Two months ago we presented a share price model for Bank of America (BAC) and predicted the share falling below zero (a step to bankruptcy). The model has a history of three years and is based on the decomposition of the price into a weighted sum of two consumer price components, a linear time trend and a constant. All coefficients, time lags and CPIs were estimated by the least squares as applied to the model error. Here we revisit the model using new data through December 2011. The newly estimated model differs from the preliminary one due to strict constraints on time lags and new data. The best-fit two component model for BAC(t) is as follows:
BAC(t)= -2.30OHF(t) + 1.12H(t) + 2.17(t-1990) + 167.83
where OHF is the consumer price index of other food at home and H(t) is the index of housing, both having notime lag behind the price (see Figure 1 for the evolution of the CPIs). Both CPIs are available only for November 2011, and thus we actually have a one month lead of the CPIs, if they would have been already available for December 2011 (will be available on January 19, 2012). One has to reestimate the model when the CPIs for September are published by the BLS . The standard deviation of the modeling error is $2.90 for the period between July 2003 and December 2011. Figure 2 depicts the observed and predicted prices and indicates that the market overestimates the share above the predicted level. The overestimation is also clear from Figure 3 where the model residual is displayed.
Despite a small increase in the predicted price in December, we still suggest that Bank of America might have problems, which could bring its share price down to $1 in the near future. Similar problems had Lehman Brothers and other banks several months before bankruptcy.
Figure 1. The evolution of the defining consumer price indices.
Figure 2. Observed and predicted BAC share prices.
Figure 3. The model residual.