What's Important in the Financial World (3/4/2013)

The Shanghai Composite, the exchange where most large Chinese companies trade, dropped 3.7%. The reason stated by experts was that planned government restrictions on cheap money for home buying would end. If property values drop, consumer confidence might drop with it. The drop could be a caution for U.S. market investors. The Shanghai was at a 52-week high, and it took very little news to undermine that. No one should be surprised if many markets around the world are overbought. However, the difference between these markets and the Shanghai is that the Chinese market is nowhere close to its all-time high. It traded 80% above current levels five years ago. In that way, it is like the Nasdaq, which reached highs in 1999 and 2000 that never will be matched again. Optimism in tech pushed the U.S. index to unsustainable levels. All of this is to say that, although the market in China has sold off, it may still be inexpensive, at least compared to a period of irrational exuberance reached half a decade ago. Either there is something very wrong with the Chinese economy, or the drop is little more than a blip, based on historical prices.

Entitlement Cuts on the Table

This weekend, something new surfaced in the battle of the federal budget. President Obama suggested something that until recently was unthinkable. Cuts in entitlements, which includes Social Security and Medicare, could be used to balance the budget. These entitlements are the largest part of federal spending, and reducing them would ding incomes, particularly of elder Americans. Obama will not be reelected, so there is little at stake beyond his popularity. For other politicians there is a risk of a revolt among older Americans who want nothing to do with elected officials who will not protect their financial flanks. According to Reuters:

“He’s reaching out to Democrats who understand we have to make serious progress on long-term entitlement reform and Republicans who realize that if we had that type of entitlement reform, they’d be willing to have tax reform that raises revenues to lower the deficit,” White House senior economic official Gene Sperling said on Sunday on the CNN program “State of the Union.”

Facebook Up and Down

The price recovery of Facebook Inc’s (NASDAQ: FB) shares was trending, but they are selling down again. Optimism that the social network has found a way to raise rates on the ads it runs, and that it had unlocked the value of its users who access the site on mobile devices, moved shares from less than $26 at the end of last year to almost $33 at the end of January. Since then, the stock has declined to less than $27. There is no single cause. One trigger may be the success of LinkedIn Corp. (NYSE: LNKD). Investors like the company because it has multiple sources of revenue, which Facebook, despite its efforts, does not. Another red flag for Facebook investors is research that says people spend less time on the site than they did just months ago. Finally, Facebook continues to be grouped with a series of Web 2.0 companies, including Zynga Inc. (NASDAQ: ZNGA) and Groupon Inc. (NASDAQ: GRPN), which should have been sold privately to large companies like Google Inc. (NASDAQ: GOOG) and not pawned off on public corporation investors.