Sample issue of the Trader's Digest:

Happy Friday!

This week, we turn our attention to the buzz around the recent influx of amateur day traders.

Quote of the week

Nothing so undermines your financial judgement as the sight of your neighbour getting rich.

- JP Morgan

Millennial traders are killing it in this market

📈 The spotlight continues to shine on millennial day traders who are beating the returns of billionaire investors like Warren Buffett and Stanley Drunkenmiller.

By most objective measures, the stock market has risen to frothy levels, but it's hard to stay rational when seeing people like this 26-year old Robinhood trader who "started seriously 2 months ago" generating outsized returns.

From the article: "One Chicago-resident flipped his sister’s stimulus check into nearly $10,000."

Sports gambling 'army' distorting stock market

✊ One explanation for the unusual exuberance of stock market is the Covid-related shutdown of sporting events. With nothing to bet on, sports gamblers have turned to the stock market to get their fix.

From the article: "Bianco gave the example of Portnoy, who has 1.5 million Twitter followers, saying this month that he bought US$600,000 worth of stocks in pet retailer Chewy because stocks always go up, and he likes dogs.

“That’s it with the analysis,” Bianco said. “And there’s hundreds of thousands of people who listen to this guy and they all nod in agreement.”

Trader dies by suicide after seeing -$730k balance

😣 A 20-year-old options trader took his own life after seeing a large negative balance in his account. This is an utter tragedy that makes me both angry and sad. The thing is, he might not have realized that the negative number was only temporary and he hadn't actually lost all that money.

From the article: "When the stock closes between the two strike prices, the put you bought at the lower strike price expires worthless, but the one you sold is in the money and legally binds you to buy the stock at the strike price. In the case of three contracts of $2,615 Amazon puts, that would be $784,500 to purchase 300 shares. Over a weekend, say, you may see a –$784,500 debit to buy the stock, but you would not see the stock among your holdings until Monday.

Kearns may not have realized that his negative cash balance displaying on his Robinhood home screen was only temporary and would be corrected once the underlying stock was credited to his account. Indeed it’s not uncommon for cash and buying power to display negative after the first half of options are processed but before the second options are exercised—even if the portfolio remains positive.

“Tragically, I don’t even think he made that big of a mistake. This is an interface issue..."

Is the Fed addicted to propping up markets?

💉 The US Federal Reserve is being increasingly accused of manipulating the stock market by pursuing monetary policies that prevent stocks from ever going down.

The phenonmenon has become so well known in the investment community that there's a name for it: the Fed Put.

The basic idea is this: Every time the stock market begins to drop, the Fed steps in with massive easing policies to push prices up again. They are actively preventing the stock market from falling.

Critics (and many in the professional investment community) point out that such actions create a moral hazard that results in large market mispricings. This is perhaps best examplified in the recent surge of people buying stocks in bankrupt companies.

Meanwhile, there is caution in SE Asia

🛡️ The head of Southeast Asia’s biggest banking group said the amount of stress on the real economy will be “huge” after months of lockdowns.

From the article: "There is a likelihood of a correction to bring the markets in line with fundamentals, he added. That view is also vindicated by market analysts, who have in the past two weeks highlighted the risk of financial markets getting ahead of economic reality."

And also warnings from a billionaire investor

💣 Billionaire investor Howard Marks is warning about reckless day trading.

From the article: "If there's been buying and if stocks are being held by people who believe that they only go up, I think that bodes ill..."

"It reminds me of the people who were day trading in 1999 and declaring day trading a 'can't miss' strategy," Marks said. "The tech stocks crapped out in 2000."

Portnoy poked fun at Marks' comments in a tweet on Tuesday, accusing him of resenting day traders' success compared to veteran investors such as Warren Buffett. "Another poor sad billionaire is mad that people are making a ton of money besides him and Warren," he said. "Poor old Howard."

My thoughts

🤔 It's been eye-opening for me to witness the disconnect between an increasingly bullish market sentiment and an increasingly bearish economic reality.

(I missed out on experiencing the dot com boom and subsequent bust back in 1999/2000, as I had not yet been trading then.)

It would be interesting - and I suspect, highly educational - to see how things play out over the second half of the year.

A thoughtful Q&A

😰 Question: I'm stuck in quarantine, and I have all the time in the world, and I still can't seem to get anything done. What's wrong with me?

I thought the first answer was especially good.

Uh oh.

😬 In times like these we all need a little laugh.

End Note

I try to make this newsletter one of the best emails you get. If you enjoy it, consider sharing it with a friend or two. You can send them here to sign up.

And, should you come across anything interesting this week, send it my way! I enjoy finding new things and sharing them with members of this newsletter.

Have a great weekend,

Chris Lee | Pip Mavens blog