Google (GOOG) shares sold off again Tuesday as last year’s favorite stocks continue to get hammered. Google dropped $36 in midday trading to $450, putting the stock just 3% above its 52-week low. Another 2007 favorite, Apple (AAPL), sold off again as well, dropping below $116 in early trading before recovering to $119. The stock has lost 40% of its value this year after more than doubling in 2007. Bespoke Investment Group notes that another leader of last year, Goldman Sachs (GS), is languishing as well, and muses about where new leadership in might come from. “Ambac (ABK) and MBIA (MBI) have been moving markets lately,” a post on the firm’s Web site says, referring to the bond insurers whose good news has fueled late-day marketwide rallies in each of the past two trading sessions. But “they probably are not the type of names we should be pinning our hopes on.”

One group doing well for a change Tuesday: the holdings of hedge fund manager Ed Lampert. Lampert has been selling his shares in Citi (C) after long accumulating the stock, and in recent quarters his other portfolio holdings have been sagging as well. But on Tuesday, a strong earnings report from big holding AutoZone (AZO) sent that stock up 5%, and other Lampert names followed: AutoNation (AN) and Sears (SHLD) each rose 3%, while Citi added 2% and Home Depot (HD) was up fractionally despite a weak earnings report. Only tiny Acxiom (ACXM), Lampert’s smallest position at Dec. 31, was down. It’s early yet, but perhaps the go-to guy is returning to form.

Tech hard-chargers want in on the e-mail business. Dell (DELL) agreed Tuesday to spend $155 million to buy MessageOne, a small-business e-mail software company that competes with Google’s (GOOG) Postini and Yahoo’s (YHOO) Zimbra. “MessageOne brings to Dell world-class technology and talent that will broaden Dell’s configurable services offerings,” Dell said Tuesday morning. As it happens, MessageOne is run by Michael Dell’s brother Adam - an apparent conflict of interest Dell dealt with in part by hiring Morgan Stanley to offer up a so-called fairness opinion and by having Michael Dell and his wife agree to donate their proceeds to charity.

Elsewhere, there is talk of a Google play for Plaxo, the former LinkedIn rival backed by Sequoia Capital’s Michael Moritz. The Plaxo deal chatter taps into a Silicon Valley debate that Fortune’s Josh Quittner takes note of: “Who really owns your address book?” Many companies believe you do - but Microsoft (MSFT), surprise surprise, isn’t among them. It has been trying to sell third parties access to Hotmail users’ contact lists, Quittner reports. The company insists that it’s doing so not for selfish reasons but to protect users’ security. Maybe it’s time for a fairness opinion on that practice.

Google’s (GOOG) aggressive comments this weekend on Microsoft’s (MSFT) bid for Yahoo (YHOO) aren’t helping its stock. Google shares, which fetched $600 as recently as the middle of last month, are struggling Monday to stay above $500. The stock briefly dropped as low as $498 and change in midday trading, down about 3%, before bouncing back to around $501. Google shares last sported a 4-handle back in August, before a late-year runup that briefly took the stock as high as $747 a share in November. Since then, the stock has lost more than $70 billion in market value. Still, the damage to anyone but the most recent buyers has been limited: Even after Monday’s declines, anyone who bought the stock before last June is still in the black.

Google’s (GOOG) 8% drop Friday wipes $15 billion off the search giant’s market capitalization and puts the stock back at levels last seen back in September. But that’s not the worst of it. Fortune’s Philip Elmer-DeWitt notes that Google stock has now dropped more than 230 points from its November high of $747 a share - wiping out more than $72 billion in market value. That’s more than half again as much as Microsoft (MSFT) is offering for Yahoo (YHOO), for instance.

On the other hand, even at Friday’s reduced levels Google stock has risen 506% since its initial public offering in August 2004. That, along with the company’s hammerlock on the fast-growing Internet ad market, is why even at a rich price-to-earnings ratio Google stock continues to be a favorite of tech investors - regardless of the unanswered question of how the company will perform in a sharp downturn. Unfortunately, judging by recent trends, investors may find out the answer soon enough.

Microsoft’s (MSFT) bid for Yahoo (YHOO) is a rare bit of good news for Yahoo shareholders, but they’re not the only potential beneficiaries. One line of thought says the $44.6 billion proposal could help investors in Time Warner (TWX), publisher of Fortune, by giving the company a chance to sell its AOL unit. 

