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Last week’s inflation print was a stunner that set alarm bells ringing across Wall Street. A fresh 40-year high in consumer price inflation set off speculations that the Federal Reserve will raise interest rates by a half-point when policy makers meet next month.

![consumer price index](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Screen_Shot_2022_02_14_at_8_47_48_AM_880800da53/Screen_Shot_2022_02_14_at_8_47_48_AM_880800da53.png)

“_I’d like to see 100 basis points in the bag by July 1,_” [James Bullard, St. Louis Fed President said in an interview with Bloomberg News](https://www.bloomberg.com/news/articles/2022-02-10/fed-s-bullard-backs-supersized-hike-seeks-full-point-by-july-1). “_I was already more hawkish but I have pulled up dramatically what I think the committee should do_.” The question, of course, is whether this view is shared by his colleagues on the FOMC.

There are only three meetings between now and July, stoking speculation that the Fed could hike 50 bps in the upcoming March meeting. That’s a substantially more aggressive start than investors expected even a few weeks ago.

**Keep calm, and carry on**

So, is the equity market toast? Interestingly, no. Going back as far as the late 1980s, the market actually tends to rise rather than fall during the rate-hiking cycle. (Disclaimer: this isn’t an apples-to-apples comparison because the lengths of each cycle vary greatly.) 

![how do equity indeces perform during active Fed cycles](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Screen_Shot_2022_02_14_at_8_48_14_AM_4d734a5141/Screen_Shot_2022_02_14_at_8_48_14_AM_4d734a5141.png)

To be sure, it is harder to see the market producing such a performance during a period in which the economy experiences a 1970s-style inflation. The above examples serve as a good guide only assuming the inflation spike is indeed temporary. 

Ok, so why don’t stocks drop during Fed rate hikes? In part, it’s because Fed hiking cycles are often preceded by market corrections. Hiking cycles are telegraphed well in advance (witness the long, drawn-out buildup into the start of this next one). 

![Jerome Powell](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/106422456_1583256702102rts34kgj_977c90d653/106422456_1583256702102rts34kgj_977c90d653.jpeg)
_I swear, I don’t want to - CPI is making me do it …_

The second reason is that while markets don’t love tight monetary policy, they hate runaway inflation even more. A Fed that falls behind the curve is expected to move much more aggressively later on (to catch up). This raises investor fears of a policy error that could tip the economy into a recession.

**Fed and inflation proof stocks**

If you accept inflation and a more aggressive Fed as a given, what to do? TOGGLE’s analysis - [featured in the Business Insider recently](https://www.businessinsider.com/stocks-to-buy-fed-rate-hikes-artificial-intelligence-retail-investors-2022-1) - highlighted 14 particularly resilient stocks in the event of a more aggressive Fed hiking path. 

It’s also worth finding companies that can preserve their profit margins through pricing power. Across the economy, margins have slipped to 14.8% during the fourth quarter from 15.2% during the third quarter, according to Wells Fargo data.

Caterpillar (CAT), for one, is lucky enough to have customers flush with cash from rising commodity prices, so it’s easy to get them to pay up. Another one, CNHI Industrial (CNHI) makes farm equipment and trounced profit estimates. They can thank the soaring price of farm products like soybeans and corn for that. 


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Daily Brief - Equity performance during Fed hiking cycles 

## The 10 days ahead: TOGGLE Leading Indicator
_The TOGGLE Leading Indicator is the aggregated indicator of all TOGGLE insights for stocks in the US market_

After correctly pointing to the recent market gyrations, the TLI remains in neutral territory. To learn more about the indicator, watch our [Guide to TLI video here](https://www.youtube.com/watch?v=NgAt2JHbNsA) and [read it here](/investing/guide-to-toggle/toggle-leading-indicator).
 
Stay tuned for an announcement soon about the TLI coming to the TOGGLE app!

![TOGGLE leading indicator](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/aggregate_toggle_signals_spx_6_7_8_stars_5_2a4cedc494/aggregate_toggle_signals_spx_6_7_8_stars_5_2a4cedc494.png)

## Answer to yesterday’s Literary Contest

_📚 Congratulations to the winners of the literary contest, who will get a free Pro license for one year!📚_

Published in 2007, The Blade Itself is the first chapter of the First Law trilogy by Joe Abercrombie - a successful British writer originally from Lancaster.

With the character of Logen Ninefingers the author carries on a long-standing tradition in speculative fiction: deconstructing and rewriting Conan the Barbarian.

