October Book Lust

Options Volatility Trading

I’ve said before how much I enjoy following my virtual friend Jim Gobetz on Twitter (@aiki14).  Jim is the Managing partner and CIO in a family office based in Philadelphia PA and Wilmington DE. He appears on StockTwitsTV for a pre-market show  M-W-F mornings.

Jim tweeted about “Options Volatility Trading” By Adam Warner last week and I asked him to write a review for this month’s Book Lust column.  He graciously agreed:

I guess I should begin by stating my bias up front, Adam was one of the first people I found on StockTwits, and I have found his “short form” writing to be of the highest quality. This “long form” effort enhanced that opinion greatly. I think there is literally something for everyone in the book, whether they are experienced guys from the trading floor or newbies getting their first taste of the world of options.

The book begins with a bit of personal history which I found quite interesting. I love stories of the trading that went on, on the floor, back in the day and Adam brings the perspective of a young guy who thought he had a “legacy pass,” and from that starting point does a great job of laying out the workings of the options market and the thinking of the insiders.

He then moves on to the meat and potatoes first of the options themselves, and then the concepts of volatility, and it’s measure, and how traders use these metrics to gain an edge. His chapter on trading the VIX is particularly valuable in this day and age where the popular media feeds the public with constant heaps of this piece of data, without the least interest in whether that public has a clue to it’s limitations. Adam gives the reader a nice dose of reality in Ch. 11 where he addresses some of the popular conceptions and where they diverge from the truth.

The last quarter of the books gives the reader actionable strategies that put the prior chapters information into workable plays , charting concepts for derivatives, and finally a look at some of the rules that have changed and the consequences of these changes.

What I found most interesting was Adam displays an ability to take very technical subject matter and present it in a way that will satisfy the options technophile and not overwhelm the newly initiated.

I would recommend the book to anyone I thought was ready to made the move into options trading, and to all my friends and colleagues who trade them every day.

The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash

Another StockTwits friend is  @Barrie Abalard, who conceals her identity with this  pseudonym.  Barrie’s a technical writer who worked in the financial and funds transfer software industry for fourteen years. She currently supports herself by trading stocks and writing. She is a fellow regular contributor to the Die Broke Blog.

As fellow writers, Barrie and I trade book recommendations, and one of hers to me was The Trillion Dollar Meltdown by Charles R. Morris. Her review follows:

I first read this book in May, 2008 and, despite the occasional jargon and complex explanations of arcane financial instruments, found it compelling. I’ve since read it a second time. Morris has been scarily accurate concerning much of what transpired to create the economic crash of 2008. (Keep in mind that Morris wrote the book in 2007 for a February, 2008, publication date.)

The author contends that the 2008 crash has its roots in what transpired after the last big economic crisis, which ended in 1982. He details how we progressed from leveraged buyouts of banks in the Eighties to the stock market crash of 1987 to the LTCM (Long-Term Capital Management) debacle of the Nineties, all in the first couple of chapters. Chapter 3, “A Tsunami of Dollars,” explains how the Fed’s “years of working the liquidity pump” flooded the world with dollars, artificially keeping markets afloat. Chapter 4 is about what he calls “The Great Unwinding,” accurately predicting what happened to the credit markets in 2008 and to our economy. Morris lays fault upon the ratings agencies as well, and anticipates the crash of the monoline insurers Ambac and MBIA. I’ll leave it to you to read the book and discover his predictions regarding what will happen (and is happening) to the USA post-crash.

I should note that Morris is cool to the concept of “free markets,” but that’s largely because he equates free markets with little to no regulation. (Even a free market, in my opinion, needs some regulation to restrain fraud and the darker side of self-interest.) Otherwise, I have little quibble with the underpinnings of the book.

Do not be fooled by the slimness of this volume—Morris covers everything in 160 succinct pages. Densely packed with explanatory material, it includes detailed descriptions of CDOs (collateralized debt obligations), CDSs (credit default swaps), and MBSs (mortgage-backed securities), as well as how mark-to-market works and its role in the credit crisis. If you want to understand the events leading up to the 2008 stock market crash and recession but don’t have a degree in economics or finance, I urge you to read The Trillion Dollar Meltdown.

Justice: What’s the Right Thing to Do?

I heard the author, Harvard government professor Michael J Sander interviewed on The Diane Rheme Show a couple of weeks ago and wish I had time to read this book.

