Share price prediction for Hewlett Packard

Two years ago we presented a quarterly report of the performance of our share price model for Hewlett Packard (NYSE:HPQ). This company provides a good example of a successful share price prediction at a several month horizon.  We have already published our predictions at a four month horizon five times (July 2010, January 2011, March 2011, July 2011, and September 2011, February 2012). This is a revision of the original model which validates our concept of share pricing.  

All predictions were based on our concept of share pricing as decomposition into a weighted sum of two CPI components.  The intuition behind our concept is simple; a faster growth in the CPI directly related to the share price (e.g. energy consumer price for energy companies) relative to some independent and dynamic reference (e.g. some goods and services which price does not depend on energy) should be manifested in a higher pricing power for the company. Our model selects (using the LSQ method) a defining CPI and the best reference index from a set of 92 CPI with estimates started before 2000. This set is fixed what is important for model stability. Both CPIs for a given model must define the studied price for at least 8 months in a row, i.e. the model has to be the same for a relatively long time: the longer – the better. Our model for HPQ was stable between 2010 and 2012 and showed an excellent predictive power at a four month horizon for more than 30 months without gaps. The current revision extends the model by another 24 months of successful prediction. Altogether, the model is valid since the beginning of 2010 with just minor changes. 

Originally, the long term model for HPQ share price was defined by the index of food without beverages (FB) and that of rent of primary residency (RPR). The former CPI component led the share price by 4 months and the latter one led by 5 months. The current model includes slightly different components of the CPI: the index of other food at home (OFH) and the index of housing operations (HO), which are quite similar in the overall evolution to the originally used components. Figure 1 depicts the overall evolution of all four involved indices through February 2014. Below we present five best-fit models for HPQ(t) obtained at different times:

 

HPQ(t) = -3.20FB(t-4) + 2.91RPR(t-5) + 3.64(t-1990) - 50.82, July 2010

HPQ(t) = -3.34FB(t-4) + 3.41RPR(t-5) + 0.51(t-1990) - 85.44, June 2011

HPQ(t) = -3.46FB(t-4) + 3.68RPR(t-5) – 0.72(t-1990) - 99.88, September 2011

HPQ(t) = -3.40FB(t-5) + 3.60RPR(t-6) – 0.57(t-1990) – 97.72, December 2011

HPQ(t) = -3.27FB(t-4) + 3.46RPR(t-5) – 0.39(t-1990) – 95.71, February 2012

HPQ(t) = -1.58OFH(t-4)+3.15HO(t-11) – 4.03(t-2000) – 89.35, February 2014

 

where HPQ(t) is the price in US dollars, t is calendar time. All coefficients have been slightly drifting but very close. This process expresses the trade-off between the linear trend in the difference between  the defining CPIs and the time trend term in the above equtions.  

Currently, HPQ price is predicted to decline a little in March and April 2014. This fall is a marginal one ($1) and lays within the uncertainty bounds of the model prediction – standard deviation of the model residual is $2.9 since 2003. Figure 3 depicts the model error. It is worth noting that the residual is an I(0) process that means that the predicted and observed prices are cointegrated time series. This makes all statistical estimates valid. 

 

 Figure 1. Evolution of the price of OFH and HO relative to FB and RPR.  

Figure 2. Observed and predicted HPQ share price.

Figure 3. The model residual error; sterr=$2.91.

The price of steel and iron will be falling

For price prediction of various commodities, our general approach is based on the presence of long-term sustainable (linear and nonlinear) trends in the evolution of the CPI and PPI in the United States [1, 2]. The difference between components of these indices is not a random one but is rather a predetermined process. Using these trends, one can predict consumer and producer price indices for select goods, services and commodities.  

On Seekingalpha, we first reported on the evolution of the producer price index (PPI) for iron and steel in July 2009. We compared our earlier prediction from 2008 with the actual evolution of the difference between the PPI of steel and iron and the headline PPI and made the following forecast: 

“In the short run, one can expect a fast recovery of iron and steel prices to the level observed in January-March 2008, i.e. the index will reach the level 210 to 220. However, this recovery will not stretch into 2011, and the index of iron and steel will be declining in the long run to the level of 2001, as depicted in Figure 3. In other words, the period between 2008 and 2010 is characterized by very high volatility, which will fade away after 2011.” 