![conan the barbarian](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/conan_the_barbarian_1200421_dba207368e/conan_the_barbarian_1200421_dba207368e.jpg)

From Fafhrd (Lankhmar) to Cohen (Discworld) to Karsa (Malazan) to Cnaiur (Second Apocalypse), every major author has taken a jab at rewriting the Barbarian Hero. 

A quick peek at [TVTropes’ page](https://tvtropes.org/pmwiki/pmwiki.php/Main/BarbarianHero) will give you a sense of the degree of influence that Conan has had on successive writers.

Whereas Conan was larger than life - a hero of myth really - Abercromie’s makes Logen very human. 

Logen is scared, self-effacing, and constantly surprised at his own survival. His internal monologue is interspersed by the iconic and often hilarious musing:

_**“Say one thing for Logen Ninefingers, say he…”**_

With a remarkable [4.19 stars on 192k ratings in Goodreads](https://www.goodreads.com/book/show/944073.The_Blade_Itself), The Blade Itself  is considered one of the best works of speculative fiction in the last two decades. If this weekend you feel like speculative fiction, give the book a try.

## General Interest - The fall and resurgence of a novel art style
_Every week we endeavour to bring you one high quality article post of general interest_

Wired magazine is a great tech publication - more so for acknowledging that their predictions [almost never come true](https://www.wired.com/story/wired25-david-karpf-issues-tech-predictions/).

In 2015 Wired published a famous piece that struck a chord with many of its readers - “[Pixel Art Is Dying Along With the Games That Made It Cool](https://www.wired.com/2015/08/geeks-guide-pixel-art-is-dying-along-with-old-school-videogames/)”.

The word _pixel_ means picture element, and denotes the smallest element on a screen - like the 2532 x 1170 pixels in your iPhone. 

Born out of primordial videogames - think Pac Man and Space Invaders - Pixel Art was influenced by limited screen resolution and small colour palettes.

The result was a blocky and colourful aesthetic which dominated the videogame industry for the good part of three decades - until pixels became so small you could not see them.

![Pac Man and Supermario](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Picture1_3_4482cdf9a5/Picture1_3_4482cdf9a5.png) 
_From Pac Man to Supermario, a number of iconic intellectual properties were born out of pixels_

The 2015 Wired piece quoted Mark Ferrari, an accomplished pixel artist with a hand in classics like Loom and The Secret of Monkey Island. 

In the interview, Mike expressed a bleak vision of the future of Pixel Art: “_The popular market for pixel art will last as long as the generation who played those [old] games is still running the world_”.

Mike’s prediction turned out wrong. Very wrong.

![Monkey Island](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/59404_cab7a63a4b/59404_cab7a63a4b.jpg) 
_Monkey Island by Lucasarts_

The intervening 7 years saw the rise of high-quality indie video games. Indie producers found powerful visuals in pixels and a generation of new masterpieces were born: Hyper Light Drifter, Stardew Valley, Undertale, Terraria and many more.

A bit like lego blocks, pixel art requires different skills from freehand illustrations and can still deliver a large emotional payload - with lower barriers to entry for beginners.

Take the case of Stardew Valley below. A true magnum opus, the game was created by a single developer who coded the game, wrote the music, and painted the art.

Stardew Valley became a global success and sold 15 million copies.

![Stardew Valley](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/1_1screenshot15_d1a0edfbfd/1_1screenshot15_d1a0edfbfd.png) 
_Stardew Valley: when you really wanted to be a farmer_

In a true renaissance of the style, Pixel Art videogames now represent the majority of indie games produced. Time to get some Pixel Art NFTs maybe? 

[Nyan cat is on sale…just sayin’.](https://www.theverge.com/2021/2/18/22287956/nyan-cat-crypto-art-foundation-nft-sale-chris-torres)

![Nyan cat](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Nm_Jgg_dd2fd23fab/Nm_Jgg_dd2fd23fab.jpg) 
_Unsurprisingly Nyan cat has being packaged in an NFT_



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Daily Brief - Friday Edition - TOGGLE Leading Indicator, Literary Contest Winners, and more

Say one thing for the pandemic, say it’s a survivor.

We’ve thrown vaccines and lockdowns at it, and yet the virus has mutated and kept apace with our efforts. The recent mutations are - however - a sort of truce. 

[COVID is becoming an endemic but less aggressive version of itself](https://www.ft.com/content/b3aa95ed-18b3-406a-b611-9845dd07bbbc) - a regular companion of our seasonal flu and colds. The emergency will soon be over, as Fauci himself said.

If COVID is waning, what does that mean for markets?

**For one, less QE**. With no pandemic and inflation on the rise, there is truly no excuse to avoid normalising monetary policy.

