When Janet Yellen delivered her semi-annual Humphrey-Hawkins speech earlier this week, she did something rarely done by a Fed chair. She made very specific stock market sector investment recommendations.
Yellen trail blazing at the fed
Yellen has blazed her own unique trail at the Fed – sounding an oddly populist tone for a private institution that is owned by large banks. This includes her recently bold statements that both social media stocks are overheated and biotechnology stocks are “stretched.”
It was hitting the biotech that is currently finding reverb. Her call that biotechnology valuations are “stretched, with ratios of prices to forward earnings remaining high relative to historical norms” has come to be questioned in a recent letter from ISI Group’s biotechnology analyst Mark Schoenebaum, reported by Brendan Conway for Barron’s.
Schoenebaum’s open letter
In an open letter, Schoenebaum questions the Fed chief’s statistical skills:
Dr. Yellen –
Thank you for sharing your thoughts recently on the biotech sector. Given your stature, I paid very close attention to your comments, as did most biotech observers.
You stated that biotechnology valuations are “stretched, with ratios of prices to forward earnings remaining high relative to historical norms.”
I just gathered biotech price to earnings ratios back to 1993 using Russell 1000 data, and my data show that the current ratio is roughly in-line with the historical median and is approximately 80% below the peak.
Please tell me what I’m missing, Dr. Yellen.
In a follow up e-mail to clients, Schoenebaum didn’t quibble that biotech is “cheap,” but rather was arguing that there is little empiric evidence to support conclusions of a “bubble” in the sector based on historic statistical measures.
While the biotech sector has significantly higher valuations when compared to a standard basket of value stocks, when compared to itself biotech stocks were in their somewhat predictable state of high valuation.
Yellen maybe right about biotech stock falling
Yellen could ultimately be proven accurate in her implication that social media and biotech stocks could fall back to earth. But at a larger level the comments highlight a tendency for the grandmotherly looking Yellen to exhibit a refreshing independence.
The New Yorker recently noted the Fed Chairman’s first official speech occurred not to a sedate group of controlling bankers in New York City, but rather in a Chicago neighborhood talking about revitalization of average people. “Although we work through financial markets, our goal is to help Main Street, not Wall Street,” which stunned financial observers at the time.
As the New Yorker article observed, Yellen spoke mainly about unemployment, and told the stories of three blue-collar Chicagoans, two black, one white, who had lost their jobs in the recession. Her staff had located these people for her, and she had spoken to them on the phone before her speech. Two of the three were from Chicago’s desperately poor West Side, a part of town that helps the city earn its reputation as the murder capital of the US. Both had criminal records.
As Yellen is considered, she might not only be viewed from the standpoint of being the first female Fed Chairman, but also among the first to tear up the controlling big bank script and blaze a new and interesting trail. She has been handed a QE mess and if Yellen can somehow manage to withdraw the needle of stimulus without causing the addict stock market to convulse will be a historic accomplishment.
At minimum, it will be interesting to watch. While she has an increasingly vocal group of haters – many from establishment corners. Her appointment by Barack Obama, who stepped over the big bank favored Larry Summers when making the pick, could be a most historic choice to run the Fed.