Figure 1 reproduces Figure 3 from the 2009 post, where the green line gives a prediction of the future evolution. Since 2009, we made several updates considering new data on both PPIs (June 2010, February 2012,  December 2012, and August 2013). Here we revisit the previously predicted fall in the producer price index of steel and iron and formulate a preliminary hypothesis on the evolution in 2014-2016.   

Figure 2 displays the difference between the PPI and the index for iron and steel (BLS code 101) since 1985. Between 1985 and 2000, the curve fluctuates around the zero line, i.e. there was no linear trend in the absolute difference. The difference is characterized by a sharp decline between 2001 and 2008. Our main assumption described in the aforementioned post was absolutely right - the negative trend observed before 2008, after a short period of large fluctuations, started its transformation into a positive trend after 2010. In Figure 2, the (slightly updated according to actual data between 2009 and 2011) new trend is shown by green line. This trend suggests that the PPI grows faster than the index of steel and iron by approximately 2 units of index per year.  

Figure 3 demonstrates the most recent period and confirms that our prediction for 2013 was correct – the difference fluctuates around the green line. A short-term growth in the price of iron and steel observed in November 2013 and January 2014 is a transient one (a fluctuation) and the difference will return to green line in the second quarter of 2014.   

We confirm our forecast  that the difference will be growing fluctuating around the green line till 2016. The price of iron and steel will be declining further before the difference reach ~10 to 20.  Investments is iron and steel related assets are likely not profitable. 

Figure 1. The prediction of steel and iron price made in 2009.

 

Figure 2. The difference of the PPI and the index of steel and iron for the period between January 1985 and January 2014. The green line was first introduced in 2008. 

Figure 3. Same as in Figure 2 for the period between January 2005 and January 2014. Green line predicts the evolution of the difference after 2009. 

WWIII

The logic of the current international conflict successfully unwinds into a WWIII. There is no way back for both sides because of lost face of the powers. Many politicians forget "mutual assured destruction", which is around the corner. Both powers approaching the edge definitely  put in danger the whole mankind not thinking about people. and thus, do not deserve the power. Recklessness.
 

Is it good for a country when population grows fast?

The answer is not easy. Figure 1 show that there is a positive correlation between the total growth in population since 1950 and the total GDP growth (data borrowed from the Total Economic Database run by the Conference Board). The countries with rapidly growing population get higher GDP growth rate. However, when the GDP is replaced with the GDP per capita in Figure 2, the growth in population seems to be a negative factor for personal prosperity. The U.S. does not demonstrate any superiority over any European country except Switzerland. However, we have to take into account that the level of GDP per capita in 1950 was almost the highest in the US and Switzerland.   

Figure 1. The total growth in population since 1950 vs. the total growth in real GDP 

Figure 2. The total growth in population since 1950 vs. the total growth in real GDP per capita. 

Linear time trends in CPI

This is an update of our previous post with an addition of two more months and calculation of the slope of the new trend.

We found sustainable linear trends in the difference between the headline and core CPI in 2007. We also were the first to suggest that the linear trend between 2002 and 2008 to be reversed to the opposite after an extended period of strong fluctuations. These findings are currently validated by six years of observations – the studied difference is on a sustainable linear trend since the middle of 2011. When extended into the second part of the 2010s, this trend implies that the joint consumer price of food and energy will be falling against other consumer goods and services in the headline CPI.  (Figure 4 is an update, which demonstrates the slope of the new linear trend is similar to that between 1987 and 1999.)

We have been routinely reporting on the difference between the headline and core CPI since 2008. Figure 1 illustrates our general finding that this deference can be well approximated be a set of linear trends. The last trend likely finished in 2009. That’s why we expected a new trend to evolve since 2011 into the late 2010s.

