Modelling and predicting the evolution of XOM stock price

As discussed many times in my blog, the difference between core CPI and headline CPI (here and below we use seasonally adjusted index) can be approximated by three straight lines: before 1980, between 1980 and 2000, and after 2001. Figure 1 illustrates the concept.

The core CPI is the headline CPI less food and energy. Therefore, the difference is inherently related to the price index for energy, as demonstrated in Figure 2.

The link between the price for energy and consumer price index (inflation) allows suggesting that stock prices related to energy might be driven by the difference between the core and headline CPI. As an example we have selected the Exxon-Mobile Corp. (XOM) as a typical representative of energy industry and the company with the largest weight in S&P 500.

Figure 3 displays two curves - historical (close) price for Exxon-Mobile stocks (black line) and the difference between the core CPI and headline CPI between 1970 and 2009. The latter is scaled by the following function:

F(t) =5*(core CPI- CPI) + 90 (1)

where F(t) is the scaled function needed to fit two curves between 2001 and 2008, which is good. There is no fit before 2000, however. At first glance, one might assume that the difference provides no information about the evolution of the price for XOM. This is not a right assumption. Figure 1 shows that linear trend before 2000 was positive and after 2000 – negative. So, it is reasonable to suggest that the sign of slope in (1) should be changed to an opposite one: -5. Free term in (1) is another issue – it can change randomly. After reversing the sign and calibrating relevant amplitude and level between 1980 and 2001 by the function:

G(t) = (-5)*(core CPI- CPI) + 35 (2)

we obtain a much better fit as depicted in Figure 4.

Now we can conclude that the difference between the core CPI and the headline CPI is a very good approximation of the evolution of the price of energy-related stocks, except short periods of spike-like behavior. (We are looking into this problem, but have no even preliminary explanation.) On the other hand, these spikes were in the past, and we would be more interested in the near future movement in the XOM prices. Figure 5 shows the most recent period between 2000 and 2009. The fit between the observed and predicted (from the CPI) price is remarkable. Although, this is not a fundamental finding, because the CPI includes the price index for energy. So, we correlate energy and a derivative of energy. The fundamental findings are as follows:

1. During the short periods of transition between linear trends, as shown in Figure 3, the price for energy-related stocks (for example, XOM) suffers a strong fall. It might be induced by an elevated volatility in the CPI associated with the transitions.

2. The dependence of the price for energy-related stocks on the difference between core CPI and CPI currently likely undergoes a transformation from a negative factor (-5) to a positive one (+5) (see Figure 1)

3. Because the difference (core CPI- CPI) will be positive during the next 5 to 10 years, the price for XOM is likely to grow despite the price index for energy will be growing at lower rate than the core CPI (see Figure 2).

4. A new rally will likely start by the end of the transition period.



Figure 1. The difference between core CPI and headline CPI as a function of time. One can distinguish three lengthy periods of quasi-linear behavior. Since the second half of 2008, the difference has been suffering a transition to a new linear trend with a positive slope.




Figure 2. The difference between the core CPI and the index for energy is similar to that between the core CPI and CPI in Figure 1.




Figure 3. Historical (close) price for Exxon-Mobile (black line) and the difference between the core CPI and headline CPI between 1970 and 2009. The latter is scaled by the following function: 5*(core CPI- CPI) + 90, in order to fit two curves between 2001 and 2008.


Figure 4. Historical (close) price for Exxon-Mobile (black line) and the difference between the core CPI and headline CPI between 1970 and 2009. The latter is scaled by the following time dependent function:
-5*(core CPI- CPI) + 35, between 1980 and 2001;
+5*(core CPI- CPI) + 90, between 2001 and 2009.



Figure 5. Comparison of the observed and predicted price for XOM stocks between 2000 and 2009.

[FRED]

Re: Modelling and predicting the evolution of XOM stock price

Is the value of this analysis that it lets you decide to invest in XOM stocks if you are expecting CPI inflation to rise?

[charliebrown]

Re: Modelling and predicting the evolution of XOM stock price

xom is one of congress' whipping boys. if you expect large profits from xom, beware of windfall profits tax, higher corp income taxes or some other form gvt take away.

