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Doug Kass: Buy Dips Until Debt Deal, Then Sell

Monday, 25 Jul 2011 | 1:49 PM ET

If you’re among those traders who are selling stocks due to the squabbling in Washington, strategic investor Doug Kass thinks you’ve got it all wrong.

As the August 2nd debt ceiling deadline approaches, as long as there’s no deal on the table the trade is long, according to Kass who's the president of Seabreeze Partners and a CNBC Contributor. For the next few days, he expects “the market will rally into the uncertainty.”

And it's not just Kass who's saying it. From the floor of the NYSE trader Steve Grasso agrees. “I think any debt ceiling dip should be purchased,” he says.

However once lawmakers reach a deal – the trade changes. That’s the time to reposition, either defensively - or into cash - or short.

Find that trade hard to swallow? Here’s the thesis:

Buy the DC Debt Rumor

Kass and Grasso feel reasonably confident that lawmakers understand the seriousness of a debt default and regardless of the rhetoric, they won’t let allow it to happen.

And to take that a step further, they believe that's the prevailing feeling on the Street -- that the squabbling is more a political game of chicken than a real threat to the nation’s triple A credit rating.

“Ultimately the news will be that a new debt ceiling has been put in place,” says Kass.

In addition, Kass doesn’t see a lot of other selling pressure right now – in fact he thinks a lot of the selling has already happened. “There’s an element of summer exhaustion," he says.

Kass goes on to say, large hedge funds have already been de-risking into the summer. That should relieve selling pressure in the market, at least in the near-term.

Hence, for the next few days, Kass and Grasso expect to see the market climb this wall of worry.

Is Debt Debate a Confidence Killer?
Should investors be raising cash because of all the drama in Washington? Doug Kass, Seabreeze Partners weighs in.

Sell the Debt Deal Headline

However, once lawmakers arrive at some kind of deal, now that’s the time to reposition.

Kass says “that’s when I’d get flat out short.”

That’s because once a deal is cut, Kass thinks the market will come to realize what he calls "the soup we’re in – or the ramifications of austerity both here and abroad.”

In other words, it’s not only the Federal government facing fiscal imbalances – it’s also a growing issue at the state and local levels. And the resulting austerity could present serious headwinds to growth.

"I think more analysts will ratchet down growth expectations for Q4 2011 and into 2012,” Kass adds.

The ripple, according to Kass, will be corproate earnings that grow less robust (when compared to the year ago period.) And, as a result, Kass thinks the p/e multiple investors will be willing to pay for stocks will decrease, which in turn will send the S&P lower.

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UBS: BUY EUROPEAN STOCKS, SELL U.S. STOCKS

On a related note, the traders were taking a close look at a note out of UBS which suggests the U.S. debt stalemate worse for stocks than the European crisis?

Trader Steve Cortes says it's "ludicrous advice out of UBS." He says, "if anything I think the US is an island of stability."

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A NEW RECORD IN GOLD

One place that is seeing a big reaction to the debt stalemate is gold . The commodity hit another record today, and silver is on the rise again too.

What’s the trade?

Pete Najarian says, "I continue to think the miners are under priced."


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Trader disclosure: On July 25, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Pete Najarian owns Pete Najarian owns (AAPL), (C), (GE), (PFE), (MRK), (TCK), (HPQ), (MS), (MSFT), (SCCO), (TER), (AKAM) and (MRVL). Pete Najarian owns (DE) call options. Pete Najarian owns (CROX) call options. Pete Najarian owns (V) call options. Pete Najarian owns (BX) call options. Steve Grasso owns (AMD), (ASTM), (BA), (BAC), (C), (D), (JPM), (LIT), (LPX), (LVS), (MAR), (MHY), (NDAQ), (PFE), (PRST), (UAL), (XHB), (XLB) and (XLI). Steve Cortes owns (EXC), (SO), (PEP), (PM), (GS) and (MS). Steve Cortes is short Corn. Steve Cortes is short Wheat. Steve Cortes is short (LULU). Steve Cortes is short (IYT). Steve Cortes is short Copper. Steve Cortes is short (EUR).

Steve Grasso
Stuart Frankel & Co and it’s partners own (AAPL)
Stuart Frankel & Co and it’s partners own (CSCO)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MET)
Stuart Frankel & Co and it’s partners own (MU)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners own (UAL)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners are short (QQQQ)

Brian Kelly
Accounts Managed By Brian Kelly Capital Own (TLT) calls
Accounts Managed By Brian Kelly Capital Own (GLD) calls
Accounts Managed By Brian Kelly Capital Own (GDXJ) calls
Accounts Managed By Brian Kelly Capital Own (SPY) calls
Accounts Managed By Brian Kelly Capital Own (BMO)
Accounts Managed By Brian Kelly Capital Own (SLV) calls
Accounts Managed By Brian Kelly Capital Own (FCVX) calls
Accounts Managed By Brian Kelly Capital Own (MOS)
Accounts Managed By Brian Kelly Capital Own (UGA)
Accounts Managed By Brian Kelly Capital Own (USO) calls

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