This review from Publisher’s Weekly: Harvard government professor Sandel (Public Philosophy) dazzles in this sweeping survey of hot topics—the recent government bailouts, the draft, surrogate pregnancies, same-sex marriage, immigration reform and reparations for slavery—that situates various sides in the debates in the context of timeless philosophical questions and movements. Sandel takes utilitarianism, Kant’s categorical imperative and Rawls’s theory of justice out of the classroom, dusts them off and reveals how crucial these theories have been in the construction of Western societies—and how they inform almost every issue at the center of our modern-day polis. The content is dense but elegantly presented, and Sandel has a rare gift for making complex issues comprehensible, even entertaining (see his sections entitled “Shakespeare versus the Simpsons and “What Ethics Can Learn from Jack Benny and Miss Manners”), without compromising their gravity. With exegeses of Winnie the Pooh, transcripts of Bill Clinton’s impeachment hearing and the works of almost every major political philosopher, Sandel reveals how even our most knee-jerk responses bespeak our personal conceptions of the rights and obligations of the individual and society at large. Erudite, conversational and deeply humane, this is truly transformative reading. 

Buddha’s Brain: The Practical Neuroscience of Happiness, Love and Wisdom

Rick Hanson, PhD, wrote this with Richard Mendius. Hanson is a psychologist and teacher of contemplative neuroscience. He cofounded the Wellspring Institute for Neuroscience and Contemplative Wisdom,and has been a board member of Spirit Rock Meditation Center.

Publisher’s Weekly review: The brain physiology associated with spiritual states has been fertile ground for researchers and writers alike. Neuropsychologist and meditation teacher Hanson suggests that an understanding of the brain in conjunction with 2,500-year-old Buddhist teachings can help readers achieve more happiness. He explains how the brain evolved to keep humans safe from external threats; the resulting “built-in negativity bias” creates suffering in modern individuals. Citing psychologist Donald Hebb’s conclusion that “when neurons fire together, they wire together,” Hanson argues that the brain’s functioning can be affected by simple practices and meditation to foster well-being. Classic Buddhist concepts such as the “three trainings”—mindfulness, virtuous action and wisdom—frame Hanson’s approach. Written with neurologist Mendius, the book includes descriptions and diagrams of brain functioning. Clear instructions guide the reader toward more positive thoughts and feelings. While the author doesn’t always succeed at clarifying complex physiology, this gently encouraging “practical guide to your brain” offers helpful information supported by research as well as steps to change instinctive patterns through the Buddhist path.

Conquering Fear: Living Boldly in an Uncertain World

Library Journal: Rabbi Kushner, author of the international best seller When Bad Things Happen to Good People, now focuses on specific fears that impact our lives—terrorism, natural disasters, aging, job loss, death, change, and the destruction of humanity. Some may say that these events are brought on by sinful acts; however, Kushner, who does not believe in a vengeful God, points out that the words “do not be afraid” are mentioned in the Old and the New Testament more than 80 times. Kushner writes that fear can paralyze us, make us tense, and often keep us from taking action. He explains that a small dose of fear is healthy and that we can gain mastery by recognizing legitimate fears, dismissing exaggerated ones, and avoiding letting it keep us from activity. Prayer, meditation, and helping others are the keys to alleviating excessive fear. VERDICT: A short, easy-to-read book filled with a great deal of wisdom and words of hope along with some practical measures for reducing fear. Kushner’s message is inspirational and transcends all religious creeds and spiritualities.

The Surprising Solution: Creating Possibility in a Swift and Severe World

Written by Bruce Piasecki, this review from Publisher’s Weekly: Piasecki (In Search of Environmental Excellence) updates his 2007 book (formerly titled World, Inc.) to address the current economic crisis and further explore the new frontier of sustainability, innovation and corporate social responsibility.

The underlying theme of this thought-provoking work is that big businesses have overtaken governments in terms of political and economic power—51 of the 100 largest economies in the world are now corporations; 300 multinational businesses control 25% of the world’s assets, and as much as 40% of world trade now occurs within these top multinationals. With their disproportionate power, big businesses now wield a tremendous ability to shape our social landscape, and the author impresses the importance of “Social Response Capitalism,” an approach that emphasizes a business’s “social brand” as well as the price and quality of their product or service. While the concepts are fascinating, the shifts in tone from academic to more casual create a jarring inconsistency. Still, for any reader who is a student of innovation and who seeks to understand the role of corporations in addressing global problems in the future, this is a treasure trove of provocative ideas.

Green Tax Code?

Thanks to The Atlantic’s July-August edition, I took a brief walk through the US political-environmental history of my adult life.

For me, it started with President Carter’s much-derided “sweater address” to the nation, in which he suggested we lower our thermostats.  I recall vaguely the buzz about the White House’s unsightly solar panels. Even as a high schooler I paid attention to the news.