[World Traveler]

Re: Modelling and predicting the evolution of XOM stock price

I bought a lot of Exxon stock in 1980's (wish I had bought more!!) and have never sold it, so this is a discussion I am VERY interested in.

I have followed Exxon stock over the years and it has never seriously disappointed me. I also worked at Exxon for quite a while, and know people that still work there. They are RUTHLESS cost-cutters, dump business lines that don't meet return on capital employed guidelines, and acquired (they would use the term "merged with") Mobil at a time when oil stocks were out of favor, therefore getting a great deal.

After the Mobil merger, Exxon Mobil made a strategic decision to organize business functions globally, rather than regionally (by country) as Exxon had been organized. An increasing percentage of its profits come from outside the U.S., and there's been a focus on being part of and profiting from Asia's growth. So its dependence on the U.S. economy is decreasing.

They have done major share buybacks in recent years, always with actual profits, and not with borrowed money. Their line has always been that the share buybacks are one of the best investment opportunities available to Exxon Mobil corporation.

This is one of the questions I've wrestled with since economic meltdown began. Will Exxon stock continue to be a good investment? Peak Oil and increased difficulty/ expense in finding new oil fields would say yes. Also, transition to alternative energy sources will take a long time, since there's a huge fixed investment in current oil-based systems. So my guess is that oil prices will tend to rise over the next few years, as it becomes scarcer, even if the world finds the will to transition to alternative energy sources over the long-long haul.

The negative is that Exxon stock is a STOCK, and at least the 1970's tell us that inflation is not good for stocks.

I've outlined the pros and cons above, and my decision has been to hold onto the Exxon stock, anticipating that it may be flat in the short to medium term due to a flat global economy, but that it has very good prospects, especially after the world economy recovers, compared to other available investment options. At least until the world gets serious about alternative energy in a big way.

So that is the question. Are oil industry stocks a good vehicle for profits? Will these STOCKS rise enough to outpace the inflation that awaits us? Will they be a proxy for Peak Oil and an inflation hedge? Or will they suffer along with the rest of the stock market and not do any major breakouts from the pack, because, after all is said and done, they're still just stocks?

What do others think?

[Jay]

Re: Modelling and predicting the evolution of XOM stock price

I bought a lot of Exxon stock in 1980's (wish I had bought more!!) and have never sold it, so this is a discussion I am VERY interested in.

I have followed Exxon stock over the years and it has never seriously disappointed me. I also worked at Exxon for quite a while, and know people that still work there. They are RUTHLESS cost-cutters, dump business lines that don't meet return on capital employed guidelines, and acquired (they would use the term "merged with") Mobil at a time when oil stocks were out of favor, therefore getting a great deal.

After the Mobil merger, Exxon Mobil made a strategic decision to organize business functions globally, rather than regionally (by country) as Exxon had been organized. An increasing percentage of its profits come from outside the U.S., and there's been a focus on being part of and profiting from Asia's growth. So its dependence on the U.S. economy is decreasing.

They have done major share buybacks in recent years, always with actual profits, and not with borrowed money. Their line has always been that the share buybacks are one of the best investment opportunities available to Exxon Mobil corporation.

This is one of the questions I've wrestled with since economic meltdown began. Will Exxon stock continue to be a good investment? Peak Oil and increased difficulty/ expense in finding new oil fields would say yes. Also, transition to alternative energy sources will take a long time, since there's a huge fixed investment in current oil-based systems. So my guess is that oil prices will tend to rise over the next few years, as it becomes scarcer, even if the world finds the will to transition to alternative energy sources over the long-long haul.

The negative is that Exxon stock is a STOCK, and at least the 1970's tell us that inflation is not good for stocks.

I've outlined the pros and cons above, and my decision has been to hold onto the Exxon stock, anticipating that it may be flat in the short to medium term due to a flat global economy, but that it has very good prospects, especially after the world economy recovers, compared to other available investment options. At least until the world gets serious about alternative energy in a big way.

So that is the question. Are oil industry stocks a good vehicle for profits? Will these STOCKS rise enough to outpace the inflation that awaits us? Will they be a proxy for Peak Oil and an inflation hedge? Or will they suffer along with the rest of the stock market and not do any major breakouts from the pack, because, after all is said and done, they're still just stocks?

