Mistakes Market Strategists Make, Type II Errors and Elimidate

Jeffrey Miller, PhD, a fellow academic and professional money manager discussed on his blog, A Dash of Insight, errors made by market strategists and others by looking at descriptive statistics in a simplistic manner. This was also discussed by Brett Steenbarger on Trader Feed. I discussed this in my class at Seton Hall University. Here are my thoughts:

1. Using a single variable model increases the risk of Type II or ß errors. Thus you have to increase the variables and thus degrees of freedom in your statistical study to arrive at what is considered a statistically significant model.

2. Anecdotal observations are interesting as starting points but are a mean not an end in research.

3. All too often market strategists and other individuals make the mistake of form fitting data to meet their pre-conceived bias. In other words, they are trying to prove a conclusion by finding data to support the conclusion rather than derive a conclusion from a set of observations.

4. You need to back test under various conditions with multiple queries. Failure to do so will just induce more Type II errors.

I used a very simple example with my students by asking them if they watch the Syndicated TV show Elimidate as it was something that they can relate to. Most did watch (as I admit so do I from time to time). On Elimidate, four contestants go on a date with a single member of the opposite sex. The contestants are then eliminated one at a time by the single dater until a winner is selected from the four suitors. Then I asked the students to be honest and acknowledge if they try to guess the eventual winner at the beginning of the show. Again they overwhelmingly said yes. Oh course, I explained to them that their selection was made solely on their own bias based upon their own desired result, not that of the individual who was making the determination of the four contestants. It is not until more research was done by the single dater making the selection into the personalities of the four contestants was a winner determined.

As to the impact of the Federal Open Market Committee’s decision to pause or end an interest rate tightening cycle, I discussed with the class work that I published on TheStreet.com’s Street Insight where I was able to conclude that the end of a tightening cycle was positive for certain sectors of the market, such as the broker-dealers/investment banks. I pointed out that at the same time, the end of the tightening cycle might not fare as well for other sectors and suggested that they perform more research on their own at the Seton Hall Trading Room.

Lastly, there are some excellent market strategists who are top notch in my book. I am not implying that all market strategists are in any way guilty of using slipshod methods in their analysis, so its best that you know who is the best out there. In my book and in no specific order, theses are amongst the best:

Brian Reynolds - MS Howells
Tony Dwyer - FTN Midwest Securities
Richard Bernstein - Merrill Lynch

At the time of this blog entry, Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares or calls or Merrill Lynch (MER).

TIme For a New Refrigerator

After 18 years our refrigerator stopped refrigerating. The freezer worked but that was no help. So first thing on Monday morning I accompanied my wife on a mission to seek out a new refrigerator/freezer. The potential list of retailers was Home Depot (HD), Best Buy (BBY) and Sears (SHLD).

We recently bought a new front and storm door to our house from Home Depot who was also contracted to install the doors. We still have a credit card dispute with HD who tried to charge us more money after the installation. I have never seen anyone shopping for home appliances at HD. Also, we do not know of anyone who bought a home appliance there. We did buy our kitchen oven at Expo but alas, HD shut that concept down several years ago. Thus, HD was crossed off the list. We have had good experiences at Best Buy recently for purchases and installation of a Pioneer HDTV plasma television and a Sony (SNE) HDTV LCD television. However, we were able to take advantage of 12% coupons and zero percent financing at BBY. This time around we had no coupon. In addition, just like HD, we have never seen nor heard of people shopping for home appliances at BBY.

So, we trudged to Sears. As it turned out we had a 10% discount coupon for Sears’s home appliances. In addition, we have bought our dishwasher, clothes washer, clothes dryer and trash compactor at Sears. I also like to shop where I invest and as many people know, SHLD is one of the top holding for my clients, family and me.

