Sarkozy in China: a wonderful haul

Nicolas Sarkozy has visited China, where he has meet Hu Jintao’s Administration. In fact French government is willing to build strong partnership with China to enhance economy growth, spur exports and negotiate some changes in monetary policy. It appears for the moment that this meeting has generated many agreements. Thus Sarkozy’s trip in China seems to be a huge success.

· New contracts for French companies

o 20 billion of contracts
French companies have strengthened their position in China, where they have managed to create many fruitful partnerships and agreements. In fact French companies have already signed 20 billion of contracts. This wonderful haul is much higher than expected. Thus Sarkozy intends to enhance French economy by spurring exports to China.

o Many companies involved
Most of the sectors have benefited from this wave of agreements. Although Areva and EADS are the biggest winner of those transactions, many other companies also managed to find a deal.

EADS managed to sell 160 planes to China, which will generate 12 billion of Euros. Although this command is a huge success for EADS, it might be a disappointment as it is does not include any A380. However Mr Gallois, the CEO of EADS, is quite delighted regarding those new commands.

Areva also managed to generate 8 billion of euros through negotiation of new contracts with China. Areva has been negotiating for those contracts for many years in order to be the company which will supply China with nuclear energy. There was a big competition with American companies. Finally they managed to convince Hu administration that French nuclear knowledge was the best in the world. This is a huge success for Sarkozy, as China will spend substantial amounts of money in this business in the following years. Furthermore EDF, and Suez have also been able to create some partnerships with China in Energy sector.
Moreover in technology sector, Alcatel-Lucent has signed some contracts with China. Thus this company will earn 750 million of Euros thanks to Sarkozy’s trip.
In Pharmaceutical sector, the French champion Sanofi-Aventis has also benefited from this negotiation wave in China. In fact it will create a new factory in China in order to be stronger in vaccines market.
Finally Alstom, Europcar and also Natixis have developed their position within Chinese market.

· Negotiation regarding monetary policy

In the same time, Sarkozy has tried to negotiate some changes regarding the monetary policy. In fact most of currencies specialists claim the Yuan is undervalued. Thus world trade is unfair and China is benefiting from an undervalued Yuan to sell its products at very cheap prices.
The goal of French government is to convince China to increase the value of its currency, as Sarkozy said ``we need to reach harmonious and fair exchange rates''. Consequently these negotiations should accelerate the Yuan appreciation against the Euro.

· Big change after a long period of tension due to trade

The visit of Sarkozy in China is the symbol of a big change in geopolitical situation. In fact, during the previous years there was a big tense between China and Europe due to trade policy. Thus current negotiations may create a new period of strong cooperation between France and China. For instance they emphasized that they have the same point of view regarding the cooperation in North Korea nuclear dispute, the restoration of peace in the Darfur region, the nuclear problem in Iran, the position with Taiwan,etc.
Furthermore French government agreed to share technologies with China in order to improve climate and energy issues.

· A good opportunity for Sarkozy to improve its image

Finally those successful negotiations might help Sarkozy to improve its image in France, where its popularity is going down sharply. Thus he might convince French people that he is still the one they need to improve economical issues.

Ethanol: the worst energy investment of the year

Although Ethanol has been encouraged and substantially supported by the Bush administration and important investors those previous years, it has been ranked as the worst energy investment of the year. Thus it appears that Ethanol failed to substitute oil energy, and more and more analysts are beginning to claim investing in such energy was a big mistake. Consequently Ethanol sector is in a particularly uncertain and hazardous situation. Let us analyse more precisely the environment of Ethanol market.

Production and consumption encouraged by Bush administration

President Bush elaborated a plan to confront high gasoline prices. Thus this plan encouraged investment in Ethanol, which appeared to be the best alternative and substitute to oil. In fact US economy was still addicted to oil, and thus was dependent on other countries, who supply oil. The goal of the plan was to change this situation. Ethanol was also presented as a good manner to fight against the high level of oil barrel price and thus protect consumers. The government also intended to encourage oil companies to invest their huge profits in research and development or exploration.

