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Newedge Senior Director Larry McDonald on the impact of the debt ceiling debate on the markets and investors’ strategies.
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We'll put the end of the debt ceiling debate be sooner than we expected house announcing earlier today that it will be voting on a debt ceiling bill next week.
So is this deal just pushing off the bigger issue and how you can play it all to your advantage.
'cause -- -- business -- -- what's the trade well let's find out joining us now a guy who believes he knows Larry McDonald new -- senior director we cannot control those people in Washington but we can certainly anticipate what they might do and trade office.
The debt ceiling first of all how big a deal would it be to the markets in general.
Both extended to 45 days -- be a little bit of relief but because everybody's expecting that march 1 problem the one thing to look back in December.
Around December 10 it looked like the present it was gonna meet the speaker and the markets really meant a beautiful rally.
From December 10 to the eighteenth markets really beautifully from the eighteenth.
Two toward the end of the year in the market struck 4%.
4% from December 18 -- the end of the year but close.
-- all of the good things that we thought -- happening behind the scenes fell apart -- -- let me just challenge you on that those young people would say it's because they wanted to walk again.
They're lower capital gains tax rate at the old tax rates and therefore there were just -- their profits off the table.
Well it looks clear that the market thought that -- we're gonna meet in the middle in terms of the prison actually giving in -- spending cuts he pulled back on the spending cuts hard core.
In a -- here looks like the GDP and GOP looks like GOP's can extend the debt ceiling of the 45 days that's -- the market was up yesterday.
The market's way ahead of this.
But I I think that next week that the next 23 weeks there's still a lot of tests to be done to get this.
-- completed first well has to get to the house and the senate so there's going to be a ton of volatility between now -- won the Stanley okay so how do you trade it Larry.
Well the -- is.
Less than us on the show that -- various how below fourteen now it's 1213.
You do call spreads and the -- -- like to be long volatility here if you think about the end the Fed rates fascinating because you have this Italian election.
And Berlusconi.
Is really.
Pulling out all the stops.
It's -- C -- you're gonna see.
Leftist movement in Italy had an excellent let me just -- -- clear here -- if you -- long volatility that must mean that you believe it's gonna go higher correct yes I think -- -- because of an Italian election.
A well it's a combination the end of February you're gonna have Italian election.
You have the debt ceiling potential deal and -- -- worries and -- -- volatility to go hikes that the end with to sequester and the continuing resolution so.
-- all of this political risk if you think about the last 23 years list.
The bottom line is the people that have outperformed the people would have generated alpha.
Bought during periods of political fear.
The people that added to market added to their exposure in the market during -- of complacency like now typically underperformed so you wanna save that -- -- For those political fear -- save your cash until debts only thing collapses maybe it'll be three -- but I wanna focus again on your first MBS Spain and Italy.
Have two point six trillion dollars worth of bonds outstanding two point six trillion and they've got to borrow more about about a 150 billion just ordered pay off their old debts with a robots.
How are they gonna do it and what happens if there are no buyers.
Well that's something I'd look at Spain in a look at Lehman and sit -- so -- great comparisons because.
That he's not a good -- respect you well.
You know you expect to designate some.
The Fed bailed out Bear Stearns Lehman -- sold itself to the Korea Development Bank instead they pulled back because the Fed was opening up all these amazing windows.
The primary dealer credit facility for people at -- the bottom line is the Fed was giving.
-- all this new liquidity that Citi go -- to sell equities short Spanish bonds I would be shorts that's funds right here and I would also.
I think I think -- ended the first quarter in the next ninety days Spain is the big risk point for I think for for the US because.
-- -- can't -- so they have to sell a 150 billion.
Of bonds plus -- of -- of three biggest banks have to sell about a 140 billion dollars for the bonds the next year and a half two years so.
-- the good news is from Larry McDonald that bad news this come.
Well he had a short -- -- they -- fairly short until that but when the bad news comes and everybody runs for the exits that's when you're gonna be putting your money.
Absolutely so you wanna play the market long and then get ready for volatility like we had 20112012.
Both of those years we dramatic.
-- years selloffs -- Europe induced.
Larry McDonald the few which could to Sears Canada contrary great to say there -- right there you go long the -- okay please call there.