The prospect of Microsoft joining up with Yahoo could spur the leading Internet advertising player, Google (GOOG), to take a “counterbalancing defensive measure” such as buying AOL, says Chris Atayan, CEO at consumer products wholesaler Amcon Distributing (DIT) of Omaha, Neb., and a former investment banker. He notes that Google took a 5% AOL stake back in 2005 and says a purchase of the rest could help Google maintain its leadership cushion over a combined Microsoft-Yahoo.

Not everyone buys the notion that AOL’s fortunes have turned brighter as a result of the deal. But Atayan, who owns Time Warner stock, says the 46% rise in Yahoo shares Friday gives Time Warner chief Jeffrey Bewkes “a great chance to say here’s the valuation” that could apply to AOL. He believes Time Warner has done a good job cleaning up the AOL business since its swoon during the tech bust but adds, “AOL has never been worth more in recent years than it is now.”

So far there’s no sign of how Yahoo (YHOO) might react to Microsoft’s (MSFT) unsolicited $44.6 billion takeover bid. But can the struggling Internet giant really afford to say no, as it did last year? Yahoo! shares have dropped 40% over the past three months as the company falls further behind rival Google (GOOG) in the online advertising business. This week’s disappointing earnings reports from across the tech sector show that everyone is having trouble adjusting to the reality that a recession is likely to pressure ad spending in 2008. But given Yahoo’s presumed preference to stay independent, where might CEO Jerry Yang turn?

So far his options appear to be rather limited. Venture capitalist Fred Wilson points out on his blog that at the offer price, the only plausible competing bids would have to come from strategic buyers in the media business. But News Corp. (NWS), for one, is now digesting its $5 billion acquisition of The Wall Street Journal - and a rival bid for Yahoo stands to be 10 times as big. Private equity players, Wilson points out, are likely priced out of this deal by its sheer size and the fragile state of the debt markets. All this means Yahoo’s board may face the unhappy prospect of trying to squeeze a better offer out of Microsoft, but with precious little leverage.

The news that Microsoft (MSFT) is pursuing an acquisition of Yahoo (YHOO) isn’t making disappointed Google (GOOG) shareholders feel any better. While the $44.6 billion cash-and-stock proposal sent Yahoo shares soaring 60% in early trading Friday, Google shares traded down 8% in the wake of Thursday afternoon’s earnings miss. A Microsoft-Yahoo deal, while far from a certainty right now, could make it even tougher for Google to meet Wall Street’s sky high growth expectations. Meanwhile, it’s clear that the point of the Yahoo acquisition would be to fortify Microsoft for a push deeper into Google’s online advertising turf, even if Microsoft refuses to mention Google by name in its discussions of ad industry dynamics.

“While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence,” Microsoft chief Steve Ballmer said in Friday’s press release. “Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers.” It will be interesting to see how that “one player” might respond to this deal.

Google (GOOG) sank in late trading after the Net search giant became the latest tech titan to disappoint Wall Street with its fourth-quarter profit report. Google made $4.43 a share for the quarter ended Dec. 31, on a so-called non-GAAP basis. That compares with the analyst consensus estimate of $4.45 a share. Net revenue, excluding the money Google shares with advertising partners, was $3.39 billion - just shy of the $3.45 billion analyst estimate. Shares fell $48 to $516.20 - taking Google shares down to a level not seen since last September.

“We’re very pleased with our performance this quarter,” said CEO Eric Schmidt. “It reflects strong momentum in our core business, growing receptivity to our new business initiatives, and improved discipline in managing our operating expenses.” 

Earlier, Fortune’s John Fortt mused on what might happen if Google missed its estimates. He noted that despite the company’s gains at the expense of rivals such as Yahoo (YHOO), a slowing economy isn’t likely to help the company meet Wall Street’s substantial expectations. So far, reassurance for tech investors doesn’t seem to be at hand.

Could Citi’s (C) cash infusion save the market from a beastly fate?  Monday’s declines took all three major U.S. indexes down 10% from their recent highs, into so-called correction territory. There’s much talk of recession and even some concern about a market meltdown. But that’s far from the most ominous sign. After all, Google (GOOG) shares closed Monday at $666. “Aiee, the Number of the Beast,” writes Paul Kedrosky. “Now everything makes sense.”

 Another commentator sees an opportunity to mock Google’s famous IPO claim. “Perhaps,” ventured the WebConnoisseur, “they are evil.”