What Googlemania says about the US

Google turned 11 this week and the search engine's significance means America has reason to celebrate when its share price is on the way up.

The Google advertising sign has been on show in Times Square, New York, since its stock began trading in August 2004.
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It was Google's 11th birthday this week and to celebrate the ubiquitous search engine company misspelt its name as Googlle on its home page. The double "l" was supposed to look like the number 11. Stock watchers were celebrating the anniversary in a slightly less oblique fashion, however, glued to their screens as Google's share price toyed with the apparently important US$500 (Dh1,836) mark.

And they got quite excited about it. Jim Cramer, the CNBC stock analyst, was so excited by the advent of the elusive $500 Google share price that he heralded the return of something he called "Googlemania". But the significance of such lines in the sand is often overinflated. After all, share prices are either higher than they were when you bought the stock or lower. Little else matters. For those who invested in Google when it debuted in New York back in August 2004 at about $85 and held the shares through last year's slump, revisiting $500 is just another milestone on the road to riches.

For those who bought the shares at their peak of about $715 in December 2007, hitting $500 is not so much to cheer about. The 60 per cent run-up in Google's share price so far this year is good news for Sergei Brin and Larry Page, the company's co-founders, because it translates to a $6 billion increase in the value of their holdings, on paper at least. But to focus on price targets and fortunes made or lost, misses the point with Google.

The mere fact that the company's market value is rising steeply again is highly important, whether or not you own the stock, because Google by many measures is a leading indicator of the strength of the US economy. By reputation, Google is a unique stable of the world's brainiest computer geeks who together form a futuristic corporate collective impervious to the sort of economic rigours the rest of us have to put up with.

But investors noticed last year that the company, despite this mythos, is just as vulnerable to a downturn as any other business dependent on advertising and consumer spending. This realisation occurred around New Year's Day last year as Google shares started the year with a value of about $650 but spent the next 11 months tumbling to an almost unthinkable $260. Google it seemed, all of a sudden, had a lot in common with the likes of News Corp and other old-fashioned media companies that derive most of their revenue from advertising sales. And the advertising market was dead.

"All of a sudden a lot of questions were being asked," says Scott Kessler, a Google analyst at Standard & Poor's in New York. "People wanted to know how a company like Google that is so reliant on the cyclical advertising market was going to cope with the downturn." Google responded to these previously unasked questions openly and honestly, admitting it was not immune to the problems plaguing the US and global economies.

"When they said that, people really started to worry," says Mr Kessler. But Google fought on, bringing in Patrick Pichette as its chief financial officer to instil some much needed discipline. He slashed extraneous operations, cut thousands of contract workers and is on course to reduce capital spending by up to 50 per cent this year. And his medicine seems to be working. But Google's rebounding fortunes, just like its fall from favour, have a significance beyond the walls of the Googleplex headquarters in Silicon Valley.

"You can interpret Google's share price increase this year as a reflection of the fact that we are seeing a real stabilisation of the global economy and a pretty significant appreciation in markets," Mr Kessler says. The broader stock indexes in the US have been powering ahead since the spring. The Standard & Poor's 500 Index is up 57 per cent since March 9, the day US stocks began to claw back from 12-year lows.

It seems that, despite the seemingly sluggish pace of recovery, the stock market is roaring back to the days of the bull market at a rapid clip. Some people credit the seemingly steady hand of Barack Obama, the US president, who despite inheriting the worst economy since the 1930s has enjoyed a bigger stock market rally than any new president since Franklin Roosevelt. While the beginnings of an economic recovery and the excitement of a new president certainly have their roles to play in this fledgling bull market, none are as important as cash.

There are literally trillions of dollars hanging around on the sidelines of the US economy itching to be put to work. American investors have ploughed about $3.5 trillion into money market accounts so far this year, according to data from the Investment Company Institute in Washington. Federal Reserve data, meanwhile, show that reserves of cash, bank deposits and money market funds in the US have reached a record $9.5tn this month, more than enough to buy the entire S&P 500 with change left over.

With interest rates near zero, all that cash is doing virtually nothing in the money markets or languishing in the bank, so it makes sense that investors would want to put it back to work in stocks as confidence in a new bull market continues to grow. To have more money on hand than there are stocks to buy is almost unheard of. Most market analysts believe that cash reserves worth about 60 per cent of the value of the S&P is a more sensible rule of thumb.

This rough calculation means there is potentially $3tn or more just waiting to be spent on stocks before the ratio is returned to normal. Google is such a big brand name corporation that it attracts this spare cash far more readily than many other stocks, which is another reason why the company is a good indicator of broader economic fortunes. And with all the signs pointing to an extended rally in the US market, it is entirely possible Google will be celebrating its 12th birthday by crossing the $600 a share milestone, which in turn means the rest of us should be enjoying the fruits of a real economic recovery.