Furthermore Bush administration tried to enhance hybrid vehicles. Thus it encouraged drivers to use for instance General Motors cars, which work with Ethanol. Consumers are encouraged with tax credit.

US government made substantial efforts in order to boost investments in oil substitutes, in order to reduce the dependence on foreign oil. Most of those investments targeted the Ethanol market. Thus the government supported farmers and small companies to invest in this energy.
Generally Bush administration has created 20 laws and incentives in order to enhance ethanol use. This trend was also adopted by most of the states.

Does ethanol really benefit to the population?

On the one hand numerous studies claim Ethanol really benefits to the environment. Thus Ethanol seams to create new activities for farmers, who can generate more profits. Furthermore it is supposed to boost employment in the US. And Ethanol would also enable the US to create a substitute to oil, which means that Ethanol would enable the US to diminish its energy imports and maybe even generate some exports.

On the other hand, more and more analysts believe there are no Ethanol benefits. In fact it does not improve the environment; it is not as environmentally friendly as once claimed. Moreover a professor of Cornwell University emphasized that ethanol requires more energy than it generates. Finally Ethanol is not important enough to change US dependency on foreign oil.

Threats


As ethanol is becoming more popular, corn demand has increased sharply. Consequently price of corn is very high nowadays. Thus ethanol production is becoming more expensive. Corn price may have a negative effect on ethanol development.
This year has been really disappointing for Ethanol companies. Inventories go up, whereas demand slows down. In sort-run, this situation is not terrible. However, it must not last long; otherwise it would be very dangerous for those companies.
Moreover Ethanol could also be affected by the tight credit. In fact lack of liquidity could sharply affect small companies who would not be able to attract investors any more.

Is a rebound possible?

The previous year, many projects were cancelled because of the bad trend of Ethanol market. Some companies also went bankrupt. In this uncertain environment, Barry Frazier, the president of Center Ethanol LLC, does not anticipate “any sort of immediate rebound”.
However some people still believe in this energy.

To sum up Ethanol future is really uncertain, and it will be interesting to see how the situation evolves in the following months.

Natixis: french symbol of subprime crisis and unrealistic annual reports

· Who is Natixis?
Natixis is one of the biggest financial institutions in France. It was created by the merger between two subsidiaries of Caisse D’Epargne and Banque Populaire about one year ago. The merged group is specialised in five areas of expertise: corporate and investment banking, asset management, private equity and private banking, services and receivables management. Natixis in currently quoted on the Paris Stock Exchange and it belongs to the CAC40.

· First financial report the 30th August 2007

According to the Web site of Natixis
In its first six months of activity,

Natixis achieved solid operating performance. These good results were achieved thanks to strong business momentum across all segments.
Furthermore the group announced strong development potential and resilience to the subprime crisis and depreciation of the American currency. Natixis believed the subprime crisis was limited and under control.
Moreover Natixis believed the merger would create substantial synergies thanks to its integration process. In this first announcement, they emphasised €83m of synergies.
To sum up, this financial report provided a very positive image of Natixis. As a result Natixis’ shares increased sharply the day of this announcement.
Let us have a look now on the community reaction.

Community point of view

Before the announcement, some people within the financial community were really pessimistic regarding the capacity of Natixis to handle the credit crunch. Then this optimistic and positive financial report reassured most of the community in the short run. However most of analysts realized in the followings weeks the extent of the crisis. And the reality was terrible. Thus most of analysts have slashed their opinion regarding Natixis future, by discovering the real impact of the subprime crisis on the financial community. For example, “Credit Suisse” decreased its objective regarding Natixis from 19.70 to 17.50 euros after the financial report.
To conclude the financial community has realized the danger of the subprime too late.

