There is no such thing as ‘multitasking’ [RANT]

Just one quick thing on 'multitasking.' It doesn't exist, particularly if it requires the use of your eyes. Even if you have to use your eyes and your ears, you are mostly using your eyes. Why do you think pop stars dance around on stage? Yes, it's entertaining, but it also completely distracts you from how out of tune they sing. I used to joke that adding a bit of choreography makes the audience's ears 80% dumber.

When people multitask, they are actually switching between tasks in a serial fashion. We do not have dual core brains. In fact, I would argue excessive 'multitasking' is harmful to productivity due to the switching costs involved. So all this talk about not being able to do 'real work' on the iPad because it doesn't allow multitasking doesn't hold any water. People do 'real work' on the iPhone all the time, myself included. If the UI is as snappy as reported and you can switch between apps very quickly, no one will notice.

When I refer to multitasking, I'm referring to an app running in the background while you focus on something else. Perhaps your feed reader pulls your blogs into the iPad without you having to launch the app. It would be nice, but is it a deal killer? I don't think so, not for most people. Anyway, you get my drift.

…Rant…complete!

The iPad was not made for you!

I don't think I'm going out on a limb by saying the iPad will be a successful product, despite all its limitations.

Sure, I'm bummed about the lack of multitasking, expandable memory, OS X-like file management and program installation, camera, etc. The thing is, none of that really matters: the vast majority of people, probably on the order of 90%, consume media and do not create it. Particularly not on the run. Power laws are in effect here, just as they are when you look at contribution statistics for Wikipedia, profit contribution by client, or any other type of endeavor. The vast majority of content is created by a small number of people or institutions. Sure, there are social networking messages, status updates, tweets, etc. that generate data. But even in those environments, what is the ratio of followers to leaders?

Apple's mobile technology caters to the physics of mass media. Its products make it easy, even fun, to consume almost all the media you could hope to consume (ok, ok, you got me on the lack of Flash support). From this perspective, does the lack of multitasking really matter? Most people, particularly when on the move, really can't do more than one thing at once anyway (although you should be able to listen to music while doing other things, just as the iPhone can). So as a designer, would I rather eek out some more battery life or allow people to multitask, or maybe videoconference? Does the lack of expandable memory matter given the expected life of the product? Again, the vast majority of people are not looking to optimize their use of hardware, they just want it to do the things they do every day with panache. A lot of that crap will probably be in the second or third generation iPad within the next year or two anyway, but that still doesn't mean all of it is necessary now.

Just as domain specific languages are really good at certain tasks, Apple has created a platform that allows developers to create highly targeted applications that work exactly as you needed for particular purposes.
And that's why devices like the iPhone and iPad are kicking ass. I don't understand posts that ask "What's the point of the iPad?" What's the point of the Kindle then? That defunct CrunchPad/Joo Joo Bear thing? Or any other mobile device? Of course there are other devices that can do everything the iPad does. I could also lug my iMac around like that guy who plays WoW at Panera with a MiFi hotspot and a car battery.

Apple is striking a chord in the marketplace (as judged by its market capitalization and cash balance) because it has the ability to make tradeoffs that ultimately help define the product. It understands that 90% of the people are going to spend 80% of their time on these devices CONSUMING media, not creating it. And for the 20% of the time you need to shoot off an email, edit a document, or update your facebook status? Well, you can do that too…likely with ease. And finally, while Apple's marketshare is still small, it's now large enough to exert some buying power on it's suppliers. Putting out something like the iPad likely wasn't done earlier because achieving the needed price point wasn't feasible.

So, yes, I agree the iPad is a bloated iPhone, but without the phone and camera. But it does come with a bigger screen, so you can enjoy your media a bit more and be a little more productive while you're on the road. Apple's formula is taken straight out of the Clairol playbook: Nice 'n Easy, That's My Style!

Those of you that love your three monitor setup and, even now, are plotting to get that python interpreter running on the iPad? I'm sorry, but the iPad was not made for you.

iPad is going to eat Kindle’s lunch, and then kick sand in his face

I bought my wife a Kindle as an anniversary gift last year (yeah, I know real romantic). Both of us have used it a fair amount, but I ended up reading my books via the iPhone Kindle app. The touchscreen interface makes reading much more intuitive, page turns are smoother, and bookmarking is much easier. I also invert the screen contrast so the letters are white and the screen is black (makes late night reading a bit less annoying for my better half). Now, I really can't stand to read on the Kindle anymore. The only thing nice about it is the Amazon Whispernet service, which the Kindle app obviously also uses. The only downside about the iPhone is the screen size. For novels, I don't really mind, but for reference books, the small screen can really mess with the formatting of exhibits, charts, etc.

