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Beware: El-Erian & Gross Selling Buicks…Not Chevys

February 18, 2013 | About:

Investing Caffeine

As my grandmother always told me, “Be careful where you get your advice!” Or as renowned Wall Street trader Gerald Loeb once said, “The Buick salesman is not going to tell you a Chevrolet will fit your needs.” In other words, when it comes to investment advice, it is important to realize that opinions and recommendations are often biased and steeped with inherent conflicts of interest. Having worked in the financial industry over several decades, I have effectively seen it all. However, one unique aspect I have grown accustomed to is the nauseating and fatiguing over-exposure of PIMCO’s dynamic bond duo, CEO Mohamed El-Erian and founder Bill Gross. Over the last four years and 13 consecutive quarters of GDP growth (likely 14 after Q4 revisions), I and fellow CNBC viewers have been forced to endure the incessant talk of the “New Normal” of weak economic growth to infinity. Actual results have turned out quite differently than the duet’s cryptic and verbose predictions, which have piled up over their seemingly non-stop media interview schedule. Despite the doomsday rhetoric from the bond brothers, El-Erian and Gross have witnessed a more than doubling in equity prices, which has soundly trounced the performance of bonds over the last four years.

After being mistaken for such a long period, certainly the PIMCO marketing machine would revise their pessimistic outlook, right? Wrong. In true biased fashion, El-Erian cannot admit defeat. Just this week, El-Erian argues stocks are artificially high due to excessive liquidity pumped into the financial system by central banks (see video below). I’m the first one to admit Federal Reserve Chairman Ben Bernanke is explicitly doing his best to force investors into risky sets, but doesn’t generational low interest rates help bond prices too? Apparently that mathematical fact has escaped El-Erian’s bond script.

Source: Yahoo! Finance (Daily Ticker)

El-Erian’s buddy, Bill Gross, can’t help himself from jumping on the stock rain parade either. Just six weeks ago Gross followed the bond-pumping playbook by making another dour prediction that the market would rise less than 5% in 2013. Unfortunately for Gross, his crystal ball has also been a little cloudy of late, with the S&P 500 index already up more than +6.5% this year. Since doomsday outlooks are what keeps the $2 trillion PIMCO machined primed, it’s no surprise we hear about the never-ending gloom. For those keeping score at home, let’s please not forget Bill Gross’s infamously wrong Dow 5,000 prediction (see article).

PIMCO Smoke & Mirrors: Stock Funds with NO Stocks

Just when I thought I had seen it all, I came across PIMCO’s Equity-Related funds. Never in my career have I seen “equity” mutual funds that invest solely in “bonds.” Well, apparently PIMCO has somehow creatively figured out how to create stock funds without investing in stocks. I guess that is one strategy for a bond-centric company of getting into the equity fund market? This is either ingenious or bordering on the line of criminal. I fall into the latter camp. How the SEC allows the world’s largest bond company to deceivingly market billions in bond-filled stock funds to individual investors is beyond me. After innocent people got fleeced by unscrupulous mortgage brokers and greedy lenders, in this Dodd-Frank day and age, I can’t help but wonder how PIMCO is able to solicit a StockPlus Fund that has 0% invested in common stocks. You can judge for yourself by reviewing their equity-related funds on their website (see also chart below):

PIMCO Equity-Related Funds with No Equity

PIMCO Active Equity Funds Struggle

With more than 99% of PIMCO’s $2 trillion in assets under management locked into bonds, company executives have made a half-hearted effort of getting into the equity markets, even though they’ve enjoyed high-fiving each other during the three-decade-long bond bull market (see Downhill Marathon Machine). In hopes of diversifying their bond-heavy revenue stream, in 2009 they hired the head of the high-profile $700 billion, government TARP program (Neil Kashkari). Subsequently, PIMCO opened its first set of actively managed funds in 2010. Regrettably for PIMCO, the sledding has been quite tough. In 2012, all six actively managed equity funds lagged their benchmarks. Moreover, just a few weeks ago, Kashkari their rock star hire decided to quit and pursue a return to politics.

Mohamed El-Erian and Bill Gross have never been camera shy or bashful about bashing stocks. PIMCO has virtually all their bond eggs in one basket and their leaderless equity division is struggling. What’s more, like some car salesmen, they have had a creative way of describing the facts. If it’s a Chevy or unbiased advice you’re looking for, I recommend you steer clear from Buick salesmen and PIMCO headquarters.

Wade W. Slome, CFA, CFP[b]®[/b]

Plan. Invest. Prosper.

Rating: 2.7/5 (3 votes)


Shaved_head_and_balls - 1 year ago
You know a bull market cycle is near its end when the bulls are ridiculing the most successful bond manager of the last half century. The Bill Gross prediction of DJIA fair value 5000 almost occurred in 2009. In inflation adjusted terms $5000 from 2002 equals roughly $5900 in 2009. (The market low in 2009 was roughly 6400.) One can imagine how low the DJIA would have gone if the crony capitalists hadn't convinced the gullible or corrupt political leaders to bail out the large insolvent financial companies.
AlbertaSunwapta - 1 year ago
Some points to ponder:

- there's a ratio of about 3 to 1 for bond market capitalization to equity market capitalization

- only a portion of those markets compete head to head with each other

- much of the world's economy relies on the health of the bond markets and to ignore the prognostications of these players isn't necessarily wise.

- using a four year return assumption fails to recognize significant negative equity and positive bond market returns in prior years

- many stock only funds actually invest in market derivatives

- convertible securities can be hard to classify as either equities or bonds

- a market doesn't move in straight lines, and so an equity market can be up early in the year but still return less to negative returns on an annualized basis

- watching CNBC is more valuable in judging market sentiment than in finding wisdom
AlbertaSunwapta - 1 year ago
^Shaved, looks like you type faster than me. Great counter-points! You reveal the inherent risk to forecasting: government and central bank interference in the markets. Sometimes they do, sometimes they don't.
Carol Nadon
Carol Nadon premium member - 1 year ago
I don't understand why some so called ''inverstors'' buy bonds with a yeld lower than real inflation. When the bloodbath will hapen in the Bonk market, it will be to late to jump in the equities. Maybe I'm wrong and inflation will remain under control, otherwise ...
Pamemark premium member - 1 year ago
Please make them disappear. i don’t know how many wrong predictions these so called gurus need to make in order to disappear from cnbc/bloomberg & co .

Thilligo - 1 year ago

The only incessant talk we heard and still hear to this day on CNBC is buy buy buy. You name it. From Cramer to Liesman. They, like the guests they have on, have something to sell. It's called their book. To watch any of these financial news channels and expect an unbiased messages is ignorant at best and just plain stupid at worst. We'd all do ourselves a big service if we just tune out what the lot of them say.

Secondly, not to defend Gross and company, but the generationally high interest rates of 1982 help set the stage for the 30 year bull market in both bonds and stocks. Now, after years of negative real yields, and the anticipation for higher yields in the future, we have 1982 in potential reverse. We won't see the 12% average ann. returns that s&p gave us during this time frame. This is a new normal. Incidentally, in 1982 we were the world's largest creditor nation and now we are the world's largest debtor nations. This will be a major obstacle for us to over come.

One thing that will be interesting is whether these bond gurus can make money in a rising interest rate environment when you actually have to earn your keep. A monkey could have made money in fixed income over the last 30 years. Let see what the next 30 years look like for these guys.

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