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Bill Gross swings and misses

September 5, 2013: 1:19 PM ET

Pimco's Bill Gross is an investing legend. But he's struck out with his calls about stocks. His bond fund has lagged too.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Bill Gross, the so-called Bond King, is still very worried about what's going to happen to the financial markets once the Federal Reserve begins to slow down the pace of its asset buying program.

Gross, a co-founder of investment firm Pimco and manager of the mammoth Pimco Total Return (PTTRX) bond fund, wrote about his concerns in his latest monthly outlook.

The piece -- titled "Seventh Inning Stretch" -- is chock full of (nuts?) baseball analogies. (You know you're a contrarian when you rhapsodize about baseball on the day that the National Football League is about to blitz -- pun intended -- the public conscious once again.)

Related: Don't be a bond Chicken Little

Gross seems to think that the stock market rally will soon end. There won't be extra innings. Unsurprisingly, Gross refers to the Fed's quantitative easing as the equivalent of hitters "juicing" to boost their home run totals.

"Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?" he asks.

He raises a great point. A lot of experts are worried about what will happen to the bond and stock markets once the Fed starts to trim (my moratorium on the other T-word is still in full effect!) its $85 billion a month of Treasury and mortgage-backed security purchases.

Related: Four downsides of a chattier Fed

But this is not new. Gross has been warning of pretty much the same risks for some time now. And while he's right that longer-term bond prices have continued to fall and rates have kept rising -- the 10-year Treasury yield is now a hair below 3% -- he's been wrong about stocks.

Last December, Gross listed some Pimco picks and pans. Here's what he had to say about portions of the stock market. "Non-Dollar Emerging-Market Stocks" were a pick. "Financial Stocks of Banks and Insurance Companies" were a pan.

Hmm. That's not working out too well. Check out this year-to-date chart of the iShares MSCI Emerging Markets (EEM) exchange-traded fund versus the Financial Select Sector SPDR (XLF).

Interestingly, a big reason the emerging markets have plunged (especially as of late) is because of concerns that the next moves by the Fed will lead to massive outflows of capital from these developing nations. India, Brazil and others have large current account deficits.

So while Gross is right to be worried about the Fed, he may have underestimated what impact the end of QE would have on the rest of the world.

Related: Are emerging market woes contained or sign of contagion?

Meanwhile, bank stocks have continued to rally despite Fed fears. Investors seem to think that rates won't go so high that they will cripple recovery in the housing market. That could change.

But for now, the market seems to have faith in the Fed. The hope is that the Fed realizes the economy is still fragile, and will pull back on QE gradually.

So Gross' steroids metaphor for QE and stocks may not really be apt. The Fed is not going to completely stop juicing. It's just cutting back the dosage a bit. After all, there's no Wall Street or Beltway version of Bud Selig to suspend the Fed for a season or two. (Although Ron Paul would love to be that guy.)

Now don't get me wrong. Gross still has a great track record over a long period of time. But he's not a stock market expert.

Making matters worse, Gross's own fund has also lagged the performance of other bond benchmarks this year. Yes, it's been a brutal year for fixed income investors, particularly those betting on Treasuries.

But as this next chart shows, an investor would be slightly better off this year in a passively managed bond index ETF like the iShares Barclays U.S. Treasury Bond (GOVT)  than the actively managed PIMCO Total Return ETF (BOND) that is supposed to mimic the performance of Gross' mutual fund.

For what it's worth, Gross now thinks that "the safest pitch to swing at" are bonds with shorter-maturity dates. He also refers to them as "boring slow-rolling grounders." Sadly, there's no mention of a bond suicide squeeze or the intricacies of the infield fly rule in his piece.

And Gross also recommends longer-term Treasury Inflation-Protected Securities (TIPS) as a hedge against what he sees as "accelerating inflation at some future time" due to the Fed's easy money policies.

Related: Leashing inflation before it bites

But should you listen to this advice? Investors (and yes, people like me in the financial media) often make the mistake of guru-izing people and treating their every utterance as something that must be considered as an actionable trading nugget. Right now!

To be totally fair to Gross, he made light of this phenomenon in his April outlook. He opened the piece, titled "Man in the Mirror" after the Michael Jackson song (how meta to have the King of Bonds quoting the King of Pop), with the following question and answer:

Am I a great investor? No, not yet.

That honesty is refreshing. Gross then went on to write that "there is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne" adding that the "old guys" like Warren Buffett, George Soros, Dan Fuss, and himself "cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience."

Related: Gross told investors in August to stick with bonds

So should you pay attention to Bill Gross? Yes. But take his words with many grains of salt. He'd be out of a job if he suddenly felt that certain types of bonds were no longer a good bet and that investors should flock to stocks, gold, real estate or any other asset instead.

To use another baseball analogy, Gross may be to bond investing what Babe Ruth, Ted Williams, Willie Mays and Hank Aaron are to America's pastime. He is among the greatest.

But even those Hall of Famers were only successful a little more than 30% of the time they went to bat. That sounds about right for investing legends too.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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