April 10, 2002

The forecasts of La Jolla Economics are constructed such that the weighted average of the companies forecasts generated by our models does add up to the market. A common problem in forecasting individual companies is that when individuals develop market forecasts they tend to ignore the constraints that emanate from the market equilibrium conditions. These potential pitfalls in modeling are commonly manifested in earnings forecasts and are inconsistent with the short- and long-run behavior of the economy. Another common mistake is that some models assume that the earnings and interest rates are independent of each other. These modeling pitfalls are easily prevented and corrected, the next few paragraphs detail one solution. (full article attached)

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