What do others think?

As a world dominator, I see Exxon coming out of this mess better than all the others. I have been waiting patiently to put a chunk of my stock allocation into XOM. Also, it is my understanding that much of congress has at least part of their private investments with Exxon.

[ikitov]

Re: Modelling and predicting the evolution of XOM stock price

I would say that the rate of CPI growth is not important for the XOM's price. It is the difference (core CPI- CPI) what matters and this difference has been evolving along sustainable linear trends since 1960. (I do not think that the period between 1960 and 1980 is of importance because all subcategories of the CPI were growing in sync, but it also looks like linear for the difference.)
Therefore, assuming that the new developing linear trend obeys the same rule as that observed after 1960, one can predict that the difference will be growing during the next 5 to 10 years. The link between the XOM price and the difference between 1980 and 2000 with a positive slope implies that XOM will be also growing after the period of transition is over.

The transition is charaterized by sudden drops in the price in 1980, 2000 , and 2008. This is another process to look at. When the new trend in the (core CPI - CPI) will come to an end, do not forget to sell XOM's stocks. I would guess that this time will come when the difference reaches its previous peak.

[ikitov]

Re: Modelling and predicting the evolution of XOM stock price

" So that is the question. Are oil industry stocks a good vehicle for profits?"

My vision supported by the above analysis shows that XOM will be growing proportionally (factor 5) to the difference between core CPI and CPI. SO,oil inductry will be growing in stock price. However, the price index for enery (read oil) will be growing at a lower rate than the core CPI. Effectively, oil price will be falling to $40 - $45 during the next several years after 2010.
Some quantitative findings:
http://inflationusa.blogspot.com/sea...el/oil%20price

" Will these STOCKS rise enough to outpace the inflation that awaits us?"

There is a deflationary period ahead of us. So, any increase in stock price will outperform inflation. I would consider 10-year T-notes as a most reliable investment during deflation, which will extend into 2015-2017. It is not time to buy the notes, the yield will likely climb to 5% next MAy.

You may like to have more quantitative justification. I've written couple papers and also some posts on deflation
http://inflationusa.blogspot.com/search/label/deflation

" Will they be a proxy for Peak Oil and an inflation hedge?
Or will they suffer along with the rest of the stock market and not do any major breakouts from the pack, because, after all is said and done, they're still just stocks?"

S&P 500 will grow fast till next May, as far as I can predict. Then will drop.

http://inflationusa.blogspot.com/search/label/SP%20500

[nero3]

Re: Modelling and predicting the evolution of XOM stock price

I lightened the load on patriot coal, PCX and COP ( a competitor of XOM), I had gains of 90 and 20 %.

However, judging from my reaction to the trades, now in retrospect, I certainly think I did the wrong thing to do. When I sell something, I always get a rection to if it was the right or wrong thing to do. That's on the intuitive level. It was wrong to sell. I think monday, next week will prove to be an excellent buying opportunity.

I think COP, is a much better company to buy than XOM. They have much more room for stock gains, if oil starts to climb again.

[ikitov]

Re: Modelling and predicting the evolution of XOM stock price

Here, I repeat same analysis for ConocoPhillips. In a sense, company name is irrelevant. This is the approach that is important. You can try any company and foresee when the price will go up or down, except those companies which do not follow the link to the difference (core CPI-CPI). If you find one, please let me know and I’ll try to invent something else. I hope that the forecast at a 5-year horizon for stock prices is a valuable asset itself.