**Secondly, a lower level of retail participation**. This is arguably a result of heightened market volatility, cue the previous point. ‘[Adults are back in charge](https://www.bloomberg.com/news/articles/2022-02-05/adults-back-in-charge-of-stock-market-as-fed-awakens-big-money)’, writes a condescending Bloomberg.

**Finally, short sellers are back**. Once cowed by the mobbing hordes of Reddit, the conditions are becoming more favourable for short sellers. 

A weaker bull market and fewer retail traders make for a more pleasurable ride when short selling companies. 

![Cumulative 5 week short flow](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/800x_1_a5dfddd02a/800x_1_a5dfddd02a.png) 
_Source Goldman Sachs via Bloomberg_

As Bloomberg notes in [a recent piece](https://www.bloomberg.com/news/articles/2022-02-09/hedge-fund-bears-reloading-after-a-year-in-the-reddit-crosshairs), “_hedge funds tracked by Goldman have boosted short positions in every week but one since early November_” - as you can see in the image above. 

The jury is still out on whether the risk of a short squeeze has been reduced. Short interest data is out there for all to see, at the end of the day. 

And the days of the retail trader are far from over.


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Daily Brief - Short sellers on the rise

On Feb 1st we published a piece on the so-called January effect. 

There are in fact two distinct studies about January seasonality that have mystified and intrigued investors for decades:

- does January go up in general?
- does January’s performance tell us something about the rest of the year?

Clearly we’ll talk about the latter today, since we’re already in February.

We looked at the performance of the next 2 months after a -5% day (precisely, after a -4% to -7% month).

![performance of the 2months after a -5% drop month](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/image_40_ac2a5ed93e/image_40_ac2a5ed93e.png)

To gauge this properly, at the bare minimum you need to compare this distribution with the distribution of all other SPX months.

This comparative analysis shows that a) we’re less likely to have an all-out crash, but b) we’re more likely to have a 10% move…in either direction!

**So what’s the trade?**

This strikes us as profoundly interesting, since we’re all traders here.

The next question comes naturally: so what’s the price of a straddle for the next two months?

The answer is 5% to 6% for the March 31st straddle, depending on the day. Or you can spend 2.2% for a 5%-wide strangle.

With over 50% historical chances of a move larger than 5%, that sounds like an interesting risk-return profile.

**The technical corner** 

Remember that the cheapest straddle in equity markets is always slightly above the at-the-money (because of the skew of course).

If you choose to use that out-of-the-money straddle, that will eat a bit into your returns in case of a rally BUT it will provide better profits on the downside.

The choice is of course one based on both your overall portfolio and on your views on the market.


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Daily Brief - What happens to markets after a -5% month?

Most investors fear it, and find it unnerving. The sea of red ink in your portfolio is hard to take. As an investor, however, you should love volatility, said Warren Buffet once. You love the idea of wild swings because it means more things are going to get mispriced. 

If you stick to your knitting, you’ll see it as an opportunity to buy your best trade ideas at a steep discount.

Author of The Intelligent Investor and the father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--rewarding firms almost like in a popularity contest. But in the long run, the market is like a weighing machine--assessing the substance of a company. 

![The Intelligent Investor book](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/106835_UY_630_SR_1200_630_90ac420872/106835_UY_630_SR_1200_630_90ac420872.jpg)

Said differently, in the long run it’s the company's actual underlying business performance that matters, and not the investing public's fickle opinion about its short run prospects.

**Yup, there is a market formula**

The key is to identify the metrics that best represent the company’s long run potential, its “intrinsic value”, and enable the investor to identify the dislocation caused by market volatility. Buffett summarized the intrinsic value as “the discounted value of the cash that can be taken out of a business during its remaining life.”

Benjamin Graham actually [published a formula](https://en.wikipedia.org/wiki/Benjamin_Graham_formula) to calculate this value, and it became foundational for value investors everywhere. 

The [Discounted Cash Flow model](https://www.investopedia.com/terms/d/dcf.asp) is one of the successors of this early work. In fact, there are a number of tweaks experienced analysts will make to this basic workhorse model to create a range of alternative valuation frameworks.

Ok, but this doesn’t look that easy. How do you fill in all those variables? 

**The bigger the downswing, the safer the investment**

It’s important to remember that valuation is more art than science and the expected result is a range, not a single number. However, it’s worth spending time understanding one of these valuation models, thinking about the inputs (expected growth, interest rates) and seeing how closely market values follow it. It gives you an immediate insight into why investors obsess about earnings forecasts, and the path for Federal reserve hikes.