· Very difficult and uncertain position now
In France, Natixis is the bank which suffered the biggest losses due to the credit crunch. Its position is now quite dangerous and its shares are decreasing sharply.
In this difficult context, the future of Natixis is particularly uncertain. Thus different rumours have been created these previous weeks. Maybe there will be a change in the governance of Natixis in order to establish a more efficient management. In the same time, another French bank might be interested in making a bid to Natixis. In fact it appears that Societe Generale is preparing a bid in order to establish a partnership with Natixis. This is a good moment to make a bid, as Natixis shares are very cheap now. Furthermore some analysts even believe Natixis might collapse by the end of the year due to the subprime crisis.


To conclude, the case of Natixis is really interesting and instructive. In fact it emphasizes the unrealistic vision provided by companies’ annual reports. Although Natixis was supposed to be in very comfortable position according to its financial reports, it appears in reality that Natixis has suffered huge losses due to the subprime crisis.

A complete restructuring of the oil sector in Mexico

• Nationalization in the 1930s

In the 1930s, a major problem occurred in the oil sector in Mexico. People tried to find out: “whose oil is it?”. In other words, there was a competition to become the owner of energies. At this time, oil belonged to American companies. However Roosevelt did not defend them during this competition. In fact his goal was to create friendly relationship with Mexico. Between the two World Wars, the most important was the access and not the control of this oil. Thus oil sector was nationalized in 1938 with the regime of Lazaro Cardenas.

• A strong growth to become a crucial sector

After its nationalization, oil sector has rapidly developed. Thus Mexico was the second strongest producer of oil before the appearance of the “Elephants”, meaning the countries of Middle East. Furthermore the oil crisis of 1973-1974 has encouraged Mexico to look for additional reserves. This process has lead them to substantial discoveries in the 1980s. Thus Mexico, who was importer of oil, managed to transform its economy to be one of the leading exporter in the world. Although Mexico does not belong to the OPEC, it was the fifth-strongest producer in the world in 2005. Consequently oil sector has become crucial within the economy of Mexico; and the government is now relying on Pemex for about one third of its budget. Nowadays Mexico is dependant on oil sector.

• A complete restructuring program
  

The government of Mexico has been trying to transform its oil sector these previous years. In fact Mexico is willing to threat the nationalization of this sector. Vicente Fox is the first president who tried to reach this goal. However he never managed to change the rules. The new president of Mexico, Calderon, and its government are now trying to privatise oil sector in order to improve the declining situation of its flagship Pemex. Nevertheless it will be a very difficult task, as it is even written in the constitution that energy belong to the government and the country. Although it is difficult, most of specialists believe Calderon will manage to privatise and deregulate oil sector and reform the tax system.

The impact of the Fed policy

The Federal Reserve, which is the central bank of the US, has decided to cut once again its interest rates. Although this decrease was anticipated by most of the economists, there was a surprise regarding the extent of this decrease. In fact market thought the Fed would slash interest rates by a half of a point, whereas it has been only a quarter of a point. In the end US interest rates are now at the level of 4.5%.

• What is the aim of this policy?
  

Housing crisis and subprime meltdown have strongly damaged the mood of the market. Every week, another company announces terrible results with huge losses. And we do not know yet the extent of this crisis. In order to avoid a recession, the Fed has decided to slash its interest rates in order to improve the market confidance, avoid a recession, and boost the growth of the economy.

• Is this decrease a trend?

There is no consensus regarding the policy of the Fed. Economists ignore whether this decrease is only a short-run policy, or whether it is long-term trend. However most of specialists believe it might be the last cut until 2008, if at all.

• What is the impact on the bond market?

The immediate impact on bond market is positive. In fact this cut is a good opportunity to purchase bonds in the second market.

• What is the impact on the stock market?

Stock market is strongly related to the Fed policy. When interest rates go up, it becomes less attractive to invest in shares, as cost of opportunity is higher. On the other hand, when interest rates go down, it becomes more profitable to invest in shares, which is the case now. Consequently stock market will benefit from the policy of the Fed.