Google China to be no more?

Google's (GOOG) foray into China had never gone swimmingly, the "Don't Be Evil" chants turned to scoffs as the company told the world its better to have a censored presence in China than no presence at all. The pitchforks subsided and its been business as usual for the company as it slowly built a base of business, taking on the dominant local Baidu (BIDU).

Having now built a business, that according to analysts represents about 20-25% of the market, Google is becoming entrenched into China's business culture and livelihood. The Chinese Google portal succumbed to Government pressure in the beginning but as new reports have surfaced of cyber-attacks on the search giant, the company is taking a stand for the individual. Gmail accounts of human rights activists, the exact opposite of persona embraced by the Chinese Government, were targeted in a set of complex hacks. Google has taken this breach as an opportunity to exert maximum political pressure in China. By issuing threats that it will completely pull all operations in China, Google is looking to foster a groundswell of individual support to force the Chinese Government into change, most important of which is the curtailing of Internet censorship.

Will it work? History would say no, as China is looked upon as the most vigilant of Governments when it comes to control, censorship and human rights. Google's timing could help shift the needle, but by how much? With a presence now built in China, Google has more influence than it ever had in the region, and perhaps just maybe, a compromise does exist and can be reached.

But what if it can't and Google leaves China for good? Well, that's the worst case scenario for the company as the business opportunity in China is only getting bigger. Analyst reports have pegged Google's China sales at about $600Million, but have highlighted the incredible opportunity that awaits Western companies in this region over the next decade and beyond. Not something that Google could seriously walk away from just like that if it indeed is balancing the needs of Consumers, Shareholders, Employees and its Don't Be Evil mantra.

Right now Investors are trying to figure out the seriousness of Google's threat. Company shares are down about 1%, which is a muted move to a potentially landscape changing decision. Baidu shares on the other hand, are up 11% as the potential to dominate the Chinese search market, without a looming competitor like Google is just too large to ignore.

Something will have to give and at the end of the day the opportunity of capitalism is too great and the pressures from shareholders will force Google's hand to have a presence in China. In the interim, Google's step will be to ensure complete security in its online services to try and isolate and prevent these types of attacks, even if the source may be a Foreign Government, but the smart money has to assume Google and China will be back at the table constantly, working to compromise, making it possible for the Chinese people to see and click on Google Ads for the next decade and beyond.

Disclosure: Author is long GOOG

Markets Experience Sharp Selloff after hitting New Highs

Thursday began as another bullish day in the extended rally for the North American markets as the Dow Jones set record highs on sales guidance from mega-retailer WalMart (WMT). Technology also got off to a good start as earnings estimates and price targets were getting bumped higher virtually across the board.

Apple (AAPL) received two price target bumps this morning from analysts at Merrill Lynch and Goldman Sachs pushing shares to an all time high above $170. Similar highs were seen in momentum favourites Research In Motion (RIMM), Google (GOOG), Baidu (BIDU) and VMWare (VMW).

Just before 2pm in this afternoon's trading the markets were up over half a percentage point. It appears whispers travelled and the buyers dam broke and flooded into a massive sell-off. Within minutes the Nasdaq was in the red and major technology stocks saw their new highs evaporating. Cautious comments from JP Morgan regarding Chinese Internet portal Baidu's revenue for the upcoming quarter sparked slight profit taking which seemed to snowball throughout the technology sector. Further adding to the panic were comments made in Europe by European Central Bank Council member Axel Weber who insinuated that 1) the ECB may need to raise rates in order to keep inflation in check, and 2) that inflation should be priority number 1, not economic stability.

There was concern with the Federal Reserve's half point rate cut that the action signified a more worrisome approach to economic stability, rather than inflation. These comments out of Europe show that the ECB seems to be standing firmer towards the side of inflation concerns.

These comments seemed to rekindle trader fears of Inflation and pushed the selling further. A rally that was built around the Fed cutting rates by half a percentage point will certainly not hold up well if there's talk of a potential rate hike being needed to curb inflation. The sectors that have been gaining the most during the rally were the ones hit the hardest; Technology and Energy.

Investors should take heed that the indices were brought back after the drop, meaning that the Dow was able to hold and close above 14,000. If inflationary comments come further to light this could add tremendous volatility for the markets ahead, but investors should be concerned with specific company fundamentals, especially as the earnings season gets into high gear.

Disclosure: Author is long AAPL, GOOG