Stocks vs. Bonds: Who's Right? (w/ Michael Purves) | Trade Ideas

Michael Purves, chief global strategist at Weeden & Co., revisits his short utilities trade from last month and highlights the current dichotomy between bonds and the stock market. He takes a deep dive into both the bullish and bearish arguments for Treasuries and the S&P 500, points out why shorting volatility make sense right now, and considers a specific put option on the VIX to make the trade, in this interview with Justine Underhill. Filmed on June 12, 2019

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Stocks vs. Bonds: Who's Right? (w/ Michael Purves)

Transcript:
JUSTINE UNDERHILL: So last time you were here, which was early May, you were looking at the
market and you were bullish on banks and somewhat bearish on utilities. And that trade didn't
necessarily play out, especially with the big sell-off that we saw.
MICHAEL PURVES: Yeah, well the bullish trades on XLF did play. I think I had mentioned during
that interview that the easy money was certainly behind. The XLU was the theme I was really
excited about at that point because I saw a few different factors lining up. One, I saw this bond
market that had been on a ferocious tear with yields collapsing.
The second part, and probably in some ways the most important part, was that the relative
valuation of the utilities relative to the S&P 500 was at multi-year highs and at levels that were
typically not sustainable. Now, there's various ways to look at valuation. But I think with utilities,
which are really yield plays, I look at the spread between the dividend yield on the utilities with
the S&P dividend yield.
And if you look at the chart, you can see that over time, every time it got that tight, it typically
preceded a 10%, 15% or so sell-off in utilities. But really, there was sort of a two-factor or two
catalyst condition for that trade to work. The one was that the equities and risk assets would stay
in a constructive profile, which broadly it did for most of it. We had some volatility, but it wasn't
Earth-shattering.
And the second thing was the bond yields would go higher. And that would allow that relative
valuation to start mean reverting and put downward pressure on the XLU. In each of the prior
instances, you'd see bond yields typically would rise. Maybe not dramatically, but they would
typically rise to some magnitude, in some cases pretty sharply.
And in this situation, since I think the interview was on May 2, since then, bond yields have only
gone lower. Referring to treasury yields, the 10-year in particular. So that was sort of
confounding. So the trade has not worked. I do think we are setting up a good situation at some
point. But given how ferocious this bond rally continues, I'm not recommending going back into
more XLU puts, even though the stock is a bit higher.
I think the trade will play at some point over the summer, but I'm just not quite there yet. With
short-dated option trades, timing is really important. But I think one of the things that you learn
through each trade exercise is how interesting markets can be. And one of the dominant themes in
the markets is that there's the treasury market, the rates market over here on one page, and then
you have credit-- high yield, investment grade credit slash equities-- over here.

[RealVisionFinance]

Tell us your Trade Idea and why you think it's the right move

[DonFather]

First few sentences out of this guy's mouth shows how badly he should be fired. Doesn't even own up to losing trades. That makes him an even bigger LOSER.

[sakiracadman]

#00:15 now if you still think this guy knows the macro even after that level of idiocy stop.

[Playonstereo]

Great trade for this moment is crude oil and oil stocks!

[sazajacz]

I'm no expert, but I think this guy is clueless. He doesn't seem to know why these things are happening. But others (Kaiser, gundlach, Schiff, Grant, etc.) seem to know exactly why, and where it's heading.

[carmangeek]

He was just wrong, not following him at all.