The reason why volatility is appreciated as an opportunity by value investors is that your margin of safety, to paraphrase Ben Graham, grows with the magnitude of the downswing. You don’t have to get it exactly right to still profit when the market starts to weigh rather than vote. 


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Daily Brief - The Warren Buffett formula for volatile markets

Peloton stock surged 30% in after-hours trading Friday after [The Wall Street Journal reported](https://www.wsj.com/articles/peloton-draws-interest-from-potential-suitors-including-amazon-11644012693) that the firm is receiving interest from potential suitors, including Amazon.com. Amazon has been speaking to advisers about a potential deal, according to sources near the company. [Seeking Alpha](https://seekingalpha.com/news/3796315-apple-is-called-a-favorite-to-bid-for-peloton-interactive) reports Apple may in fact be the favorite to purchase the exercise bike maker.

The company was once a pandemic darling as homebound customers ordered its pricey exercise equipment. The once-torrid growth has slowed, however, and the company has lately been better known for the early demise of Mr. Big. The stock closed Friday at $24.60, below its September 2019 IPO price of $29.

![Mr Big](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Screen_Shot_2022_02_07_at_8_45_53_AM_22dfd901c1/Screen_Shot_2022_02_07_at_8_45_53_AM_22dfd901c1.png)

There are several potential ties between Peloton and Amazon’s existing businesses, particularly Amazon’s stellar logistics operation, which could help the bike company address the nagging supply-chain issues. And Apple? Well, the bike has a giant screen that already comes standard …  

**Meta dreams come crashing down**

Peloton surge was just icing on the cake in a volatile week that saw Facebook (sorry, Meta) [set a record for a one-day wipeout in market value: $240 billion](https://www.businessinsider.com/meta-q4-earnings-largest-ever-one-day-wipeout-190-billion-2022-2)! Its shares tanked 22% after the company disappointed on earnings and user growth. Meta’s quarterly revenue growth slowed, with sales up just 20% from a year ago (compared with 33% growth the previous quarter and 56% before that). Even worse: Quarterly profit fell by $1B from a year earlier.

**Pay up, Pal**

Meta was far from alone among the giants that faced a reckoning last week. PayPal had its worst trading day of all time, with shares plunging 24% on a weak yearly forecast (fewer than 20M new accounts vs. 49M last year). 

Spotify shares fell as much as 17% after the pandemic thriver disappointed on user growth and paid subscription forecasts for the first quarter. It didn’t mention the Joe Rogan Covid-misinformation controversy.

**Diamond hands are buying**

Long term investors have been snapping up many of these tech fallen angels. Those with a proven track record of reinvention and market dominance (PayPal and Netflix could easily fall in that category) are probably good longer term bets. The rest may be good for a trade, too!


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Daily Brief - Alexa and Siri fighting over Peloton

**The 10 days ahead: TOGGLE Leading Indicator**
_The TOGGLE Leading Indicator is the aggregated indicator of all TOGGLE insights for stocks in the US market_

The TLI correctly pointed to the chance of a rebound after SPX’s recent drop. The indicator is currently back to neutral.

To know more about the indicator, [watch our Guide to TLI video](https://youtu.be/NgAt2JHbNsA) here and [read it here](investing/guide-to-toggle/toggle-leading-indicator). 

![toggle leading indicator graphs](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/aggregate_toggle_signals_spx_6_7_8_stars_4_32264b66da/aggregate_toggle_signals_spx_6_7_8_stars_4_32264b66da.png)

**General Interest - Do you know about Quanta Magazine?**
_Every week we endeavour to bring you one high quality article post of general interest_

If you read the TOGGLE Daily Brief, chances are you know this gentleman:

![James Simons](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/James_Simons_732069f1a7/James_Simons_732069f1a7.jpg) _Jim Simons - billionaire, genius, philanthropist, hedge fund manager_

For those who don’t know him, this distinguished scholarly fellow is James Simons - colloquially known as Jim.

Jim is the founder of Renaissance Technologies - colloquially known as [RenTech](https://www.rentec.com/Home.action?index=true) and arguably the best quant fund in the world.

![Soros, Simons, Paulson, Falcone and Griffin in front of US Congress](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/soros476_fb7ab9a7f9/soros476_fb7ab9a7f9.jpg)
_Soros, Simons, Paulson, Falcone and Griffin in front of US Congress_

Jim might be famous for his appearance in Congress along with Soros and Griffin more than a decade ago - but he’s also an active philanthropist.

One of the gems amongst the activities of the Simons Foundation is [Quanta Magazine](https://www.quantamagazine.org/).

