price, one can expect an increase in IBM price. The MVI index has been quickly growing over the entire period, except during some short segments. Thus, did not allow the share to increase to fast since linear trend also has positive influence on the price. All in all, these two defining components provide the best fit model between December 2009 and December 2010.
The predicted curve in Figure 2 leads the observed price by 1 month with the residual error of $9.49 for the period between January 1995 and December 2010. Currently, the price is slightly underestimated, as Figure 3 shows, and one cannot exclude a downward correction in the first quarter of 2011.
In the long run, the index of housing will be decreasing during the next 10 years. This is a helpful background for IBM share. The MVI has a clear rise/plateau structure. The next segment is likely to be a shelf, starting in 2011 of 2012. Hence, the price share looks good at a two-year horizon.
Figure 1. Evolution of the price of H and MVI.
Figure 2. Observed and predicted IBM share prices.