When The Fat Lady Sings

It may not be the fat lady singing at the end of the opera, but the portly Congressmen this time is talking about the end game. Congressmen Barney Frank (D-MA) said that he believes a default is more likely now than it was before, with all of the finger pointing and fighting going on in Washington. “I felt for some time that a default was likely,” Rep. Barney Frank (D-Mass.), the top Democrat on the House Financial Services Committee, told POLITICO. “Now, it's more likely than not.” If there is no deal and we do wind up seeing the U.S. default on its debt, the after effects that would happen would be almost as bad as what we saw in 2008. Credit Suisse estimates that equities would drop 30%, businesses would have problems in the commercial paper market, and the U.S. dollar would plunge. Last night, Speaker of the House John Boehner (R-OH) was unable to get a vote on his bill as he did not have enough votes for it to pass. This morning, Boehner's tune has changed, and said he was "smiling" when he waled by reporters. House Majority Leader Eric Cantor (R-VA) has said a vote will happen today. Despite this, if there is a default, the Democrats are already laying the seeds on who to blame if Harry Reid's (D-NV) bill in the Senate does not pass and become law. “There is no question who would own a default after this episode, and that weakens the speaker's position,” said a Senate Democratic leadership aide to POLITICO. “Reid now has [the] upper hand in pushing ahead with his Senate plan — possibly with a couple tweaks to get McConnell on board, but nothing that compromises our bottom line. Boehner, in turn, has little choice but to acquiesce to relying on Democrats to pass a bipartisan Senate plan through the House.” The two sides are not that far apart on a deal, it is more a question of how the deal is structured in terms of debt ceiling and deficit reduction. Boehner's bill wants two votes for a debt ceiling raise and Reid's bill wants one. “Another day wasted while the clock ticks,” White House Communications Director Dan Pfeiffer wrote last night on Twitter. “Now is the time to compromise so we can solve this problem and reduce the deficit.” The time is fast approaching for the end of the opera. Will we see the fat lady sing or not? Only those in Congress can answer that for us. ACTION ITEMS:

Bullish:
Traders who believe that Congress will get something done might want to consider the following trades:

• Go long a lot of things. There is sure to be a relief rally next week if something is done on the debt ceiling. Go long the S&P 500 ETF SPY and everything under the sign that is bullish. High beta names, like Apple AAPL, Baidu BIDU and others should work well.

Bearish:
Traders who believe that a deal will not get done may consider alternate positions:

• Credit Suisse estimates that if the United States defaults, equities will fall 30%. Investors that believe a default is likely should position themselves short the stock market, long gold and silver, and short the Treasury market. Investors could buy an ETF such as ProShares UltraShort S&P500 ETF SDS or ProShares UltraShort QQQ ETF QID to short the stock market. The U.S. dollar could also take a hit, and investors could go to foreign currencies like Swiss Franc Australia FXA, and Canada FXC.

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