SINL

by Bill Baker, J.D.
Editor and Publisher, SINL

GOOG is between a rock and a hard place in its naive dealings with the Chinese government. Google's threat to shut down their Chinese operations will not have any negative impact on China's growth or internet infrastructure. On the other hand, Google will end up losing access to 1.3 billion people and China's powerful economic engine that has made it the largest exporter in the world.

Google's attempt to play hardball with the Chinese government, by threatening to shut down Google.cn, is is laughable. The Chinese government doesn't care if Google stays in China or leaves. There are Chinese internet companies, such as BIDU, that would be glad to take over Google's 31% share of the Chinese internet market.

Google can either operate within the political rules set forth by the Chinese government or leave town. In China, you either find a way to operate within the government infrastructure, tow the party line, leave town, go to a prison labor camp or get executed. That's the menu of choices. I'm sure that none of the folks at Google are up for an extended involuntary visit to a Chinese prison, so Google's only real choices are to follow the rules in China or leave.

Google will end up either leaving China or staying in China and doing what they are told to do by the Chinese government after Google puts on a little show for the media.

The problem for Google is that even if the company decides to stay in China, after causing all of this trouble, it is probably going to be treated like a persona non grata by the Chinese government. This was pointed out in the January 13, 2010 Wall Street Journal article titled, Google Warns of China Exit Over Hacking that observed:

"If Google decides to stay, it runs the risk that its threat to withdraw will worsen its already rocky relationship with Chinese authorities, who wield ultimate power over all Internet companies doing business there and could, ultimately, force Google's departure anyway. Google's business in China goes beyond its search service -- Chinese wireless carriers, for example, have been planning to sell mobile phones using the U.S. company's Android operating system."

From an investment standpoint, is this a sell/short GOOG buy BIDU story? If Google leaves China, the answer is yes. If GOOG stays in China, the answer is maybe. Either way, Google's attempt to take on the Chinese government hurts GOOG and helps BIDU. The depth and degree of the damage GOOG does to itself will be determined by the depth and degree of the Chinese government's response to this situation.

Right now, it is probably a good time to be building an option strategy around GOOG and BIDU. Stories like this create volatility.

FYI - Both GOOG and BIDU option strategies were added to the 01/07/2010 SINL Model Portfolio (SINLMP) in anticipation of earnings season.