Get Ready, Get Set, don't Go!

We told you yesterday that we would start providing individual stock data. We will start that tomorrow, but first a discussion about the current state of the markets.

We very strongly believe in our free market economy, the American economy, and the American people. This makes us always long-term bullish on the American markets. This does not mean that we can bury our heads in the sand when short-term macro economic factors occur. We will always believe that if you are invested for the long-term, then you should "ride out" the short-term down trends and remain focused on the long-term goal. Now having said that, we would suggest not buying stocks for the covered call strategy for the next 2 weeks unless you are going to buy the stock to hold for the long-term, you already own the stock and want to write calls to increase your yield, or you want to use the hedge wrapper strategy to protect your downside risk.

Why 2 weeks you ask? In the next 2 weeks we will learn "if" the other shoe to the subprime mortgage issue will drop. There are 2 companies that insure a large portion of the bonds issued in this country. They are Ambac and MBIA. These companies insure bonds that a large number of financial institutions "have on their books". Ambac and MBIA are rated by the rating services (predominately Moody's) as AAA. By insuring bonds, they lend their triple A rating to those bonds. That triple A rating carries with it a certain value. The higher the rating the higher the value of the bond, which companies that own these bonds consider as an asset and are valued on their balance sheet based on that rating. With the recent fallout from the subprime issue it is widely believed that Ambac and MBIA do not have the necessary capital to retain their triple A rating.

There are groups of banks and private investors that are currently trying to put together deals that would get these companies enough capital to retain their triple A rating. If Ambac and MBIA loose their rating, the above mentioned bonds will also loose their rating and some of their value. If that happens companies that have these bonds will have to take a "write down" on the bonds lost value. While it is important to remember that this does not represent an actual cash loss, it does represent a revaluation of an asset to a lower value. If this happens it will more than likely cause the stock market to drop in the short-term.

Moody's has stated they will re-evaluate the ratings in 2 weeks. It is our opinion that the necessary deals will get done so these companies can retain their ratings, but this will drive a large amount of volitility in the next couple of weeks.

Now tomorrow we will start discussing individual stocks.