What I didn’t understand at the time was how much reliance this country puts on the tax code to affect behavior — individual,  corporate and regulatory.   Hence today’s post and writing prompts for bloggers & newsletter publishers.

Saw-blade growth

Quoting the article: “Plotted on a graph, the history of clean-energy production in the United States resembles the blade of a saw, rising and falling each time subsidies came and went. Japan, Germany, Spain, and Denmark show smooth, upward-sloping yield curves, a reflection of consistent government policy.”

Reliance on venture capital

Long excerpt:

The nature of venture-capital investing, which involves placing many bets in the hope that a few pay off, helped create today’s array of clean technologies. But venture capitalists have been unable to replicate the explosion of growth in the Internet sector, because they aren’t big enough to compete in the $5 trillion U.S. energy market. Google required only $25 million in venture capital to become the company it is today. A large wind or solar facility can cost upwards of $500 million just to get started. “When you’re talking power infrastructure, you’re talking thousands of tons of steel and glass and giant turbines,” says Peter Le Lièvre, the co-founder of Ausra. “All the investors in Silicon Valley combined cannot put $500 million into a project.”

This poses a problem. Venture capitalists can bring an idea from the lab to pilot scale. But sooner or later the limitations of their balance sheets kick in. Many start-ups have made it this far only to die searching for additional financing. Venture capitalists have a term for this. They call it the “Valley of Death.”

The nut of the problem traces all the way back to Jimmy Carter’s choice of tax credits as the vehicle for subsidizing renewable energy. Direct grants would have been simpler. But Congress had recently changed the federal-budget process to keep closer track of how much money was being spent. It suddenly became easier to spend indirectly, by manipulating the tax code. Although no one realized it at the time, Carter’s decision to use tax credits lit the very long fuse on a bomb that detonated last fall and nearly took down the entire renewable-energy industry in America.

The trouble with tax credits (my emphasis added) is that in order to make use of them, you must owe taxes, and most start-ups struggling toward profitability do not. So while a company looking to build a wind or solar facility would qualify for valuable benefits, it had no means of realizing this “tax equity.” The work-around was to partner with someone who did, someone large enough to finance a $500 million facility and profitable enough to incur a large tax bill. Having witnessed two decades of busts and bankruptcies, traditional U.S. banks wanted no part of this. European banks, going by their more positive experience, were comfortable funding large renewable projects, but didn’t qualify for U.S. tax credits. The perversity of the government’s incentives demanded a big balance sheet, huge profits, and an indifference to risk. Enter Wall Street.

Investment banks and hedge funds stepped in to fill the void, engineering tax-equity vehicles with suspiciously complicated-sounding names, like “partnership flip structure” and “inverted passthrough lease,” to exploit the tax benefits. These deals amounted to financing agreements for large infrastructure projects, given in exchange for tax credits, often worth hundreds of millions of dollars, that could be applied against profits earned primarily on other investments (like mortgage-backed securities). For renewable-energy companies, tax-equity deals meant life or death: the combination of credits could offset two-thirds of the capital cost of a project. Companies like Lehman Brothers, Wachovia, and AIG became an integral part—even the integral part—of the renewables industry, because the utility-scale projects they financed produce the overwhelming majority of clean energy in the United States.

Basing the entire system of federal incentives on tax equity had two weaknesses, one that has always been clear and another that became clear only recently. Forcing renewables companies to route government support through Wall Street, thereby sacrificing a portion of it, was needless and inefficient. But it also tied the industry’s fate to that of the financial world’s most aggressive players. Just as Wall Street bankers bet that housing prices could never fall and got wiped out when proved wrong, Congress seems never to have imagined that Wall Street might someday have no profits and need no tax equity. Early last year, the multibillion-dollar tax-equity universe consisted of 18 providers. After September’s record carnage, the number dropped to four. Credit froze, and most projects ground to a halt. All of a sudden, not just a few start-ups but the entire renewable-energy industry was staring into the Valley of Death.

Financial and Environmental Writing Prompts

• Do you agree with Raj Atluru, managing director of the venture-capital firm Draper Fisher Jurvetson, when he claims that the stimulus bill save renewables?  Here’s The Atlantic:

“To fill the tax-equity gap, the stimulus provides $32.7 billion in direct grants and another $134 billion in loan guarantees to attract new investors to large projects. To impose stability, it extends a variety of tax credits by anywhere from three to eight years. Most striking of all, it instructs the Department of Energy to invest directly in promising cleantech companies (though the payoff comes in jobs and environmental gains, not equity). By a stroke of his pen, President Obama made a federal agency the world’s largest venture capitalist. When the official in charge of the program appeared at a Santa Barbara energy conference in March, he was mobbed by eager CEOs.”