If you never browsed the website, we can guarantee that this is one of the best - if not **the** best - divulgative scientific publications you will ever read.

![Quanta magazine](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Capture_2_82f33f23e6/Capture_2_82f33f23e6.png)

Quanta Magazine tackles hard science problems with a passion, simplifies them without losing flavour, and illustrates them with an artistic budget that we’d love to have at TOGGLE.

If you like science, [be sure and check out Quanta Magazine](https://www.quantamagazine.org/)!



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Daily Brief - Friday Edition (Feb 4, 2022) 

The latest US CPI was released in mid-January and the [7.0% print](https://www.bls.gov/cpi/) knocked the markets down 11%. The next release is around the corner [on Feb 12th](https://www.bls.gov/schedule/news_release/cpi.htm) and it’s fair to say the market will watch it carefully.

With the pandemic behind us, inflation will likely be the driving force behind Fed policy for 2022. So we want you to look at the chart below. 

The plot shows how **large changes in growth impact inflation ~12 months later**. In particular, the plot suggests **inflation will moderate in 2022**.

![how changes in Growth drive inflation after 1 year](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Figure_1_cc8b6da59f/Figure_1_cc8b6da59f.png)
_If the letters “ISM PMI” ring no bell for you, see more information below_

Of course, the linkage between growth and inflation is not a mechanical 1:1 relationship. 

Data shows the two are linked by an “elastic band” of sorts, and that **CPI can diverge from growth, but not forever**.

A moderation of inflation will help stem the risk of aggressive policy action. But it won’t happen immediately, and **the Fed is loath to respond quickly to any change in data**.

So brace for a rocky H1’22.


**_It’s learning time! What is the ‘US ISM Manufacturing New Orders PMI’?_**

PMIs are surveys of companies that ask how business is doing. They are quality leading macro data and should be observed carefully. PMI stands for Purchasing Managers' Index.

The companies who produce PMIs, such as ISM in the US, send out questionnaires to large groups of companies, asking questions like “_are inventories higher or lower than last month?_”.

The results are published as a percentage of positive responses. So if the Inventory PMI is at 60, it means that 60% of companies queried have higher inventories compared to last month.

PMI surveys have many questions but the most important one, the one you should focus on, is New Orders: “_is business better or worse than last month?_”.

New Orders are among the earliest gauge of macro growth available. Keep an eye on them in the first days of each month.

So in conclusion you should decompose ‘US ISM Manufacturing New Orders PMI’ like so:

- 🇺🇸 US: The Land of the Free and Home of the Brave – this implies that you can have China or Japan or Italy PMIs as well
- 📦 ISM: Institute for Supply Management, a non-profit organization that conducts the survey – other institutions do the same job across the world, IHS-Markit being one of the key ones
- 🏭 Manufacturing: the mega-sector aggregate of all manufacturing industries (as opposed to “service”) - you can have PMIs for any sector
- 🧾 New Orders: new orders placed with a manufacturer - this is one of the survey questions, and the full list includes Inventories, Input Prices, Output Prices, Employment Costs, and much more
- 🙋 PMI: an index based on a survey – PMIs as a whole are a vast category of data


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Daily Brief - How will inflation fall 

Robinhood’s market cap is currently $12bn. With 17.3M customers, that means that each RH customer is priced at $700.

By comparison, some of the largest brokerages out there spend north of $1,000 to acquire an active user.

Granted, the portfolio of the average RH user is $4k, a tenth of the mean Schwab account.

But these 17M users are **special**. And since 50% of our readers have a RH account, that includes **you**. 

![You are special](https://storage.googleapis.com/toggle-webcm/https://storage.googleapis.com/toggle-webcm/Picture1_e7711c0b5a/Picture1_e7711c0b5a.jpg) 
_RH traders are special (and not in the funny way)_

This cohort of young traders is - literally - **the future of trading in the US**.

To put things in perspective, let’s talk about another group of traders: the ‘old hand’, experienced traders. People in their 50’s or above who have been trading for decades and handle portfolios of hundreds of thousands dollars.

Many TOGGLE users fall in this category, they often engage our team directly and we have a great time talking markets. 

For a brokerage, these “retail whales” are pure gold: they are active, smart and large. 

When brokerages look at the traders on WSB they see the **whales of tomorrow**: 22M users who have the passion, activity and experience to become the next cohort of large traders.

Which is why buying them all in one go at a bargain price makes the most sense in the world.

You’ve seen companies like TastyWorks and Interactive Investor being snapped to the tune of $1bn+ recently.

So keep an eye on Robinhood. 