Well, the iPad rectifies the screen issue (and then some, according to all the bloggers that attended the event). The iPad isn't really that much more expensive than a Kindle either. It certainly is more versatile. Anyway, I sort of feel bad for Bezos. He did a good thing with the Kindle — Apple is just leveraging it's IP too well now.

We'll have to see how the productivity side of the iPad stacks up (particularly with no multitasking allowed), but from an eReader perspective, iPad is the new king of the hill. I mean, really, are you going to buy a Nook?

Three Documentaries

I've been on a documentary kick (care of Netflix Watch Instantly) and was surprised at how much I enjoyed the following films.

• Harvard Beats Yale 29-29. My initial reaction to this title was similar to my reaction to my cable operator offering an Ivy League basketball package. Who could possibly care? Netflix proved me wrong. I still have no interest in Ivy League basketball, but Harvard Beats Yale 29-29 was surprisingly good. The ending is as action packed as any big-time game you've seen, and the fact that the players (now old white guys) can talk about the game with a refreshing amount of mature perspective makes this film a bit different (and more enjoyable) than your typical sports documentary. One other thing: Tommy Lee Jones is weird.
• Tyson. I'm a boxing fan. Whatever you think of Iron Mike, he was one of the most compelling figures in the sport for most of our adult lives. This film was more artsy than I thought it would be, with Tyson providing an almost stream-of-consciousness commentary about his life. The chaos draws you in. Interesting stuff, particularly if you are a boxing fan.
• Who the #$&% Is Jackson Pollock? This movie definitely wasn't on my radar screen, but my wife turned it on. Why not? The film describes how a female truck driver happens upon a potential Pollock painting and her quest to get it authenticated. She is, of course, rebuffed by the art intelligentsia. Drama ensues!

Monte carlo and fundamental analysis

A recent discussion about stock options and the creation of Trefis (and it's ability to model firm value in a friendly way) made me wonder: Why isn't monte carlo isn't used more often in standard valuation models? Every b-school graduate has used @Risk or Crystal Ball, so associating probability distributions to revenue, expense, and other model drivers should be vaguely familiar at least.

This occurred to me because Trefis has a "crowdsourcing" feature that allows users to share their valuations with each other. If one could extract the driving assumptions from all these models (assuming there area lot of them for a given firm), I imagine the resulting valuation distribution might approximate a monte carlo model a single analyst might come up with.

But why do this? Growth estimates (e.g. sales, expenses, etc.) reflect an analyst's opinion about the stock, right? If you don't believe your valuation and outlook, what's the point? By articulating a risk profile for a given valuation, one is forced to consider the risk picture more broadly. Even if your expected valuation agrees with the last trading price, the risk profile of the valuation can still be used (via options) to account for other potential outcomes. One could even compare the "fundamental" risk profile with that implied by stock options to determine whether there are meaningful differences in opinion. I know Bloomberg has implemented the variance-gamma option model that allows analysts to extract a return distribution that takes into account the implied volatility skew. Combining this with a Black-Litterman exercise to estimate returns for a given portfolio (e.g. S&P500) might make for some interesting analysis.

For example, I imagine a portfolio manager might apply the Black Litterman approach to the SP500 and determine where the firm's fundamental analysts diverge meaningfully from returns implied by the current 'optimal' index pricing/weighting. By adding a risk profile layer to this basic analysis using monte carlo, the portfolio manager might find ways to trade a portfolio of options more effectively than simply buying or selling the underlying stock as he attempts to trade into his optimal exposures. Indeed, even if the firm's fundamental analysts agree completely with the returns implied by the Black-Litterman exercise, the individual firm risk profiles could suggest some micro or macro hedging via individual stock options or index options.

One concern is term mismatch. Stock options are short-dated options whereas fundamental analysts typically (or should I say allegedly?) look for fundamental value to be realized over a longer term (years vs. weeks or months). I suppose one could look at LEAPs, but I'm not sure how practical it is to trade those longer-dated contracts.

Anyway, food for a future notetoself. Maybe I just ate too much thai food.

Holy Schnikes! Script GUIs with Sikuli

Sikuli is based on Jython, so you can use python idioms when scripting your GUI. Man, those kids in Boston are wicked smaht. Pretty darn intuitive and makes it even easier to script repetitive tasks. It's sort of similar to Automator on OS X, but cross platform and more flexible. Looks a bit slow though and it looks like the application actually has to be launched for the script to work. It's early though…

A moth to the flame

Just moved. No phone. No TV. No Internet (not counting my craptastic AT&T iPhone service). All my bright phosphorescent screens lie dark and useless and partially boxed.

I am down to watching the baby monitor…the stench of desperation is in the air!