• Is it inefficient to force renewable companies to route government support through Wall St?
• What do you think about the Department of Energy now essentially becoming the world’s largest venture capitalist?
• Comment on this claim: “American capitalism—even when it’s working—is not without its limitations, one being that promising ideas rarely get funding if their commercial potential lies beyond venture capitalists’ 10-year investment horizon.”
• Do you agree that The Energy Department research budget has never recovered from Reagan’s cuts?
• Do you have statistics to back up or dispute this claim? “People in cleantech circles often point out that the electric utilities spend a smaller portion of revenue on research and development than pet-food companies do. “

Greenfinger?

With the G8 coming to agreement on climate change, The Atlantic’s article “Moving Heaven and Earth” is timely.  In it, I learned a new vocab word, “Anthropocene,” coined in 2000 to describe the period of time when humans began changing the world’s climate and ecosystems.

I also learned about large-scale projects that are designed to “deform the Earth intentionally, as a way to engineer the planet either back to its pre-industrial state, or to some improved third state.”  These projects fall under the term “geo-engineering”and give me the creeps.

Following is a brief overview of the strategies followed by writing prompts for bloggers and newsletter publishers (but they can also be used for conversation starters at the neighborhood pool party).

Gas the planet

For those who saw Blade Runner, the red skies envisioned by this strategy will be familiar.  Imagine factories whose sole occupation is pumping out sulfur dioxide.  During the day all that aerosolized pollutant would shield the planet from the full blast of the sun and would often redden the sunsets.  Cost estimate: $100billion compared to an estimated annual $1t to cut carbon emissions through traditional means.

Churn the seas

The National Center for Atmospheric Research’s plan calls for a fleet of 1500 ships constantly churning sea water and spraying it high enough for the wind to carry it to the clouds, making them whiter and fluffier, which in turn enables them to better reflect the sunlight. Cost: $600m up front plus $100m annually.

Frisbees

An astronomy and optics professor at the University of Arizona proposes shooting Frisbee-sized ceramic disks at the gravitational midpoint between Earth and Sun to provide a huge sunshade and keep the planet in a perpetual state of annular eclipse.  Cost: Several trillion (the technology doesn’t exist).

No international treaty needed

The trouble with treaties is the incentive to cheat, but with geo-engineering any one country could act alone.  “Instead of a situation where any one country can foil efforts to curb global warming, any one country can curb global warming on its own.  Pumping sulfur into the amosphere is a lot easier than trying to orchestrate the actions of 200 countries  — or for that matter, 7 billion individuals…”

The article contemplates a possible “Greenfinger” who might implement geo-engineering with the single minded focus of  the James Bond villain, Goldfinger. “There are now 38 people in the world with $10b or more in private assets…theoretically, one of these people could reverse climate change all alone.”  Even a poor country like Bangladesh could afford to take unilateral action to reduce the chance their low-elevation coastal zones would wash away in global-warming-induced rising seas by pumping out sulfur dioxide.

Cut carbon emissions

There is almost universal agreement by climate scientists that we’re better off reducing carbon emissions than going into geo-engineering.  Lots of ideas there too, including capturing emissions in giant cooling towers, but the problem is where to put all that captured carbon.  One idea is to inject it into the “right kind of geological structure” that would be deep enough to keep it there.

Another reduction strategy for reducing the carbon dioxide we currently produce is blooming plankton, which thrives on it.  Some envision offshore plankton forests to replace those no longer on land.  Problem is, the dead algae would produce methane, a greenhouse gas that’s 20 times stronger than carbon dioxide.

The article concludes with the suggestion that we “keep investigating geo-engineering solutions but make quite clear to the public that most of them are so dreadful that they should scare the living daylights out of even a Greenfinger.”

A note on language

As I wrote in May, people don’t respond as well to negative as they do positive language.  For example, the founder of ecoAmerica observed “When someone thinks of global warming, they think of a politicized, polarized argument. When you say ‘global warming,’ a certain group of Americans think that’s a code word for progressive liberals, gay marriage and other such issues.”

Further, in another Atlantic Monthly article by Yale psychologist Paul Bloom, “Although it might be hard to think about the person who will occupy your body tomorrow morning as someone other than you, it is not hard at all to think that way about the person who will occupy your body 20 years from now. This may be one reason why many young people are indifferent about saving for retirement; they feel as if they would be giving up their money to an elderly stranger.”

Bottom line for environmental communicators: find a way to couch messages in positive language; ground them firmly in the present.

