4/6/14

Predicting share price:Loews Corporation may grow to $59 in June


We have been reporting on the performance of our share price model for Loews Corporation (NYSE: L) since 2010. Loews operates primarily as a commercial property and casualty insurance company”. In November 2012, we presented a model including data available for October 2012. Here we update the model with the closing price through March 2014 and the (not seasonally adjusted) consumer price indices for February 2014.
Our model decomposes a share price into a weighted sum of two consumer price indices (selected from 92 CPIs), linear trend and constant; all coefficients and time lags to be estimated by a LSQ procedure. For L, the same model is valid since November 2008 and does not show any clear sign of changes in the future. This is a reliable model valid during the past 65+ months! 
A preliminary model for Loews Corp. was obtained in September 2009 and covered the period from November 2008. This initial 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. (The difference between F and FB is just marginal.) The food and beverages index leads by 5 months and the TS index by 4 months.  Table 1 demonstrates that the original 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, Mar 2011

L(t) = -2.01F(t-5) – 2.09TS(t-4) +27.96(t-1990) +440.65, Sep. 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, Feb 2012

L(t) = -2.00F(t-5) – 1.96TS(t-4) +27.18(t-2000) +693.99,  Sep 2012

L(t) = -1.89F(t-5) – 1.93TS(t-4) +26.23(t-2000) +670.12, Mar 2014
      

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. The model residual error is of $2.61 for the period between July 2003 and March 2014, as shown in Figure 3. 

Figure 2 predicts a significant rise in L share price – to $59 in June. With the current level of $45 it makes 30% in three months. With the longer record of successful price prediction at a three months horizon we cannot exclude a significant (much larger than the standard error) positive correction. 

Table 1. Selected models for the period between November 2008 and March 2014.

Month
b1
CPI1
lag1
b2
CPI2
lag2
c
d
Mar-14
-1.890
F
5
-1.928
TS
4
26.235
670.116
Feb
-1.913
F
5
-1.918
TS
4
26.321
671.512
Jan
-1.961
F
5
-1.919
TS
4
26.628
678.268
Dec-13
-1.993
F
5
-1.919
TS
4
26.856
683.139
Nov
-1.996
F
5
-1.920
TS
4
26.876
683.735
Oct
-1.991
F
5
-1.914
TS
4
26.808
681.817
Sep
-1.991
F
5
-1.928
TS
4
26.889
684.539
Aug
-1.986
F
5
-1.927
TS
4
26.848
683.596
Oct-12
-1.999
F
5
-1.947
TS
4
27.097
689.405
Sep
-2.002
F
5
-1.952
TS
4
27.147
690.783
Aug
-1.996
F
5
-1.953
TS
4
27.096
689.968
Jul
-1.999
F
5
-1.958
TS
4
27.140
691.539
Jun
-1.994
F
5
-1.956
TS
4
27.092
690.232
May
-1.993
F
5
-1.960
TS
4
27.107
689.991
Apr
-1.998
F
5
-1.963
TS
4
27.159
691.350
Mar
-2.002
F
5
-1.964
TS
4
27.185
692.307
Dec-10
-2.040
F
5
-2.085
TS
4
28.090
441.815
Nov
-2.041
F
5
-2.073
TS
4
28.028
437.890
Oct
-2.047
F
5
-2.074
TS
4
28.078
436.265
Sep
-2.031
F
5
-2.079
TS
4
27.999
433.271
Aug
-2.041
F
5
-2.074
TS
4
28.035
430.991
Jul
-2.086
F
5
-2.016
TS
4
28.023
424.383
Jun
-2.115
F
5
-1.988
TS
4
28.064
420.540
May
-2.228
F
5
-1.868
TS
4
28.194
410.849
Aug-09
-2.523
FB
6
-1.380
TS
4
27.927
377.241
Jul
-2.568
FB
6
-1.378
TS
4
28.165
379.330
Jun
-2.613
FB
6
-1.352
TS
4
28.286
377.759
May
-2.621
FB
6
-1.352
TS
4
28.336
376.243
Apr
-2.641
FB
6
-1.349
TS
4
28.431
375.306
Mar
-2.656
FB
6
-1.373
TS
4
28.596
378.046
Feb
-2.550
FB
6
-1.373
TS
4
28.037
365.204
Jan
-2.399
FB
6
-1.352
TS
4
27.098
344.684
Dec-08
-2.337
FB
6
-1.321
TS
4
26.611
331.821
Nov
-2.323
FB
6
-1.313
TS
4
26.497
327.081

 

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

 

Figure 2. Observed and predicted share prices.

 

Figure 3. The model residual error; stdev=$2.61.

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