As discussed in this thread for the price of XOM stocks, the difference between core CPI and headline CPI (here and below seasonally adjusted index) can be approximated by three straight lines: before 1980, between 1980 and 2000, and after 2001. Figure 1 illustrates the concept. The core CPI is the headline CPI less food and energy. Therefore, the difference is inherently related to the price index for energy, as demonstrated in Figure 2.
The link between the price for energy and consumer price index (inflation) allows suggesting that stock prices related to energy might be driven by the difference between the core and headline CPI. As an example we have selected the ConocoPhillips (COP) as a typical representative of energy industry and the company with the largest weight in S&P 500.
Figure 3 displays two curves - historical (close) price for ConocoPhillips stocks (black line) and the difference between the core CPI and headline CPI between 1982 and 2009. The latter is scaled by the following function:

F(t) =4*(core CPI- CPI) + 90 (1)

where F(t) is the scaled function needed to fit two curves between 2000 and 2008, which is good. There is no fit before 2000, however. At first glance, one might assume that the difference provides no information about the evolution of the price for XOM. This is not a right assumption. Figure 1 shows that linear trend before 2000 was positive and after 2000 – negative. So, it is reasonable to suggest that the sign of slope in (1) should be changed to an opposite one: -5. Free term in (1) is another issue – it can change randomly. After reversing the sign and calibrating relevant amplitude and level between 1980 and 2001 by the function:

G(t) = (-4)*(core CPI- CPI) + 0 (2)

we obtain a much better fit as depicted in Figure 4.
Now we can conclude that the difference between the core CPI and the headline CPI is a very good approximation of the evolution of the price of energy-related stocks, except short periods of spike-like behavior. (We are looking into this problem, but have no even preliminary explanation.) On the other hand, these spikes were in the past, and we would be more interested in the near future movement in the COP prices. Figure 5 shows the most recent period between 2000 and 2009. The fit between the observed and predicted (from the CPI) price is remarkable. Although, this is not a fundamental finding, because the CPI includes the price index for energy.

So, we correlate energy and a derivative of energy. The fundamental findings are as follows:
1. During the short periods of transition between linear trends, as shown in Figure 3, the price for energy-related stocks (for example, COP) suffers a strong fall. It might be induced by an elevated volatility in the CPI associated with the transitions.
2. The dependence of the price for energy-related stocks on the difference between core CPI and CPI currently likely undergoes a transformation from a negative factor (-4) to a positive one (+4) (see Figure 1)
3. Because the difference (core CPI- CPI) will be positive during the next 5 to 10 years, the price for COP is likely to grow despite the price index for energy will be growing at lower rate than the core CPI (see Figure 2).
4. A new rally will likely start by the end of the transition period.

Figure 1. The difference between core CPI and headline CPI as a function of time. One can distinguish three lengthy periods of quasi-linear behavior. Since the second half of 2008, the difference has been suffering a transition to a new linear trend with a positive slope.


Figure 2. The difference between the core CPI and the index for energy is similar to that between the core CPI and CPI in Figure 1.


Figure 3. Historical (close) price for COP (black line) and the difference between the core CPI and headline CPI between 1970 and 2009. The latter is scaled by the following function: 4*(core CPI- CPI) + 90, in order to fit two curves between 2001 and 2009.

Figure 4. Historical (close) price for COP (black line) and the difference between the core CPI and headline CPI between 1970 and 2009. The latter is scaled by the following time dependent function-4*(core CPI- CPI) + 0, between 1980 and 2001; +4*(core CPI- CPI) + 90, between 2001 and 2009.

Figure 5. Comparison of the observed and predicted price for COP stock between 2000 and 2009

[ikitov]

Update

Update - one hour later.



I've just found that there exist "close price adjusted for dividents and splits". As a physicist I have no clue what is this. I prefer to consider it as a time series to model. Preliminary results are presented in two figures below. The adjusted time series demonstrates much better fit between the observed and predicted prices. There is no changes to the text in the previous post. The only correction is related to the empirical relartionships. Now:


COP =(-6)*(core CPI- CPI) + 80 ; from 2001 to 2009
COP = (+2)*(core CPI- CPI) - 5 ; from 1980 to 2001


So, the next trend guarantees the rate of COP growth two time larger than that of the difference between the core CPI and the headline CPI.




Figure 1. Historical (close) price for COP (black line) and the difference between the core CPI and headline CPI between 1980 and 2009.




Figure 2. Comparison of the observed and predicted price for COP stock between 2000 and 2009

[*T*]

Re: Update

I've just found that there exist "close price adjusted for dividents and splits". As a physicist I have no clue what is this.

It's the correct series to model. E.g. you should not be interested in modelling stock splits.