I’ve been reading a lot of drive by comments in the last few days about Google’s stock going up. A number of such mentions were to quick to point out all the wonderful things recently going for Google such as the Hitwise August report on Sept 20th showing Google now receiving 64% of the US Searches pie – up from almost 60% from the year before.

Other reasons provided were specific to upcoming road-maps or roll-outs, such as the rumor on Google’s upcoming “Facebook Killer” plan to open up their systems to third parties (more than before) and to expose the social data layer through various APIs.

But I don’t think much of this had to do with the big spikes we just observed, there’s something else at play.

Disclaimer: I am in no way an expert in the stock market or the economy, but I don’t think I am going to be far off here in explaining what I do understand. With that said, do feel free to correct or disagree with me in the comments. the more the merrier.
Disclosure: I do not currently invest in any of the companies mentioned in this article, in fact I don’t have any free cash to invest in any company on the market. I am too much of a sucker for good domains as an investment instead

It’s The Interest Rate Cuts – Not the Features!

In my opinion the recent jump in price was hugely aided by the US Federal Reserve’s interest rate cut of 50 basis points that occurred on September 18th.  To put it into very simple terms, whenever there’s a concern that investors may not safely make their money with one thing or another, investors jump ship and start putting money into “safer” things such as gold, bonds, and other safer sectors.

And it just so happens that the Tech sector is relatively safe compared to say, the mortgage and credit industries and their various derivatives. That is, while the credit affected sectors are going through a squeeze now since the debts behind them are starting to go into defaults, investors feel fairly confident that companies such as Google, Microsoft, and Intel will still be here when the dust settles. Even if we hit a bad downturn or a recession, of course everyone will be hit, but it is unlikely these major companies will go so much down so as not to make a comeback eventually.

Take a look at this graph of the past 5 days below. It compares stock prices of Google, Yahoo, Microsoft, and Intel. As you see there’s an especially big spike right on September 18th for ALL OF THEM – not just Google, which is when the interest rate cut was announced. Investors saw the writing on the wall – “oh man, this crap isn’t worth much anymore!” - and they jumped on gold, silver, foreign currencies, and tech stocks, among other things.



Here is a bit more on the logic behind the rate cut:

• It suddenly got cheaper to borrow US dollars: banks and loans can continue facilitating borrowing left and right and let everyone dig themselves deeper into debt. So…
• The US Dollar got weaker as investors felt they can make more of a profit on different, stronger currencies. Dollar went down – the Euro, Canadian dollar, and even the Peso went up!
• In a nutshell it’s a signal that the economy is going to be slowing. The cut is a band-aid to slow down the potential recession, the coming housing collapse, and the credit crunch.
• As various credit derivatives are becoming ever closer to worthless (read: all those home mortgages sold off in ways which made it look less risky to buyers) the Tech sector is looking much more attractive as a refuge to investors.

A Recession Would Do Google Good?

I came upon this other interesting take on tying the possible coming recession to what it means for Google. Doug Caverly recaps that among all the trouble coming, Google is actually sitting on a 13 billion pile of cash. And while this pile of cash is quickly loosing value (as long as it is kept in US dollars anyway), it’s still enough to be VERY maneuverable when everyone else is in a credit crunch trying to borrow money to do business. Should recession come, Google will continue to build out as never before, and acquire companies for even less than before left and right.

More on the Economics of the recent Interest Rate Cut

If you are interested more on the subject of what might be waiting for us in the near future, here are some opinionated articles on the subject (thanks Alex!)

• The Real Reason For The Fed’s 50 bp Interest Cut
• More about the Credit Bubble, Major Bear Market coming?
• Why this might have been a bad Fed decision

Comments area is below and I am always glad to read any comments or flames