Mark my words AT&T residential service, your days of self congratulation are at an end. I will have my vengeance, in this life or the next.*

*(note to , I am simply paraphrasing the movie “Gladiator” and not actually threatening AT&T. do not send FBI. Baby is sleeping)

Goodbye sunny CA :(

Synthetic tranches intuition for stock option guys

I had a couple of interesting conversations comparing equity options to tranches, so I thought I'd develop some of the parallels here.

I'm assuming you're already familiar with equity options, however, so let me walk you through an example. Let's assume there is a stock index that, for argument's sake, can vary between $0 and $100. Now, consider the following series of call spreads on this index.

• Call spread A = long call option with a strike of $0, short a call with a strike of $3.
• Call spread B = long call option with a strike of $3, short a call with a strike of $7.
• Call spread C = long at $7, short at $10.
• Call spread D = long at $10, short at $15.
• Call spread E = long at $15, short at $30.
• Call spread F = long at $30, short at $100 (I know we've limited the stock to $100, but work with me here).

Let's say the index trades at around $1.50. Call spread A is most sensitive to changes in the index price (relative to the other call spreads) since it is "at-the-money" (ATM). In contrast, the $30-$100 spread offers little value since it is so far "out-of-the-money" (OTM). If the stock price increases to $5, call spread A has moved completely "in-the-money" (ITM) and is no longer as sensitive to moves in the underlying index (the maximum PnL for the spread has been realized). Call spread B is now the ATM option portfolio. As the index price moves, the value of each call spread will fluctuate depending on whether it is ITM, ATM, or OTM. Another way to look at it is in terms of option premium. If the index is trading at $1.50, I'll likely get much more premium by selling call spread A or B than call spread F.

Now let's consider the constituents of this index. Let's say it's made up of biotech companies that are highly dependent upon a certain upstream compound, pending FDA approval, for their businesses to succeed. If the compound is approved, these companies are going to make tons of money and the value of the index will likely approach $100. If it is not approved, the value of the index will approach $0. Your estimate of the compound's likelihood of approval will bias your estimate of call spread relative value. If you think approval is more likely than expected, you may be able to purchase the $30-100 call spread cheaply since it's OTM. If enough people agree with you, the premium associated with the $30-100 call spread will be driven higher until it reaches some equilibrium level. This reflects the binary nature of the approval process and the highly correlated expected returns of the index constituents.

The example would be much different if the index was made up of a well-diversified group of companies, spanning different sectors, etc. Some constituent stocks will go up and some will go down, but one might expect the distribution of potential index values to approach something more bell-curved than the binary outcome described in the biotech example. In this case, the value of the $30-100 call spread will remain low since the index probably won't generate those higher expected returns (again, relative to the biotech example).

Now stop. Replace the "$" signs in the example above with "%", generalize the "biotech vs. diversified" discussion in your head to correlated vs. uncorrelated, and substitute "expected loss" for "expected return." You officially understand standardized synthetic tranches. Tranches on the standard CDX index work in exactly the same manner. The expected loss of the index is tranched into 0-3%, 3-7%, etc., slices. If the index is implying a loss of 1.5%, for example, the 0-3% tranche is the ATM tranche. The intuition regarding the greeks, discussed in previous posts, follows naturally (delta, gamma, rolldown/theta, vega/correl01).

One common stumbling block is the whole expected return vs. expected loss business.  To be explicit, credit guys are primarily concerned with expected loss (default risk) whereas equity guys are focused on expected return. If I buy protection on the 0-3% tranche, I expect default risk to increase. When I buy the $0-3 call spread, I expect the stock price to increase. So remember, when you talk about CDS, you should talk explicitly in terms of buying and selling protection.

• Buy protection = I expect things to get crappier (I want to short the credit)
• Buy call option = I expect things to improve (I want to get long the stock)

So from a directional perspective (crappier <–> better), I suppose buying tranche protection is more like buying a put spread on a stock/index. For whatever reason, though, I prefer to think of it as buying a call spread on expected loss. This preference is driven by the quoting conventions of credit vs. stocks. CDS is quoted in spread (which reflects default risk) while stocks are quoted in terms of price.

The same term structure considerations are also applicable, though one should remember CDS maturities (e.g. 5, 7, 10y) are much longer than equity options.
 
Anyway, there are direct lines one can draw between stock options and standard synthetic tranches. Hopefully this helps bridge the gap.

And for something totally unrelated, here's a link to an oldie but goodie:

Giz summarizes the CES-related news deluge

The press releases and blog posts are coming fast and furious from the CES show. If you don't have the patience to follow all the announcements, you might save yourself some trouble by visiting The Best of CES care of Gizmodo. Just a thought.