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Fed’s Valuation Remarks Stretched Into Weeklong Debate

Talk about a “stretched” topic: They’re still discussing Janet Yellen’s testimony to Congress and the accompanying report from the Federal Reserve last week.

The Fed’s assessment that valuations of some smaller, biotechnology and social-media stocks may be “stretched” continued to stimulate the creation of .pdf files on Wall Street well into the weekend, not to mention one video of an analyst sporting a white wig to play the role of Yellen and perform a recital of the relevant bits.

Scott Chronert, Citigroup Inc.’s strategist for small and mid-sized stocks, wrote a letter to Fed Chair Janet Yellen in a report yesterday. While he agrees high valuations typically reflect an “increased proclivity for risk,” he said, “viewed differently, high valuations typically result from confidence in underlying fundamental growth opportunities.”

That underlying confidence can help companies raise capital that will be used to create jobs, Chronert wrote. High valuations alone don’t usually cause stocks to crash, he said. Rather, financial crises are usually to blame.

Brian Belski, chief investment strategist at BMO Capital Markets, weighed in with a report titled “A Whole Lot of Yellen Going On.” He pointed out: Was anyone surprised to hear biotechnology and social media stocks have stretched valuations?

Looking at the broader market, he noted that a majority of industries within the Standard & Poor’s 500 Index have price-to-earnings ratios that are actually below five-year averages despite the rally.

‘Respectable Job’

“Such facts do not reek of a bubble in our view,” he wrote. “It is both encouraging and bullish that a majority of industries and the market overall have done a respectable job on a fundamental basis keeping up with price appreciation.”

Of course, by now you may be saying to yourself, all I care about is finding out what analyst actually put on a white wig to impersonate Yellen. That’s Mark Schoenebaum, a biotech and pharmaceuticals analyst at International Strategy & Investment Group LLC, who said he got 400 messages from clients about the Fed comments.

“Because I’m a full service analyst, I’ve actually been able to track down Janet Yellen from the Fed and she’s going to join me on the video today,” he said, before ducking off screen and returning in the white wig to read the part about “stretched” valuations.

So what does this prop-comic analyst think? He said by no means would he argue that biotech is cheap. But looking at Russell 1000 Index biotech P/Es, right now the stocks are roughly 80 percent below their peak, which “was demonstrably and inarguably a bubble back in 2000.” The valuations are roughly at the long-term median, said Schoenebaum, and less than 10 percent above the median when the bubble period is excluded.

Schoenebaum prefaced his Yellen impression by pointing out the July 18 report accompanying the video contained timestamps, “so you can jump forward to what you want to listen to.”

Don’t worry, Mark. There’s surely more rewinding than fast-forwarding going on this time.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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