The Dow and Tech Soar While Facebook Crumbles
After their worst week of the year last week, markets are bouncing back today. Most notably, the Nasdaq-100 (INDEX: ^IXIC) is up 1.85% as of 1:20 p.m. EDT while the Dow Jones (INDEX: ^DJI) is up 0.75%. Of course, Facebook (NAS: FB) is at the front of many investors' minds, but we'll discuss that after looking at some news that's actually driving the broader markets.
Stabilizing China's GDP
The main suspect in the market's recent retreat has been global growth. Europe is looking more and more like a low- or no-growth quagmire that will last a decade. Even higher-growth countries are suffering, as worries concerning China's growth have begun bubbling over.
Fears over China were soothed today when premier Wen Jiabao called for "putting growth in a more important position." That remark signaled to investors that China was willing to use some of the fiscal weapons at its disposal. Should investors be cheering loudly?
Yes and no. While China's propping itself up is good for investors, as many companies are seeing their growth powered by sales to China, it's still important that policy decisions are good over the long term. In China, there's a headline problem. While investors cheer higher GDP growth, that figure doesn't always show the strength of the underlying economy.
A huge problem that's brewing in China is the level that gross investment like real estate and infrastructure has in the economy. It's out of whack, and is driving the headline GDP figure. If the country continues pouring too much money into housing and infrastructure, that money will go to projects that are increasingly of dubious need. That could build a dreaded debt bubble that can be hidden away in China's state-owned banks and local governments.
If China wants long-term growth that's of a higher quality, it needs to boost its consumer spending. As Michael Pettis, an influential blogger on China, calculates it, consumption as a percent of China's GDP bottomed at 34%. Some measures have shown it rise since, but when you consider many other developed economies have consumption near or above 70%, it shows the amounts of balancing left to go.
So while the markets may cheer China's trying to stabilize GDP, it's important to note that lower GDP can be a very good thing. It's just a matter of the underlying quality of the GDP, and whether the household consumption of GDP is showing stronger growth than investments.
OK, on to Facebook
And so we arrive at Facebook, the stock everyone's looking at today. The company is down 9.3% as of this writing. The answer to why it's falling is -- to me -- a very simple one: The underwriters who supported the stock last week aren't there to prop it up. On Friday, many of the Facebook underwriters had to step in and buy what's being reported as billions worth of stock. That risky move was needed to ensure the IPO didn't tank on its first day and become somewhat of a black eye to the group of underwriters who collected below-average fees for the public-relations benefits of taking Facebook public.
However, that level of support can only last so long, and it appears that Facebook is finally collapsing to a price it should have hit on Friday. Luckily for the battered tech sector, Facebook looks like an aberration. High-quality growth stocks that have been pummeled in recent weeks like F5 Networks (NAS: FFIV) and even Apple (NAS: AAPL) are on the rebound. Those two stocks are both up around 4%.
A better idea than Facebook
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At the time this
article was published Eric Bleeker owns shares of no companies mentioned above. The Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple and F5 Networks, as well as creating a bull call spread position in Apple. The Motley Fool has adisclosure policy.
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