Environmental and Financial Writing Prompts

• If you have working knowledge of these or other geo-engineering strategies, please leave a comment with links.  You might consider comparing and contrasting those you know with those in The Atlantic’s article.
• Refer to the post I wrote about Prince Charles’ Rainforest Bond proposal. Given what one rogue nation could do to gas the planet with sulfur dioxide, perhaps it makes sense to pay rainforest countries for the services their natural resources offer to the health of the planet and every living being.
• Given the state of venture capital, by what means can environmental entrepreneurs fund their work?  Is there something between governmental support and venture capital?  With so many unemployed financial mathemeticians looking for something to do, this seems a worthwhile problem to ponder.
• How can funding and regulation work together to protect the entire world from a Greenfinger or rogue state?

Krugman v Samuelson on Green

In today’s NYT, Nobel Laureate Paul Krugman weighs in on climate change with the terse observation that “just as denials that climate change is happening are junk science, predictions of economic disaster if we try to do anything about climate change are junk economics.”

“Right now, the biggest problem facing our economy is plunging business investment. Businesses see no reason to invest, since they’re awash in excess capacity, thanks to the housing bust and weak consumer demand.”  Krugman outlines how a commitment to greenhouse gas reduction would give businesses a reason to invest in new equipment and facilities even in the face of excess capacity.

He concludes, “given the current state of the economy, that’s just what the doctor ordered.”

On the other side, reporter, author and Washington Post columnist Robert Samuelson says “The trouble is that these models embody wildly unrealistic assumptions: There are no business cycles; the economy is always at “full employment”; strong growth is assumed, based on past growth rates; the economy automatically accommodates major changes — if fossil fuel prices rise (as they would under anti-global-warming laws), consumers quickly use less and new supplies of “clean energy” magically materialize.”

Writing Prompts:  Financial Services, Environmental

• What’s more important, getting started on a global climate change or getting the right global environmental policy in place?
• Krugman admits “Yes, limiting emissions would have its costs. As a card-carrying economist, I cringe when “green economy” enthusiasts insist that protecting the environment would be all gain, no pain.”  Do green enthusiasts over-state their case?
• What about Krugman’s claims on overcapacity?

Green Investments and the US Labor Market

A new white paper released by the Economic Policy Institute (EPI) reminds that the U.S. economy lost 5.1 million jobs over the past 15 months.

With a nod to the Obama administration’s commitment to a cap and trade plan for carbon emissions, the paper warns that, nevertheless, new federal investments are needed to provide economic benefits that “go beyond the primary one of emissions reduction.”

Promising Conclusions

The EPI concludes  that a commitment of $100 billion annually in new public investments over the next decade would yield:

• Approximately $160 billion in additional output annually for the next two years, which translates  into approximately1.1 million net new jobs created.

• An increase in the relative wages of those 70% of U.S. workers without a four-year college degree by almost 0.5% each year that the increased commitment to green investments persists. While modest, this amount does represent a wage increase for high school graduates that is roughly 40% as large as the entire increase this group has seen since 1979.

• An increase of approximately 100,000 in the number of unionized jobs in the United States (even in the unlikely case that all of the jobs supported through this new spending merely displaced currently existing jobs).

Writing Prompts:  Financial, Environmental, Services, Consulting

• Respond to this EPI conclusion based on your own data and experience:  “In the short run, any investment that can be done quickly to help meet the challenges of undertaking serious carbon emissions abatement will have welcome near-term macroeconomic impacts. And over the longer-term, these investments will provide a payoff in the form of climate change mitigation, energy independence, and economic gains from energy efficiency.  In the longer run, dedicating more resources to ameliorating global climate change will actually lead to a mix of industry employment that nudges back against the forces that have generated ever-greater wage inequality for most of the past 30 years.”
• Support or refute this EPI claim: “Each dollar of infrastructure investment—broadly defined—provides on net about $1.59 in additional economic growth, making it about 33% more effective than generic tax cuts and literally 10-15 times more effective than most business tax cuts. In short, infrastructure spending, including ‘green’ investments, is about as good economic stimulus as there is.”
• This week the cap and trade debate drew comparisons to the earlier Acid Rain Trading Program, which was established in 1990 under the Clean Air Act.  The administration said it “delivered huge benefits—to the tune of $120 billion a year—with an annual cost of only $3 billion a year. The acid rain program is a trading system comparable to a carbon cap-and-trade program.”  If you were in business during that time, reflect on the similarities and differences between the Acid Rain Trading Program and cap and trade.
• A new project of the Sierra Club, National Resource Defense Council and others, called “The Reality Coalition,” takes on the premise that there is such a thing as clean coal.  Is there such a thing as “clean coal”?
• Reflect on how the administration’s proposed Green Investments and cap and trade plans would directly affect your business or that of your customers.