Capital Markets Lab Weekly Market Wrap Up, January 11–15, 2010

Google to Potentially Exit Chinese Markets

Google users in China gathered outside the Google Beijing office to place flowers and candles after the company stated it may leave the world’s biggest Internet market.

In what Google calls a “highly sophisticated attack” on their corporate infrastructure, a cyber attack involving 20 other large companies, including Yahoo! and Adobe Systems, has triggered the world’s largest Internet search engine to reconsider its exposure to the Chinese markets. Google has stated that the attackers targeted Gmail accounts of Chinese human rights activists but were only able to access the date the account was created and subject lines, not the actual content itself. Also, dozens of US, China, and Europe-based Gmail users who are advocates of human rights in China appear to have been accessed by third parties not through a breach at Google, but most likely via phishing scams or malware placed on the users’ computers. Google is in talks with US officials concerning the cyber attacks and is working hand-in-hand with Yahoo! was launched in 2006 after agreeing with Chinese officials, in discomfort, to censorship regulations. Google’s potential departure from China may send a signal to the world that the world’s biggest Web market is an inhospitable place for foreigners. This exit will have followed Yahoo! Inc. and EBay Inc’s exit, leaving China without a foreign company to serve its 330 million web users. Google has stated that it plans to no longer continue to censor its search results and will begin to reach an agreement with the Chinese government involving an unfiltered search engine.

Although China holds more internet users than the entire US population, the revenues generated from this market by Google are insignificant, making the pullout easier; Google owns 35.6% of the market share while Baidu, a Chinese based Internet search engine owns 58.4%. However, this pullout would deeply effect Google future growth and China’s business operations. The announcement came in on January 12, 2010, sending Google shares down $8, or 1.34%, and has continued a similar trend since then. Baidu ADR shares, on the other hand, have seen a positive gain of $71, or 18%, since the announcement.

A. Medina

Natural Gas

Natural gas inventory, measured as natural gas stocks in storage, came in at 2,852 Bcf (billion cubic feet) on Thursday, January 14. This represents the amount of underground storage of natural gas for the week ending January 8, surveyed by the U.S. Energy Information Administration. The change in storage WoW (week over week) was -266 Bcf. As it can be seen in the chart below, the current trend of inventory has been very close to the historical maximum value. This week traders expected numbers to be closer to historical lows. Analyst Cameron Horwitz said “…there was hype of a record breaking number”. When this number didn’t come in, the markets witnessed a sell off in the commodity. Although a decreasing supply without a decreasing demand usually means a rise in price, traders had already priced in the expectation of higher numbers, resulting in the opposite effect (see chart above). Traders were also encouraged to sell natural gas by the abnormal temperatures that the MDA Federal Inc. expects to last until the end of January. Seeing as 52% of US homes are heated using natural gas, this is very important to speculators during the winter season.

A. Tarhini

Note: The shaded area indicates the range between the historical minimum and maximum values for the weekly series from 2005 through 2009.

Small Business Optimism, Economic Optimism and ABC Consumer Confidence

The National Federation of Independent Business’ “Small Business Optimism Index” dropped to a five month low of 88 points on Tuesday. The indicator has been in decline since late 2004 and was severely impacted by the recession when it hit an all time low of 80. It had been trending upwards over the last few months but ticked down Tuesday, indicating that small business owners are still in doubt about whether or not the economic growth rate in the United States will be able to support a full recovery. Seeming to reaffirm what small business owners believe, the ABC consumer confidence index rose to -47 points; representative of a greater number of negative responses than positive regarding the state of the economy, personal finances and the overall climate for buyers.

However, the silver lining seemed to be economic optimism, taken from a survey conducted by Investor’s Business Daily. This indicator came in better than expected on Tuesday. It signals the possibility of a positive surprise in the consumer confidence indicators as computed by the University of Michigan and the Conference board, which are scheduled to be released later this month. These indicators are widely followed and are thought to represent the overall sentiment of the consumer.

R. Belsky

Article submitted by: Alex Tarhini, Alejandro Medina and Robert Belsky of the Capital Markets Lab.

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