CNBC's Fast Money: Doug Kass: Buy Dips Until Debt Deal, Then Sell - CNBC

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:

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.

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.

Here's another way of saying it - the debt ceiling has generated a distraction.

”Everyone is focused on the debt ceiling and they’re losing sight of slowing growth,” Kass says. But we’re getting the trouble signs every day in the form of “problems developing in China – weakness in consumer confidence – weakness in PMI etc.”