“The TARP and the stimulus package should increase, by about 25%, the outstanding Treasuries in the US,” he says. “That has got to be negative for Treasuries but it’s a huge fiscal stimulus for the economy.”
In other words, don’t discount the idea that issuing all those bonds and spending the money on stimulus and the TARP could cause a rebound in the economy.
The trade is “be careful of Treasuries but be long assets that have been beaten down because if we do get a rebound they could snap back,” he says.
And the other thing to look at is municipal bonds. “We’re going to have to deal with deficits and we’ll do it with higher taxes on higher income individuals. That increases the value of a tax exemption on munis,” concludes Kelly.
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Trader disclosure: On Jan 16, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (C), (BAC), (SDS), (TM), (MCD), (DIS), (MSFT); Seymour Owns (AAPL), (BAC), (EEM), (F), (COP); Finerman's Firm Owns (DSX), (MSFT), (COP); Finerman's Firm Is Short (IYR), (IJR), (IWM), (MDY), (SPY), (USO), (VNO), (BBT), (COF);
Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO; Virtus Diversifier PHOLIO Owns (IGE), (DBC), (DBV)
Virtus Investment Partners Owns More Than 1% Of (ABD), (ARE), (BIG), (DLR), (EPR), (EXR), (IGE), (SLB), (MAC), (DBC), (DBV), (SKT), (UA), (CLB); Virtus Investment Partners Owns More Than 1% Of Seagate Tax Refund Rights; Virtus Investment Partners Owns More Than 1% Of Corporate Office Properties Trust SBI MD; Virtus Investment Partners Owns More Than 1% Of Goldman Sachs Financial Square Fund - Money Market Fund
Jim Iuorio Owns (JNJ), (MSF)