We have been regularly reporting on the share price
model for Alcoa (NYSE: AA) since April 2011.
Here we revisit and update the AA model using new data, including the monthly
closing price in October 2012 and the estimated CPI components for September
2012. The principal result is that the model has the same defining CPI
components and time lags with slightly changing coefficients. Therefore, the
model is a reliable tool to predict the evolution of Alcoa shares. The new
observations validate our previous predictions. Essentially, the model is stable during the
past 18 months and forecasts the AA price over the two-month horizon (the
consumer price index, CPI, data lag by approximately 20 days behind the monthly
closing price of the share). It shows the fall in the price down to $5 in
November-December 2012.

Alcoa is company from Materials subcategory of the
S&P 500 list specialized in aluminum. Our concept is intuitive and
straightforward. A company is what it produces. There are price setters and
price takers. Some goods and services drive economic development and some
follow up. Let’s imagine a company producing some goods (services) very
attractive to people right now. The company may raise the overall price for its
goods (services). Accordingly, stocks go up, likely with some time lag. One of
the indicators of the overall price is the consumer price index (CPI) for these
specific goods and services or some very intimately related G&S. Then it is
not excluded that the company’s share depends on this CPI in a statistically
reliable way and one can obtain a good link between the price and this CPI.
Since the headline CPI evolves under the pressure of a big set of goods and
services, one need to find some dynamics reference (another CPI) which would be
most independent on the CPI related to the company. Hence, we have to find two
CPIs which describe the evolution of the price the best (in the LSQ
sense). When both CPIs lead the price, a
deterministic model can be obtained and we are looking for such companies in
the S&P 500 list. Alcoa is one of the companies with a deterministic model
– both defining CPIs lead by three months at least.

According to our general
approach to share price modeling, we decompose the observed time history of the
monthly closing AA stock price (adjusted for splits and dividends) into a
weighted sum of two CPI components, time trend and free term. Two defining CPI components are selected to
minimize the model (RMS) error and may lead or lag behind the share.

The original and current AA
model is defined by the (not seasonally adjusted) index of food away from home (SEFV)
and the price index of rent of primary residence (RPR), as reported by the US BLS. The former
CPI component leads the share price by 3 months and the latter is 5 months
ahead of the share price. Figure 1 depicts the overall evolution of both
involved indices through September 2012. It seems these indices have been
evolving in sync since 2002 with the only step-like change in the SEFV index in
2008. We present five empirical models
as estimated in April, October, and December 2011 as well as in February and
September 2012:

*AA(t) = -6.71SEFV(t-2) + 3.34RPR(t-4) + 19.23(t-1990) + 298.87, Aril 2011*

*AA(t) = -6.61SEFV(t-2) + 3.22RPR(t-4) + 19.51(t-1990) + 300.89, October 2011*

*AA(t) = -6.47SEFV(t-3) + 3.08RPR(t-5) + 19.58(t-1990) + 302.45, December 2011*

*AA(t) = -6.38SEFV(t-3) + 3.01RPR(t-5) + 19.53(t-1990) + 301.93, February 2012*

*AA(t) = -6.29SEFV(t-3) + 2.97RPR(t-5) + 19.26(t-2000) + 491.86, September 2012*

where

*AA(t)*is a share price in US dollars,*t*is calendar time. Figure 2 illustrates the observed and predicted models for December 2011. The residual error in Figure 3 is $2.91 ($3.05 in December, $3.04 in October, $3.12 in April, and $3.05 in February 2012) for the period between July 2003 and September 2012. Figure 2 also shows monthly high and low prices as the uncertainty in the monthly closing price as the best share price estimate. Since the closing price has to characterise the whole month by one value the high and low prices might serve as strict statistical bounds.Figure 1. Evolution of the price of SEVF and RPR.

Figure 2. Observed
and predicted AA share prices.

Figure 3. The
model error; sterr=$2.91 between June 2003 and September 2012.

## No comments:

## Post a Comment