An Upbeat Outlook on Inflation
Good news echoed through the stock market this week as the U.S. Bureau of Labor Statistics shared a positive report on inflation in October.
The Consumer Price Index (CPI) rose by only 3.2% on a year-over-year basis, led by a drop in gas prices. This marks an improvement from the 3.7% gain reported in September and a significant drop from the peak of 9.1% in June 2022.
Moody’s Analytics Chief Economist, Mark Zandi, expressed optimism, stating that inflation is gradually moderating, and all indicators look promising. He believes that by next year, inflation will be close to the Federal Reserve’s target of 2%.
Breaking down the numbers, gas prices fell by 5% in October, providing relief for consumers. However, when volatile energy and food prices are excluded, the “core” CPI still rose by 4% year-over-year.
Surprisingly, sporting event admissions and motor vehicle insurance were among the key contributors to inflation. Meanwhile, food costs remained elevated, with items like frozen vegetables seeing a 10.7% increase.
Despite the overall positive trend, it will take some time for costs to return to pre-COVID levels, according to Wells Fargo analyst Sarah House.
Tax and Investment Strategies for November
Looking ahead to November, it’s historically a favorable time for investors. Considered the best month of the year for the market, it presents an opportunity for tax-loss harvesting.
Investors are encouraged to assess their portfolios, especially in the technology sector, which has seen significant gains this year. Taking profits on technology holdings might be wise, but it’s essential to be mindful of potential tax liabilities.
The strategy of tax-loss harvesting involves selling losing investments to offset gains, reducing taxable income. November is an opportune time for this, considering the historical market trends.
For instance, if you’ve experienced gains in companies like Apple, you can offset them by selling shares in underperforming sectors like utilities. This strategic move can be financially beneficial, particularly with attention to the duration of holding securities.
The article emphasizes the importance of acting strategically to save on taxes, encouraging investors to be proactive rather than waiting until the last minute.
Home Depot’s Take on the Economy
Shifting focus to Home Depot, the company reported a sales decline but exceeded Wall Street’s expectations. The decline is attributed to moderation in home improvement projects, with consumers opting for partial remodels.
Despite the decline, Home Depot’s CFO, Richard McPhail, expressed optimism about the economy, noting a perceived end to the worst of the inflationary environment. This positive outlook contributed to a 6% increase in the company’s stock after the earnings report.
The World of Startups and Unicorns
Ever wonder just how much a startup can be worth? Check this out: ByteDance, the parent company of TikTok, valued at an impressive $225 billion. Then we have Space X, valued at $150 billion.
Here are the 8 highest valued startups:
Trading Strategy
Traditional Covered Call:
Stock Ownership: In a covered call, an investor owns shares of a stock.
Call Option Sale: Simultaneously, the investor sells a call option against those shares.
Poor Man’s Covered Call:
Long LEAP Call Option: Instead of owning the actual stock, the investor buys a long-term equity anticipation (LEAP) call option. LEAP options have a longer expiration period, often more than a year.
Short-Term Call Option Sale: Similar to the covered call, the investor sells a short-term call option against the LEAP call.
Key Characteristics of the PMCC:
Lower Cost: Since the investor buys a LEAP call option instead of the actual stock, the initial cost is significantly lower.
Limited Risk: The risk is limited to the cost of the LEAP call option, providing a more conservative approach compared to owning the stock outright.
Time Decay Benefit: The strategy can benefit from time decay because the LEAP call option has a longer expiration period, allowing the short-term call option to expire worthless over time.
Profit Potential: Profits come from the appreciation of the LEAP call and the premiums collected from selling short-term call options.
Example:
Suppose an investor believes that XYZ stock will increase in value over the next year. Instead of buying 100 shares of XYZ, which could be expensive, they buy a LEAP call option for XYZ with a strike price at or near the current stock price. Simultaneously, they sell short-term call options against the LEAP. If XYZ’s price rises, the LEAP call gains value, and the short-term call options may expire worthless.
Here is the profit profile for a PMCC on AAPL
“Buy the January 180 Call, Sell the December 195 Call, for Net Debit 11.85 or less”
BTO 011924 180 C
STO 122523 195 C
At CFU we are masters of trading Spreads, Iron Condors, PMCC’s and Cash Secured Puts. Our results for 2023 have been incredible as we endeavor to make our members money each week.
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