Now we had to decide on a style and model. With a family of seven (six since we have one in college) plus frequent family and guest visitors, a large sized refrigerator / freezer is necessary. Our old refrigerator was 25 cubic feet. A similar size was necessary. We took measurements at home before leaving for Sears so we could make sure that a new unit would fit in the old space. There are 3 styles of refrigerator / freezer combinations. First is the side by side. We don't like that style. Actually we have one at the lake house (not our choice, it came with the house) but for our normal lifestyle it does not work. Then there is the freezer top / refrigerator bottom style which was like the unit that just died. Finally, a newer style called the trio was also available. The trio style has a freezer on the bottom and then two French style doors for the refrigerator on top. We decided on the Black Kenmore Elite 24.7 cu. ft. TRIO (see the picture above). It also comes with a water / ice dispenser on the left door. We could not use the 10% discount coupon because the unit was already on sale for about 12% off of the normal price. In addition we received a rebate for the delivery charges and were not charged for removal of the old unit.

Hopefully we won't have to deal with this situation for another 18 years. Instead now I may have to remodel the kitchen.

At the time of this blog entry, Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of Sears Holdings (SHLD).

Professor Cody Willard

Congratulations to Professor Cody Willard, the dynamic hedge fund manager, Real Money.com contributor, blogger and band leader who scaled the Ivy Tower today to begin another aspect to his life, that of Adjunct Professor at Seton Hall University.

For those of you not aware, I am a full time professor at Seton Hall University, in addition to managing my own Investment Advisory business, LakeView Asset Management, LLC. Each and every Thursday (this semester) a group of students will be joining me in the Stillman School of Business' Trading Room (see picture above) to view and discuss Jim Cramer’s Mad Money which appears from 6 to 7PM. From time to time other guests from Wall Street or TheStreet.com will join us. Feel free to came and participate.

On Average There are 2 Sneakers to a Box

While shopping at the Aviation Mall in Queensbury, NY we stopped by a shoe store to look for some back to school foot attire. I came across a box of Puma sneakers and snapped this picture on my Palm (PALM) Treo 650. While hard to read, if you look closely enough, in the lower left hand corner of the box in the picture is printed Average Contents 2. The mathematician that I am began to wonder. Does Puma sell some boxes with 1 sneaker? Does Puma then offset that with boxes of 3 sneakers? Is there an arbitrage whereby I can buy 2 boxes of 3 sneakers and sell them as 3 pair?

College Tuition

I had an interesting discussion with my graduate assistant Michael Cavallaro on the topic of fixed versus variable college tuition. As it turns out I just paid my first round of tuition for my son. It turns out that his tuition plan is fixed, that is to say you pay not by credit but by semester. This was how I paid my way through the Wharton School at the University of Pennsylvania. On the other hand Seton Hall is on a variable or pay by credit formula. That’s how I paid my MBA bill at NYU’s Stern School of Business. I don’t think that there is a right or wrong way of pricing college tuition. It really depends on the structure of the institution’s classes, faculty and endowment. Universities which rely on large class size and have large endowments can favor a fixed tuition plan. Those which focus on small class sizes and rely on adjuncts more than permanent faculty and do not sport large endowments find it best to go the variable route.

I will say that having shopped around recently; some schools are definitely overpriced relative to the quality of their academic product in many respects. Please note that Penn, Seton Hall and NYU are not amongst those overpriced versus lesser quality institution. Quite the opposite, I think those schools offer great value. However, when selecting a college keep in mind the quality of the education and outplacement versus the tuition. As with the stock market, there are always bargains, blue chips and underperformers out there.

Back to School

Welcome to the LakeView Asset Management Blog hosted by myself, Scott Rothbort. I hope to share with you some of my thoughts from the world of investments, academia and the world in general.

Today (or shall I say, this week) is back to school. So far, my observations at retail stores indicate that we have a very brisk and healthy back to school season. In particular, I saw lines and heavy shopper activity at Staples (SPLS) and Sears (SHLD). I have held SHLD for our client accounts since the stock was Kmart.

Today SHLD is up on strong volume with the stock price advancing above the level at which it closed the day before announcing earnings in August. Helping the stock today is information fresh from the SHLD 10-Q in which the company disclosed a nearly 2.3 million share buyback. More buybacks are no doubt on the way.

On the day of the earnings release, I spoke on Bloomberg TV about some of my thoughts on Sears and its ace Chairman, Eddie Lampert.

At the time of this blog entry, Scott Rothbort, his family and or clients of LakeView Asset Management, LLC were long shares of Sears Holdings (SHLD)