The U.S. Bureau of Labor Statistics has reported the estimates of various consumer price indices for December 2013. Figure 2 shows the predicted trend and the actual difference since 2002. The studied difference has been fluctuating around the zero line between in 2009 and 2011 and then showed a turn to the early predicted trend (Figure 3).  Essentially, the zero difference suggests that the core and headline CPI are practically equal and evolve at the same monthly rate, i.e. the joint price index of energy and food has been following the price index of all other good and services (the core CPI) one-to-one.  Figure 4 shows that the new trend has finally stabilized and the observed difference between the core and headline CPI (normalized to the headline CPI) demonstrates no large deviations from this trend. The slope of 0.0021 per year is similar to that observed between 1987 and 1999. This is a good indicator that the next 10 years the difference will follow the current trend, i.e. the core CPI will grow at a lower rate that the other CPI components. 

Figure 1. Two trends in the difference between the headline and core CPI.  

Figure 2. The evolution of the difference between the core and headline CPI since 2002. 

 

Figure 3. The evolution of the difference between the core and headline CPI since 2010.  

Figure 4. The new trend is similar to that between 1987 and 1999. The duration of the new trend will likely be similar, i.e. 12 years

Increasing inequality is a purely political (taxation) problem

Here we show that the source of increasing income inequality in the tax law. At the end of the day, the whole bunch of US politicians is responsible for the increase in the portion of personal income for the richest families. This is good news since the return to “normal” income distribution is a political procedure. There are no economic forces behind the change, which would be much more difficult to overcome.   

We have discussed the evolution of inequality   in the USA a few times in this blog and demonstrated that the proportion of personal (money) income in the Gross Domestic Product has not been changing much since 1947. This is the year when the Bureau of Labor Statistics started to measure personal incomes. We have also revealed the source of some kind of virtual increase in income inequality – private companies redistribute their income in favor of personal income of their owners. The question is – how do they get extra money to redistribute to their private owners? This post answers this question - the US tax system started to reduce the level of tax for private companies. Primarily, it is made by increasing the rate of depreciation, which enterprises are officially permitted to charge for tax purposes (usually fixed by law).  Hence, the tax law in responsible for the increasing inequality.

We start with a graph showing the growth in GDP, gross personal income (GPI) and compensation of employees (paid) since 1929. Figure 1 demonstrates that the level of GPI has been rising faster than that of the GDP (and the compensation) since 1979. (The share of GPI in the GDP has been rising since 1979!) The difference between the GPI and GDP curves depicted in Figure 2 has a striking kink around 1979. And this is the start of the current rally in the rich families’ personal income. In other words, a new political (taxation is a fully political issue) era started in 1979. We would like to stress again the proportion of the compensation of employees in the GDP has not been changing since 1929, with a small positive deviation in the end of 1990s and a negative deviation since 2009.  This observation supports our previous finding that the proportion of personal (money) income in the GDP has not been changing.

So, where the extra money is from? The level of personal income has been actually increasing faster than that of the GDP and it should be a looser, which lost its share in the GDP.  Figure 3 shows two major components of the GPI. The net operating surplus (private) has been changing at the same rate as the GDP since 1929, while the proportion of taxes on production and imports has been growing at lower rate since 1980. We have allocated the source of income for rich families. They take money from the decreasing taxes. But what is the mechanism of money appropriation? Figure 4 demonstrates that the decrease in taxes goes directly into the increasing share of consumption of fixed capital. This is the force behind the increasing income inequality.  The increasing share of the consumption of fixed capital is successfully converted in private money, not in investments! This is a political problem started likely started by Reagan.

There is no economic problem behind increasing income inequality. 

Figure 1. GDP, GPI, and compensation of employees normalized to their respective levels in 1960.

Figure 2. The difference between the GPI and GDP curves in Figure 1.

Figure 3. GDP, net operation surplus (private), and taxes (on production and imports) normalized to their respective levels in 1960.

Figure 4. GDP and consumption of fixed capital normalized to their respective levels in 1960.