We have been reporting on the performance of our share price model for Loews Corporation (NYSE: L)
since 2010. In March 2012, we
presented an updated model including data available for February 2012 and predicted
a slight price growth in Q2. Actually, the (monthly closing adjusted for splits
and dividends) price grew from $39.02 in February to $41.0 in April, with a following
slight decrease to 40.85 in June. Here
we update the model with the closing price through October 2012 and the (not seasonally
adjusted) consumer price indices for September 2012. We have found that the share
price may grow by $6 in December 2012 – January 2012 timeframe and definitely might
be considered as a potentially good investment idea. The standard deviation of
our model since June 2003 is only $2.43 and the increment of $5 is definitely
above the uncertainty bounds. At the
same time, there were short periods of large deviation between the predicted
and observed curve, e.g. in 2010.

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. 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. 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 60
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 October 2012. 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, Nov. 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, Sept. 2011*

*L(t) = -2.03F(t-5) – 2.02TS(t-4) +27.65(t-1990) +431.99, Dec. 2011*

*L(t) = -2.01F(t-5) – 2.01TS(t-4) +27.49(t-1990) +428.70, stdev=$2.41, Feb. 2012*

*L(t) = -2.00F(t-5) – 1.96TS(t-4) +27.18(t-2000) +693.99, stdev=$2.43, Sept. 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 $2.43 for the
period between July 2003 and October 2011, as shown in Figure 3.

Figure 1. Evolution of the price indices
F and TS.

Figure 2. Observed and predicted
share prices.

Figure 3. The model residual error;
stdev=$2.43.

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